Option in lease to purchase reversion at a valuation — Whether option enforceable — Option to purchase at a price to be agreed by two valuers and in default of such agreement to be fixed by an umpire appointed by the valuers — Tenants exercised option but landlords declined to appoint a valuer — Whether, in order to enable the option to be effectively exercised, the court should intervene by giving a direction or by itself appointing a valuer or otherwise supplying the necessary machinery — Argued for landlords that there was no contract for the sale of the reversion and the court would not make a contract — ‘Ground encumbered with authority, more ancient than modern’ — Highly educational review of
This was an
appeal by William Vernon Eggleton, Thomas H D Keck and Alan G Keddie, the
landlords, from a decision of Lawson J (sitting as an additional judge of the
Chancery Division) who decided in favour of the tenants, Sudbrook Trading
Estate Ltd, that options to purchase the reversions contained in three leases
were valid and had been validly exercised. The options relate to properties in
High Orchard Street, Llanthony, in the city of Gloucester.
Roger Kaye
(instructed by Taynton & Son, of Gloucester) appeared on behalf of the
appellants; Gerald Godfrey QC and Martin Roth (instructed by Rickerbys, of
Cheltenham) represented the respondents.
Giving the
judgment of the court at the invitation of Cumming-Bruce LJ, TEMPLEMAN LJ said:
In these proceedings the tenants seek to enforce an option in a lease which
enables them to purchase the reversion at a valuation and the landlords contend
that the option is unenforceable.
The option is
contained in a lease dated March 23 1949 and made between the respective
predecessors in title of the present landlords and tenants. By the lease a
property at High Orchard Street, Llanthony in the city of Gloucester, was
demised for a term expiring on December 24 1997 at a yearly rent of £2,750
subject to periodical rent reviews. Clause 11 of the lease conferred on the
tenants an option
To purchase
the reversion in fee simple in the premises hereby demised . . . at such price
not being less than £75,000 as may be agreed upon by two valuers, one to be
nominated by the lessor and the other by the lessee and in default of such an
agreement by an umpire appointed by the said valuers . . .
By three
further leases dated November 18 1955, August 30 1966 and July 26 1968
adjoining properties were also demised by the predecessors in title of the present
landlords to the predecessors in title of the present tenants for terms ending
on December 24 1997 and each lease contained an option to purchase the
reversion on terms identical with the option contained in the 1949 lease, save
that different minimum purchase prices are specified in the 1955 and 1968
leases, and no minimum price appears in the 1966 lease.
The tenants
having exercised their options to purchase the reversions, the defendant
appellants, as landlords, have declined to appoint a valuer. The tenants claim
that there exists a contract for the sale of the reversion. In the court below
Lawson J, sitting as an additional judge of the Chancery Division, made an
order dated November 17 1980 whereby he declared that the clauses in the leases
to which I have referred conferred on the tenants valid options to purchase the
reversions in fee simple and that the options had been validly exercised. In
this court the tenants have argued that the court will direct the landlords to
appoint a valuer if the landlords continue to refuse to do so and will if
necessary appoint a valuer and an umpire to determine the price; alternatively
if the machinery for the ascertainment of the purchase price indicated in the
lease fails for any reason, because the landlords refuse to appoint a valuer or
because the valuers can agree neither on a price nor on an umpire or because
the umpire fails to determine a price, the court will remedy the defective
machinery and will carry out the original intentions of the parties by determining
the fair price of the reversion which the machinery provided by the lease was
obviously intended to produce.
The landlords
appeal from the order of Lawson J and in this court claim that there is no
contract for the sale of the reversion because the price has not been fixed and
the court will not make a contract where none exists. If there is a contract
for the appointment of valuers, which appointment might lead to a contract for
the sale of the reversion, the court will not make a mandatory order or take
any other step to require performance of the contract to appoint a valuer and
cannot itself appoint a valuer or an umpire or determine a fair value. The
court cannot decree specific performance and has no power to alter or modify
the express terms of the contractual relations between the parties embodied in
the lease. The tenants cannot demonstrate any damage and are therefore without
remedy. The option is unenforceable.
The ground is
encumbered with authority, more ancient than modern. In Milnes v Gery
(1807) 14 Ves 400 there was a contract for sale at a price to be determined by
two valuers or an umpire chosen by the valuers. The valuers were appointed but
were unable to agree on the choice of an umpire. The vendors sued for specific
performance and asked the court to appoint a valuer or to make a valuation. Sir
William Grant MR dismissed the action, saying at p 406
The only
agreement into which the defendant entered, was to purchase at a price, to be
ascertained in a specified mode. No price having been fixed in that mode, the
parties have not agreed upon any price . . .
And at p 409
the Master of the Rolls said:
If you go
into a court of law for damages, you must be able to state some valid legal
contract, which the other party wrongfully refuses to perform; if you come to a
court of equity for a specific performance, you must also be able to state some
contract, legal or equitable, concluded between the parties; which the one
refuses to execute. In this case the plaintiff seeks to compel the defendant to
take this estate at such price as a master of this court shall find it to be
worth; admitting, that the defendant never made that agreement; and my opinion
is, that the agreement he has made is not substantially, or in any fair sense,
the same with that; and it could only be by an arbitrary discretion that the
court could substitute the one in the place of the other.
That was a
case in which there had been no misconduct either on the part of the
contracting parties or on the part of the valuers appointed by them. The
machinery had broken down and the court was powerless to substitute other
machinery.
In Gregory
v Mighell (1811) 18 Ves 328 a tenant had been in possession for 11 years
under an agreement for a lease for 21 years at a fair and just annual rent, to
be fixed and ascertained by two valuers to be chosen by the landlord and the
tenant respectively or their umpire. Valuers were chosen but the landlord
refused to sign arbitration bonds and the valuers refused to proceed unless
such bonds were signed. Sir William Grant MR made an order for specific
performance of the agreement for a lease and directed the master to ascertain
the fair rent, saying at p 333
after it was
known, that the arbitrators had not fixed any rent, and that none of the other
means, provided by the agreement, were resorted to, the defendants still
acquiesced in the plaintiffs retaining possession of these lands. That was a
case in which the failure of the arbitrators to fix a rent can never affect the
agreement. It is in part performed; and the court must find some means of
completing its execution; . . . the plaintiff is not to be considered as a
trespasser. Some rent he must pay; the amount must be fixed in some other mode;
. . . it should be ascertained by the master, without sending it to another
arbitration; which might possibly end in the same way.
That was a
case in which it could not be said that there was no agreement because the
parties had acted for 11 years on the basis that the agreement subsisted. It
was also a case in which one of the contracting parties was at fault in not
performing his duty to ensure that the valuers duly valued.
In Blundell
v Brettargh (1810) 17 Ves 232 there was a contract for sale at a price
to be fixed by two valuers or their umpire in writing under seal before July 1.
The valuers agreed the valuation by June 10, but did not complete the written
award until June 24 by which time one of the contracting parties had died. Lord
Eldon LC held that on the construction of the agreement the award was required
to be made during the joint lives of both contracting parties. He refused to
order specific performance, saying at p 243
there is no
instance, where the medium of arbitration or umpirage, resorted to for settling
the terms of a contract, having failed, that this court has assumed
jurisdiction to determine, that, though there is no contract at law,
there is a contract in equity; and this court will specifically execute that
contract, to which the parties never agreed.
This was
another case in which the machinery for fixing the price agreed between the
parties failed without any default on either side.
In Morse
v Merest (1821) 6 Madd 26 there was a contract for sale of an estate at
25 years’ purchase based on an annual value to be fixed by three named valuers
on or before a certain day. The vendor refused to allow the valuers to enter
the estate and they were therefore unable to make their valuation before the
time expired. Sir John Leach V-C granted an injunction ordering the vendor to
permit the valuation to be made, saying that
in equity a
defendant was not permitted to set up a legal defence which grew out of his own
misconduct and . . . this agreement was now to be acted upon as if no time were
limited, or the time was not past.
This was a
case where one of the contracting parties was in default and the machinery for
fixing a price was still capable of operating, and could be made to operate by
a negative injunction.
In Agar
v Macklew (1825) 2 Sim & St 418 tenants exercised an option in a
lease to purchase the reversion at a price to be determined by two persons, as
surveyors or appraisers to be chosen by the landlords and the tenants
respectively or the umpire appointed by the valuers. The landlords refused to
appoint their valuer. The tenants asked for an injunction directing the
landlords to appoint their valuer or for an order that if the landlords
persisted in refusing to nominate a valuer the value should be ascertained by
the master. Sir John Leach V-C dismissed the action, saying at p 423
I consider it
to be quite settled that this court will not entertain a Bill for the specific
performance of an agreement to refer to arbitration; nor will, in such case,
substitute the master for the arbitrators which will be to bind the parties
contrary to their agreement.
If this case
was good law in 1825 and remains good law, the tenants in the present case must
fail.
In Morgan
v Milman (1853) 3 De G M & G 24 a vendor agreed to sell to a railway
company property at a price to be ascertained at the option of the vendor by
arbitration or a jury. The vendor died before directing how the property should
be valued. Lord Cranworth LC said at p 34 that the authorities
enunciate the
proposition in the strongest language, that where the parties have stipulated
that the price should be ascertained by arbitration . . . that in such case, if
the arbitration does not proceed, the price is not ascertained according to the
mode in which the parties stipulated, this court has no right to make a
different contract from that which the parties have entered into, and ascertain
it for them in some different mode.
This was a
case where neither contracting party was in default and where the machinery
chosen by them to ascertain the price irretrievably broke down.
In Darbey
v Whitaker (1857) 4 Drew 134 a vendor agreed to sell the lease and the
goodwill of a public house at a fixed price and to take the fixtures and stock
in trade at a valuation to be made by two named valuers or their umpire. One of
the named valuers refused to proceed because the purchaser said he did not
intend to complete. Sir Richard Kindersley V-C refused to grant specific
performance of the agreement in whole or in part, so that the vendor lost the
sale of the public house because he could not enforce the sale of the fixtures
and stock in trade at a valuation. At p 140 the Vice-Chancellor said:
Now I assume
it to be clear that this court has no power to decree specific performance of a
contract for sale or purchase at a price to be fixed by arbitration, unless the
arbitrators have actually fixed the price. It appears to me that that is
implied by the very nature of a decree for specific performance. What would it
be? A decree that directs payment to the
plaintiff of such a sum of money as A and B shall fix. I never saw such decree,
and I think the court cannot make it, on the ground that this court will never
make a decree that it cannot see its way to enforce. Now how could I enforce
such a decree? What is the time to be
allowed for arbitration? How can I
compel the arbitration? It appears in
this case as a fact, that one of the arbitrators has refused to go on, because
he was told by the defendant that he did not mean to complete. How can I be
sure that he will go on? And even if the
arbitrators do go on, and differ, how can I compel the appointment of an
umpire?
In that case,
notwithstanding that the purchase of the fixtures and the stock in trade was
subsidiary to the main agreement for sale of the public house at a fixed price
and notwithstanding that the valuation machinery broke down as a result of
default on the part of the purchaser, the court refused the vendor any remedy
on the grounds that the court will not make a decree for specific performance
which it cannot supervise, control and carry into effect.
In Collins
v Collins (1858) 26 Beav 306 there was an agreement to sell at a price
to be fixed by named valuers or by an umpire chosen by the valuers before
making their valuation. The valuers were unable to agree on an umpire, and the
vendor sought an order from the court appointing an umpire, and relied for that
purpose on the Common Law Procedure Act 1854. Sir John Romilly MR held that the
Act did not apply to a valuation and made no order. His judgment makes it clear
that he regarded the law as settled in the line of authorities from Milnes
v Gery (1807 supra) to Darbey v Whitaker (1857 supra),
and the only question for his decision was whether the court had power to make
an order under the Act.
In Tillett
v Charing Cross Bridge Co (1859) 26 Beav 419, where the authorities were
reviewed, the court refused specific performance of a contract which included a
term that named nominees or their umpire should decide what kind of housing
should be built on the land comprised in the agreement. The decision was put on
the grounds (p 426) that
this court
cannot decree specific performance of a contract which it does not see its way
to enforce eventually; if it should turn out hereafter that these persons will
not fix the character of the houses and will have nothing to do with it, then
the result will be that the court ought not to have decreed the specific performance,
and is not now to make such a decree hypothetically on an event which may or
may not happen hereafter.
In that case
the task which the court was asked to perform was more difficult and more vague
than an order directing a contracting party to appoint a valuer or an order
appointing a valuer.
In Vickers
v Vickers (1867) LR 4 Eq 529 it was agreed that in certain circumstances
which happened a retired partner should have the option to purchase the former
partnership business to be valued ‘in the usual way’ by two valuers, one to be
named by the vendor and one by the purchaser or by their umpire. The valuers
were appointed but the purchaser then changed his mind and would not allow the
valuation to proceed. The purchaser sought a declaration that he was entitled
to become the purchaser of the business and of the property connected with the
valuation and also sought specific performance of the agreement. Sir William
Page Wood V-C refused to grant any relief on the grounds that until the price
was fixed the contract was not a complete contract and there was nothing upon
which the court could act:
Because the
courts have decided, we must take it to be positive law, that there is no
existing contract until the valuation has taken place; . . .
That was a case
in which the machinery chosen by the parties broke down because of the default
of the vendor. The fact that there was no contract for the sale of the property
in existence was logically no reason why the court should not injunct the
vendor against a breach of his obligation to allow the valuation to proceed,
but nevertheless the purchaser failed.
In Dinham
v Bradford (1869) 5 Ch App 519 a partnership agreement contained a
provision that on the determination of the partnership one partner should
purchase the share of the other at a valuation to be made by two persons, one
appointed by each partner. There was no express provision for the appointment
of an umpire. The vendor sought a winding up of the partnership in the usual
way. The purchaser sought specific performance of the provisions in the
partnership agreement which enabled him to purchase the share of the vendor.
Lord Hatherley LC affirmed the decision of the Vice-Chancellor, who declared
that the purchaser was entitled to purchase the share of the vendor and
directed the value of the vendor’s share to be ascertained by the court. The
provision which enabled one partner to purchase the share of the other when the
partnership determined was part of a partnership agreement which had been
carried into effect. At p 523 the Lord Chancellor said:
This case is
not like that of the sale of an estate the price of which is to be settled by
arbitration, but is a case in which the whole scope and object of the deed
would be entirely frustrated if the court were to apply the well known doctrine
to the present state of circumstances. In cases of specific performance the
matter is very plain and simple. One person agrees to sell his estate in a
given way, and no rights are changed by the circumstance of that method of
selling the estate having failed. The estate remains where it was, and the
money where it was. But here is a man who has had the whole benefit of the
partnership in respect of which this agreement was made, and now he refuses to
have the rest of the agreement performed, on account of the difficulty which
has arisen. It is much more like the case of an estate sold, and the timber, on
a part, to be taken at a valuation, the adjusting of matters of that sort
forming part of the arrangement, but being by no means the substance of the
agreement; and in such cases the court has found no difficulty. If the
valuation cannot be made modo et forma, the court will substitute itself
for the arbitrators. It is not the very essence and substance of the contract,
so that no contract can be made up except through the medium of the
arbitrators. Here the property has been had and enjoyed, and the only question
now is, what is right and proper to be done in settling the price?
In the present
case the option to purchase the reversion was part of the terms whereby the
tenants agreed to enter and pay rent and to enjoy the property. The landlords
contend that the option to purchase the reversion is a separate agreement and
that the lease, unlike the partnership agreement in Dinham v Bradford
(above) will continue to operate. If the option does not create enforceable
rights and obligations, the court has no power to intervene.
In Richardson
v Smith (1870) 5 Ch App 648 it was agreed that an estate should be
purchased for £24,000 and certain articles worth about £2,000 should be
purchased for a price to be determined by two valuers appointed by the parties.
But the vendor declined to nominate a valuer and the purchaser sought and
obtained an order for specific performance. Sir John Stuart V-C made an order
for specific performance. Lord Hatherley LC and Giffard LJ in effect severed
the agreement and ordered specific performance limited to the estate on the
grounds that the agreement with regard to the articles was a minor and subsidiary
part of the agreement and not at all essential. To hold otherwise, said Lord
Hatherley, at p 651
would induce
vendors who are desirous of retaining the power of escaping from their
contracts to introduce provisions for the valuation of some minor part of the
subject matter of the contract in such a mode that they might at any time
escape from the performance of the agreement as to the main subject of the
contract simply by setting up an act of their own in wrong of the purchaser,
and refusing to appoint a valuer.
In the present
case we do not regard the option to purchase the reversion as being minor or
inessential, but if the landlords are correct it is severable, thus leaving in
force the lease without the unenforceable option to purchase the reversion.
In Smith
v Peters (1875) 20 Eq 511 there was an agreement for the sale of a house
at a fixed price and of the fixtures and furniture at a valuation by a
specified valuer who was willing to carry out the valuation but was not allowed
by the vendor to enter the premises in order to value. Sir George Jessel MR
made an order for specific performance of the agreement and a mandatory order
compelling the vendor to allow the valuer to enter on the premises. He said at
p 513:
There is no
evidence that the value of the fixtures and furniture was so large as to be an
essential portion of the contract.
Clearly the
Master of the Rolls saw no difficulty in the fact that a concluded contract for
the sale and purchase of the fixtures and fittings could not come into existence
until the valuation was made. He obliged the vendor to comply with his implied
obligation not to prevent the valuation being taken.
In Re Smith
and Service and Nelson & Sons (1890) 25 QBD 545 shipowners claimed
damages for a breach of a charterparty which contained an arbitration clause
providing for one arbitrator to be appointed by the shipowners and one by the
charterers and for a third arbitrator to be appointed by the first two
arbitrators. The shipowners appointed an arbitrator but the charterers refused
to do so. The shipowners asked the court to order the charterers to appoint an
arbitrator, relying on the Arbitration Act 1889 or an inherent power in the
court. The Court of Appeal held that there was no statutory power to order the
appointment of an arbitrator and that the courts of equity had always refused
the grant specific performance of an obligation to appoint an arbitrator.
Lindley LJ, at p 553, said that the order sought was ‘opposed to all the
practice of the last two hundred years’.
If the court
had no authority to order a contracting party to appoint an arbitrator, then
clearly it had no power to order a contracting party to appoint a valuer. There
are, however, different consequences from failure to achieve arbitration. If
arbitration machinery fails the parties may have recourse to the courts of law
to obtain a remedy. In Smith and Service and Nelson & Sons (above),
for example, the shipowners’ claim for damages for breach of the charterparty
was presumably sustainable in the courts. In the case of a valuation,
however, if the machinery breaks down and if the court cannot interfere, then
neither party has any remedy.
In Talbot
v Talbot [1968] Ch 1 a testator gave two of his sons the option of
purchasing the farms in which they lived together ‘at a reasonable valuation’.
There was no provision in the will for the mode of valuation of the farms and
the Court of Appeal affirmed the decision of Burgess V-C that the court itself
would undertake the task and direct a special inquiry as to what was a
reasonable price for the farms. At pp 11 and 12 Harman LJ referred to Milnes
v Gery, where the testator had directed a valuation by two arbitrators
and an umpire and continued:
Those means
broke down and the Master of the Rolls came to the conclusion that the court,
where the means pointed out by the testator had broken down, would not create
others, as that would be something which the court had no jurisdiction to do,
but that where the matter was left open and no machinery was provided there is
no reason why the court should not step in and lend its benevolent aid.
That seemed to
Harman LJ ‘to be good sense and good law’. He concluded
that there is
good authority for saying that an option to purchase ‘at a fair valuation’ or
‘at a fair price’ is an option which the court will enforce.
In the present
case there is no reference to ‘a fair valuation’. Mr Godfrey, on behalf of the
tenants, submitted that in the context of the lease the parties intended that
there should be a fair valuation resulting in a fair price on the footing of a
bargain between the landlord, owning the reversion and willing to sell, and the
tenants, owning the leasehold interest and willing to buy the freehold
reversion. The implication of a fair valuation does not, however, relieve Mr
Godfrey of the difficulty that in this case, as in Milnes v Grey,
express provision was made for the ascertainment of a fair valuation by two
arbitrators and an umpire.
In Brown
v Gould [1972] Ch 53 Megarry J upheld the validity of an option to renew
a lease ‘for a further term of twenty-one years at a rent to be fixed having
regard to the market value of the premises at the time of exercising this
option taking into account to the advantage of the tenant any increased value
of such premises attributable to structural improvements made by the tenant’.
The learned judge held, consistently with Talbot v Talbot, that
where an option is expressed to be exercisable at a price to be determined
according to some stated formula without any effective machinery in terms
provided for working out that formula, the court has jurisdiction to determine
it. In the present case the parties themselves have provided the machinery.
Finally Beer
v Bowden [1981] 1 All ER 1070, decided by this court on April 2 1976,
concerned a lease for 10 years which fixed a rent of £1,250 per annum for the
first five years and thereafter ‘such rent as shall thereupon be agreed between
the landlords and the tenant but no account shall be taken of any improvements
carried out by the tenant in computing the amount of increase . . .’. This
court implied a term that the rent to be agreed and fixed upon the rent review
should be a fair rent. Geoffrey Lane LJ, at p 12, said:
Had this been
a contract of sale or an ordinary commercial contract of some sort, there would
be a great deal to be said for the view that from the date of the first rent
review the contract was void for uncertainty, the parties having failed to
agree on a vital term of the contract. But here there is a subsisting estate,
and a subsisting estate in land, the lease, which is to continue. It is
conceded by the tenant that some rent must be paid in respect of these premises
by the tenant; therefore it follows that the court must imply something, some
term which will enable a rent to be fixed.
In the present
case the lease can continue without any difficulty, without any implication or
intervention by the court to make effective the option to purchase the
reversion.
The instant
case is one of an option which contains in express terms a machinery for
ascertaining the option price. That is the machinery which the parties selected
when they entered into the agreement and it is clear from the cases that, if
the machinery breaks down, the court will not force on the parties an agreement
which they did not make by substituting some other machinery. We can therefore
put on one side those authorities which support the proposition that the court
can supply the absence of certainty by itself ascertaining the ‘fair’ or the
‘reasonable’ or the ‘market’ price or rent. Mr Godfrey seeks to imply into the
option the word ‘fair’, but even assuming that this is possible — and we are by
no means persuaded that it is — it seems to us to be of no help here because it
is inherent in this option that the price, whether it be described as ‘fair’,
‘reasonable’, ‘market’ or anything else, is to be arrived at only by means of
the agreed machinery. The questions are (a) what is the effect of a failure in
the agreed machinery; and (b) does it make any difference that that failure is
induced by one of the parties?
The principles
which emerge from the authorities may be summarised thus. First, in
ascertaining the essential terms of a contract, the court will not substitute
machinery of its own for machinery provided by the parties, however defective
that machinery may prove to be.
Secondly,
where machinery is agreed for the ascertainment of an essential term, then
until the agreed machinery has operated successfully, the court will not decree
specific performance, since there is not yet any contract to perform.
Thirdly, where
the operation of the machinery is stultified by the refusal of one of the
parties to appoint a valuer or an arbitrator, the court will not, by way of
partial specific performance, compel him to make an appointment.
All three of
these principles stem from one central proposition, that where the agreement on
the face of it is incomplete until something else has been done, whether by
further agreement between the parties or by the decision of an arbitrator or
valuer, the court is powerless, because there is no complete agreement to
enforce (see Kay J in Hart v Hart (1881) 18 Ch D 670 at p 689).
It is clear,
however, that there are circumstances in which the courts have made exceptions,
the most striking of which are cases such as Gregory v Mighell
(1811) 18 Ves 328 and Beer v Bowden. This exception may be
expressed thus: where an agreement which would otherwise be unenforceable for
want of certainty or finality in an essential stipulation has been partly performed
so that the intervention of the court is necessary in aid of a grant that has
already taken effect, the court will strain to the utmost to supply the want of
certainty even to the extent of providing a substitute machinery.
A second
exception, not perhaps always easily defensible in logic, is the case where the
term which is uncertain or in respect of which the machinery has broken down is
construed as relating to a subsidiary part only of a wider contract in respect
of which no such problem arises. In Richardson v Smith (1870) 5
Ch App 648 the court adopted the more logical course of severing that part of
the contract from the remainder and decreeing specific performance of all but
the severed part. In Smith v Peters (1875) 20 Eq 511 Sir George
Jessel MR decreed specific performance and made a mandatory order compelling
the vendor to operate the machinery. It should, however, be noted that in that
case reference was to a single named valuer and that once the valuer had been
allowed to enter and make his valuation there was no further possibility of any
uncertainty. The contract was certain. The court made an interlocutory order in
order to restrain the defendant from obstructing its performance.
Subject to
these exceptions, however, the general principle has stood for over a century
and a half and was clearly recognised by the Court of Appeal in Chancery in Richardson
v Smith:
It is in vain
to say that the court has it in its power of itself to enforce such an
agreement as this, or any agreement for a valuation; unless the valuation be a
matter wholly subsidiary to, and not of the essence of, the agreement (Firth
v Midland Railway Co (1875) 20 Eq 100, per Lord Bacon V-C at p 112).
Plainly the
instant case cannot be said to be one of a stipulation which is subsidiary —
the machinery for arriving at a price goes to the very root of the transaction.
Equally, we find great difficulty in seeing how it can properly be brought
under the umbrella of the Gregory v Mighell principle. It is of
course true that the lease in which the option appears has been partly
performed in the sense that the term of years has been granted and the tenants
are in possession and paying the agreed rent. But the circumstances which
prompted the court to substitute its own machinery in Gregory v Mighell
and Beer v Bowden are entirely absent in the present case. In
those cases the tenant was in possession and, as was acknowledged on all hands,
bound to pay a rent. The grant of the term of years could not be undone and
some formula had to be found for ascertaining the rent which the tenant had to
pay for the balance of the term if he was not to occupy either rent-free or at
a rent which did not accord with any possible construction of the lease. Here
the court is concerned solely with the construction of a collateral option to
purchase. Dinham v Bradford (1869) 5 Ch App 519 is perhaps a case
rather nearer on the facts, although that was a partnership case. Lord
Hatherley LC there upheld the decree of Stuart V-C directing the price at which
the outgoing partner’s share was to be bought in to be ascertained by the
court, the agreed arbitration procedure having failed. He seems to have treated
the stipulation for fixing the price as not being of the essence and
undoubtedly he was influenced by the fact that the property (the plaintiff’s
benefit from the partnership) had been had and enjoyed. That case was approved
by the Privy Council in Hordern v Hordern [1910] AC 465 at p 474
where Lord Shaw, giving the judgment of the Board, adverted to
the distinction
between a case where a transaction fails because an operation in the nature of
a valuation upon which the conclusion of the transaction depended fails and a
case like the present, in which the transaction of sale and transfer of the
business is already concluded by the contract and the detail of a particular
method of fixing the price may have to be in some respect altered.
We confess
that we do not find the distinction self-evident and the case is not easily
reconcilable with Vickers v Vickers (1867) LR 4 Eq 529, but it
may be that the ratio was that since the agreement, which had, of course, been
fully performed except for the final disposition of the partnership assets,
contemplated only one method of winding up, namely the acquisition by one partner
of the other’s share, the method of valuation could properly be treated as
subsidiary and inessential, if it was not to result in the parties being held
to an agreement quite different from that which they had made. Whatever may be
the explanation of Dinham v Bradford, we find it difficult to see
how it can be prayed in aid in the instant case. The price is clearly an
essential stipulation of the option, but the option cannot, we think, be said
to be an essential stipulation of the lease such that the court is compelled to
provide certainty in order to make sense of the grant. The term of years
continues and the terms of the lease are unequivocal and clear, quite
regardless of the validity or invalidity of the option.
The question
then arises: if the court cannot, on authority, substitute its own machinery
for that upon which the parties have agreed, can it nevertheless, by granting
injunctive relief, decree a partial specific performance to the extent of
compelling one of the parties at least to take such steps as lie within his
power to make the agreed machinery operate?
Mr Godfrey points to two authorities which suggest that such a course is
possible. The first is the decision of Sir John Leach in Morse v Merest
(1821) 6 Madd 26 where the agreement was for a valuation to be carried out by
three named persons by a particular date. It does not appear that any
difficulty was anticipated if the valuers could once inspect the land, but the
defendant had prevented the entry until the contract date had passed. The
Vice-Chancellor held that the defendant, having prevented the valuers from
inspecting, could not rely on the passage of time occasioned by his own default
and he enjoined him from further preventing the inspection. He clearly
recognised that the relief capable of being granted at the stage was only
partial, for the
did produce a valuation, that could be used as the foundation for a
supplemental bill. It is not easy to reconcile this with the mainstream of the
authorities, and it has this distinction from the other cases, that the valuers
named were not agents for, or in any way under the control of, the defendant.
All that he was required to do was to give them an opportunity to inspect.
Nevertheless it is difficult to see how this case stands together with those
cases where the courts have said in terms that until the valuation is made
there is no completed agreement. It can only be based upon the implication of a
term that a party to a subsisting contract will not himself impede its
completion, and that postulates a subsisting and enforceable contract in the
first place.
The other case
is Smith v Peters (1875) LR 20 Eq 511. That case had two
distinguishing features. In the first place, as in Morse v Merest,
there was nothing further to be done beyond carrying out the valuation and, as
we pointed out in our summary of the case, the contract was certain by its
terms. Secondly, Sir George Jessel made it plain that by his interlocutory
order he was only enforcing a term which he regarded as a minor and subsidiary
part of the contract.
These two
cases do not help the respondents a great deal. It may be that, where the
completion of the agreement is frustrated by one of the parties and the court
can see that no further intervention on its part will be required beyond
negativing the frustrating act, specific performance can be decreed and the
defaulting party will not be permitted to pray in aid his own wrong to resist
the performance (see, for instance, Pritchard v Ovey (1820) 1 Jac
& W 396). But that is a long way from saying that where, even without the
act or omission of a defaulting party, there still remains an uncertainty as to
an essential term, the court will enforce one or more of a series of steps
which may, but equally well may not, lead to certainty.
There are, in
our judgment, two considerations which rule out such a course in the instant
case. In the first place, it is, we think, unarguable that an option granted by
A to B to purchase at such price as they shall agree could be enforced, and it
would be rendered no more enforceable by a further provision that if A & B
could not agree they should refer the matter to some other person to be agreed
between them. That is simply the classic case of an agreement to agree, which
is no contract. That defective contract is not improved simply by putting the
agreement to be arrived at at one remove and leaving it to be negotiated
between other persons (whether designated as valuers, arbitrators or by any
other description) to be nominated in the future, and in case of disagreement
between them to be settled by such person as they shall agree. It
remains equally uncertain. The court cannot force the parties to agree; it
cannot, a fortiori, force their nominees to agree: and it will not
decree what it cannot see its way to enforce. We think that the words of Sir
Richard Kindersley in Darbey v Whitaker, which have already been
quoted, are as true today as they were in 1807. If the court cannot decree
specific performance now, then equally it seems to us that it cannot do
indirectly, by way of partial specific performance, that which it cannot do
directly. The objection to the order which the learned judge made is, in our
judgment, summed up in his own words ‘wait and see’, because those words
indicate in themselves that the court cannot see that there ever will be an
agreement to enforce. Thus, on any analysis, the first declaration which the
learned judge made must, in our judgment, be wrong, because it cannot at this
moment be said whether there is a valid option in the sense of an option which
has ripened into a contract.
The second
point is, in essence, an extension of the first. It has been established for
well over 150 years that the court will not decree specific performance of an
agreement to name an arbitrator to fix the amount of a purchase price. In Aga
v Macklew (1825) 2 Sim & St 418 Sir John Leach considered it well
settled. So did Sir John Stuart in Paris Chocolate Co v Crystal
Palace Co (1855) 3 Sm & G 119 at p 124. It was affirmed by Lord
Cranworth in Morgan v Milman (1853) 3 De G M & G 24, and by
Sir Richard Kindersley in Darbey v Whitaker in 1857. Equally it
is clearly established by the authority of this court, in Re Smith and
Service and Nelson & Sons, that the court will not order a party to
appoint an arbitrator even though he is party to a submission and capriciously
refuses to do so. The learned judge in the instant case declined to follow Agar
v Macklew, which was in fact a case which applied the same principle to
a valuer, really on the grounds (a) that there has been a change in the
attitude of the courts to arbitration and (b) that valuation is a professional
exercise which involves no control by the court and therefore falls to be
governed by a different principle. As to the former, there has no doubt been a
change, and the court’s power to appoint arbitrators or umpires is now regulated
by statute. But that in no way impinges upon the authority of Re Smith and
Service as regards cases not within the statute. That case bound the
learned judge and is binding on this court. We do not see our way to
distinguish the case of a valuer, and it seems to us that the same principle
must apply.
So we are
driven to the conclusion that this appeal should be allowed. We arrive at that
conclusion regretfully because this option was clearly intended to be effective
and was at the time thought to be effective. No doubt the formula seemed a
sensible one. Nevertheless, it seems to us that in leaving the essential matter
of the price to be left to be fixed by the agreement of persons who have to be
nominated by the parties and who themselves have to agree on some third person
to resolve any variance between them, the parties succeeded in selecting a
classically uncertain formula which the court cannot assist them to operate.
We take the
view that both the effect in law of a contract expressed in these terms, and
the rule that equity will not grant specific performance thereof, have been
settled for so long that it is not open to this court now to make declarations
inconsistent with such settled principles. The landlords are entitled to a
decision that the settled law is in their favour.
For those
reasons we allow the appeal. We quash the declarations made by the learned
judge, and for his judgment substitute an order that in the action judgment be
entered for the defendants.
CUMMING-BRUCE
LJ said: That is the judgment of the court constituted as we sit at present,
but also of course with Oliver LJ, who is a party to the judgment.
The appeal was allowed with costs (except costs
incidental to a particular undertaking). Leave to appeal to the House of Lords
was refused, but on June 11 leave to appeal was allowed by the Appeal Committee
of the House of Lords.
