+44 (0)20 7353 2484 clerks@falcon-chambers.com

News

Burrows Investments Limited v Ward Homes Limited [2017] EWCA Civ 1577

DAMAGES ON A NEGOTIATION BASIS FOR BREACH OF CONTRACT

Hugh Sims QC and Oliver Radley-Gardner appeared for the successful appellant in Burrows Investments Limited v Ward Homes Limited [2017] EWCA Civ 1577. The case considers the operation of the eiusdem generis principle, and the weight to be attached to it, but importantly also confirms that negotiating damages are available in principle where a breach of a negative contractual restriction, causing no damage to the innocent party but conferring a profit on the wrongdoer, has occurred. In the course of doing so, the underlying case law was helpfully reviewed by the Court of Appeal.

Summary Facts

The case concerned a residential development is White Sands, Camber, East Sussex. The land initially belonged to Burrows, which had obtained planning permission to build out a residential housing estate. Part of the land was sold to Ward, a housebuilder, subject to the terms of a contract which included an overage agreement by which 30% of profits above a fixed ceiling were payable to Burrows. That overage agreement was protected by a restriction at the Land Registry against the Ward title. Pursuant to the contract, certain disposals were “Permitted Disposals” under Clause 4.9 of the contract, not caught by the restriction. These included sales of individual units in the open market, and also (under sub-paragraph (c)) “the transfer … of land … for roads, footpaths, public open spaces or other social/community purposes”. Save as permitted, other disposals were caught by the restriction and required the disponee to submit to a deed of overage direct to Burrows.

In the course of their development, Ward formed the view that a different scheme, increasing the density of housing (and hence the number of saleable units) was desirable. However, to unlock this more beneficial scheme, Ward had to offer five units under the new scheme to registered social landlords. This depressed the average value of the residential units and reduced the chances of the overage threshold being reached, but also involved a sale other than at open market value, and hence was not a “Permitted Disposal”. Accordingly, Ward approached Burrows for a deed of variation to allow this revised scheme to be brought forward lawfully. However, following negotiations on the terms of the deed, Ward informed Burrows that the “file was closed”. It was later discovered that Ward had proceeded without the further involvement of Burrows and disposed of the five open market units to a registered social landlord without further reference to Burrows. It was clear that, without that disposal, the enhanced scheme Ward were seeking to implement was not possible. Burrows issued proceedings on the basis that Ward had breached the terms of the contract by making a non-permitted disposal, and had thereby made a profit, and should be liable for negotiating damages. It was common ground that in fact, given the economic circumstances obtaining at the time, no overage would ever have been payable.

First Instance Decision

At trial, Ward argued that the disposal was in the “open market” and hence permitted, or else was permitted as a “transfer … of land … for roads, footpaths, public open spaces or other social/community purposes”. In the alternative, it was argued that Burrows had no interest in performance, and was not entitled to negotiating damages, because the contract was simply machinery to protect overage, of which there was none. The trial judge found ([2015] EWHC 2287 (Ch)) (i) that a disposal to a closed list of registered social landlords under a section 106 agreement was not a transaction in the “open market”, but (ii) that social housing was “land for social/community purposes” and permitted under that heading, but that (iii) in any event it was not just to award negotiating damages in the instant case. Burrows appealed on the construction point under (ii) and the question of legal principle under (iii).

The Court of Appeal

Rupert Jackson and Henderson LLJ unanimously upheld the appeal on both counts.

The Construction Issue

In relation to the construction issue, the Court of Appeal considered the familiar cases on construction. Henderson LJ then considered the eiusdem generis principle, and explained (at paragraph 48) that

t would be very strange to describe the transfer of a completed dwelling as a transfer of land, particularly when regard is had to the specific instances of transfers of land which are itemised in the paragraph. Land which is transferred for the site of an electricity sub-station, gas governor kiosk or sewage pumping station, or for use as a road or footpath, or as a public open space, is unlikely to have any buildings on it at the date of transfer, and will certainly not have a dwelling house on it. This, it seems to me, is the essential point of the ejusdem generis argument, which I prefer to regard not as a rigid canon of construction, but rather as a flexible aid to construction which reflects the twin requirements of commercial common sense and the need to construe contractual provisions as a whole and in their context. Another way of making the same point is to say that the words “or other social/community purposes” in the second part of paragraph (c) have to be read in the light of the three specified purposes which precede them, and with at least a provisional inclination to interpret the social and/or community purposes which the parties had in mind as being purposes akin to the provision of land for roads, footpaths or public open spaces.”

The Negotiating Damages Issue

Henderson LJ cited the principles governing negotiating damages from the judgment of Lord Walker in Pell Frischmann Engineering Ltd v Bow Valley Ltd and Others [2009] UKPC 45, [2011] 1 WLR 2370:

“47. The topic of Wrotham Park damages has been discussed in a number of important judgments, some quite recent, of which the most illuminating (apart from the judgment of Brightman J in Wrotham Park [1974] 1 WLR 798 itself) are those of Nourse and Nicholls LJJ in Stoke-on-Trent City Council v W & J Wass Ltd [1988] 1 WLR 1406 (“Stoke”); Sir Thomas Bingham MR and Millett LJ in Jaggard v Sawyer [1995] 1 WLR 269 (“Jaggard”); Lord Nicholls in Attorney-General v Blake [2001] 1 AC 268 (“Blake”); Mance LJ (and the short concurring judgment of Peter Gibson LJ) in Experience Hendrix Llc v PPX Enterprises Inc [2003] 1 All ER (Comm) 830 (“Experience Hendrix”); Neuberger LJ in Lunn Poly Ltd v Liverpool & Lancashire Properties Ltd [2006] 2 EGLR 29 (“Lunn Poly”); Warren J in Field Common Ltd v Elmbridge Borough Council [2009] 1 P & CR 1; and Arden LJ in Devenish Nutrition Ltd v Sanofi-Aventis SA [2009] Ch 390 .

48. These instructive judgments are not completely consistent among themselves (especially as to the circumstances in which the court will award an account of profits, alias restitutionary damages, which is not an issue in the present appeal).  But they establish the following general principles (much more fully developed in the judgments themselves):

(1) Damages (often termed “user damage”) are readily awarded at common law for the invasion of rights to tangible moveable or immoveable property (by detinue, conversion or trespass): …

(2) Damages are also available on a similar basis for patent infringement and breaches of other intellectual property rights of a proprietary character…

(3) Damages under Lord Cairns's Act are intended to provide compensation for the court's decision not to grant equitable relief in the form of an order for specific performance or an injunction in cases where the court has jurisdiction to entertain an application for such relief: Lord Nicholls of Birkenhead in Blake [2001] 1 AC 268, 281.  Most of the recent cases are concerned with the invasion of property rights such as excessive user of a right of way: Bracewell v Appleby [1975] Ch 408, Jaggard [1995] 1 WLR 269. The breach of a restrictive covenant is also generally regarded as the invasion of a property right (Peter Gibson LJ in Experience Hendrix [2003] 1 All ER (Comm) 830, para 56) since a restrictive covenant is akin to a negative easement.  (It is therefore a little surprising that Lord Nicholls in Blake [2001] 1 AC 268, 283, referred to Wrotham Park as a “solitary beacon” concerned with breach of contract; that case was concerned with the breach of a restrictive covenant to which neither the plaintiff nor the defendant was a party; but the decision of the House of Lords in Blake decisively covers what their Lordships have referred to as a non-proprietary breach of contract.)

(4) Damages under this head (termed “negotiating damages” by Neuberger LJ in Lunn Poly [2006] 2 EGLR 29, para 22) represent “such a sum of money as might reasonably have been demanded by [the claimant] from [the defendant] as a quid pro quo for [permitting the continuation of the breach of covenant or other invasion of right]”: Lunn Poly, at para 25.

(5) Although damages under Lord Cairns's Act are awarded in lieu of an injunction it is not necessary that an injunction should actually have been claimed in the proceedings, or that there should have been any prospect, on the facts, of it being granted: Millett LJ in Jaggard [1995] 1 WLR 269, 285 (but cf, at p 291); Lord Nicholls in Blake [2001] 1 AC 268, 282; Chadwick LJ in WWF-World Wide Fund for Nature v World Wrestling Federation Entertainment Inc [2008] 1 WLR 445, para 54.”

Applying those principles (at [61]), Henderson LJ explained that:

The simple fact is that Ward transferred the five properties to AmicusHorizon in breach of an express term of the Sale Agreement, namely clause 4.9.  Burrows had a legitimate interest and expectation that Ward would not breach the Sale Agreement, reinforced in the present case by the fact that Ward had negotiated with Burrows for three months on the footing that the proposed transfer was prohibited by the Sale Agreement, and had then effected the transfer behind Burrows’ back and without Burrows’ consent.  Burrows is not now seeking to extract a ransom from Ward, but merely to be compensated for the loss of the opportunity to negotiate a reasonable price for releasing Ward from its contractual obligations.  The benefit of the contractual restriction was a potentially valuable piece of property in its own right, and Burrows was deprived of the opportunity to exploit it, for what it was worth, by Ward’s unilateral action.

He also rejected the submission that there was, in light of the lack of overage payable, no interest in performance that should be protected by a damages award (at [63]):

[Ward] seeks to uphold the decision of the judge on the basis that the key consideration is whether the claimant has an interest in performance which is not readily measureable in terms of money, and for which an award of damages by reference to his financial loss would not provide him with proper recompense: see Attorney General v Blake at 282 B-C, per Lord Nicholls.  [Ward] also submits that the purpose of clause 4.9 was simply to protect Burrows’ right to overage, and not to restrict the development of the site or to provide Burrows with a ransom opportunity.  I am unable to accept these submissions, which seem to me to ignore the fundamental point that clause 4.9 expressly prevented disposals of the Property or any part thereof, other than Permitted Disposals, at any time during the Overage Period without first procuring the execution of a Deed of Covenant by the transferee.  Ward freely entered into a contract containing this express provision, and it deliberately breached it without giving Burrows the opportunity to seek an injunction to prevent the disposal.  It would in my judgment be regrettable if Ward could escape scot free, in these circumstances, without having to pay a proper price for obtaining a release from the restriction.

The Court of Appeal also considered (and distinguished) One Step (Support) Ltd v Morris-Garner [2016] EWCA Civ 180, [2017] QB 1, presently under appeal to the Supreme Court. Henderson LJ explained (at [64]) that

For present purposes, it is enough to note that the difficult issue of the potential availability of Wrotham Park damages in cases where the claimant might in principle be able to recover damages on the conventional basis, does not arise in the present case, because it is common ground that Burrows suffered no loss on a conventional basis.  And if the relevant question is what the just response would be to the facts of the present case, I would answer that justice to Burrows requires an award of damages on a negotiating basis.


Back to news listing