Judgment
Lord Justice Toulson:
Introduction
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Judgment Lord Justice Toulson: Introduction 1. This case concerns an introductory agreement relating to a contract for the sale of a property. The questions are whether the introducer is entitled to payment under, or for breach of, the introductory agreement and whether the introducer is itself liable in damages for fraudulent misrepresentation. 2. The appeal is from a judgment of HHJ Steiger QC after a 4 day trial in the Manchester County Court in July 2008. He delivered a written judgment dated 5 August 2008. 3. The action arose from an introductory agreement made between the first claimant (Ananhall) and the defendant (Mr Adler) on terms set out in a short letter dated 31 March 2005 from Mr Adler to Mr Julian Pollard and Mr Peter Gillis of Ananhall. The letter read: “Re: Grove House, Skerton Road, Old Trafford- Subject to Contract Further to your correspondence of yesterday, we are pleased to confirm that we are happy to take over your contract for the purchase of the above property, subject to Teacher Stern Selby being satisfied with the relevant documentation. If we complete this transaction we understand that a 1% of purchase price fee will be payable to yourselves and we would also like to instruct you to negotiate the removal of the break clause to the HSE. If your break clause negotiations are successful or if we “pull” the instructions prior to a satisfactory outcome, we will be liable to pay yourselves a further £75,000. These negotiations are to have a long stop date of 6 months from completion of acquisition.” Background 4. Ananhall was created in 2001 by Mr Pollard, who ran it with Mr Gillis. They were both former solicitors. Ananhall’s balance sheet and accounts at 30 June 2005 showed assets of £134,626 and pre-tax profits in the preceding 12 months of £33,586. 5. Grove House was an 8 storey office block built in the 1970’s and owned by an Israeli businessman through a Jersey company called Highcliff Holdings Limited (“Highcliff”). 6. In 2005 the upper 6 floors were let to the Health and Safety Executive (“HSE”). The ground floor was let in part to the HSE and in part to the local authority. The first floor was let to a company but sub-let to the Benefits Agency. In all, the HSE had 8 leases, which were due to expire in 2017, but were subject to break clauses in 2007 and 2013. 7. In early 2005 Mr Pollard learned that the freeholder was interested in selling the property. On 3 February 2005 Ananhall made a written offer to purchase the freehold for £3.6 million, subject to contract, subject to a structural survey of the property prior to exchange, subject to sight of management accounts and service charge accounts for the last 3 years and subject also to the following condition: “The vendors agreeing to grant us exclusivity for a period of 28 days from today or 21 days from receipt by our lawyers of a full sale pack whichever is the later, to enable us to undertake a comprehensive due diligence appraisal.” 8. On 8 February 2005 an associate company of Ananhall entered into a written lockout agreement with Highcliff giving it the required period of exclusivity. 9. Central to Mr Pollard’s planning was the prospect of persuading the HSE to give up its rights under the break clauses in return for undertakings to carry out refurbishment works. He set about exploring this possibility with the HSE’s agents, Donaldsons. 10. Mr Pollard also made unsuccessful attempts to find an investor willing to provide the capital for the purchase. 11. While this was going on Ananhall tried to persuade the freeholder to extend the lockout period, but on 23 March 2005 the freeholder’s solicitors wrote to Ananhall’s solicitors, Teacher Stern Selby, saying that the freeholder had now run out of patience and setting a deadline of Tuesday 29 March for exchange of contracts or return of the contract documents which had been sent out. The involvement of the defendant 12. In these circumstances Mr Pollard turned to Mr Adler. Mr Adler is a commercial property dealer with long experience and wealthy contacts. Mr Pollard and Mr Adler had a meeting on 23 March 2005, at or after which Mr Adler signed an agreement by which he undertook to treat as confidential any information to be supplied by Ananhall relating to various investment opportunities, including that with which we are concerned. 13. On 27 March 2005 Mr Pollard wrote to Mr Adler: “Peter [Gillis] tells me you inspected Grove House – externally at least – and expressed interest to proceed. Just to recap, we hold contract in readiness for exchange. We are using Clair Maddows at Teacher Stern. I enclose a copy of the Report she gave me on one of the HSE leases. Each floor is held under virtually identical leases. We hold similar Reports on other leases. If you require sight of a lease itself just let me know. … David Jeans of Edward Symmons has inspected the building internally with us and can vouch for its condition and value if necessary. Incidentally his view as expressed last week was that with the tenant’s break clause removed the proper yield value is 6.5% – and if the rent is reviewed at £8 psft this values the building (pre-cost) at £5.23 million and if the rent goes to £8.50 psft this values the building (pre-cost) at £5.55 million. As you know there is comparable evidence close by of a letting last month at £9.64 psft. So the value could well exceed this sum. As you know we are awaiting a response to our offer to the HSE and we expect to hear from them on 31 March or immediately thereafter – however the vendor wishes an exchange before then and has threatened to withdraw the papers. I think we should be prepared to exchange on Tuesday if we can and I am conscious that you are going to Poland for a few days now. … We will need to exchange contracts this week and to that end I suggest the deposit – let’s try 5% i.e. £180,000 – be lodged with Clair’s office on Tuesday.” The events of 31 March 2005 14. Further discussions between Mr Pollard and Mr Adler culminated in Mr Adler agreeing to take over the proposed contract with the freeholder through a single purchase vehicle company and agreeing terms for Ananhall’s remuneration, as stated in Mr Adler’s letter dated 31 March 2005 which I have set out. 15. On the same day, prior to that letter being sent, Mr Pollard received a letter from Donaldsons stating that: “…if the building is properly managed and is clearly fit for purpose then there may be a possibility of HSE remaining on some of the floors but there is not a realistic prospect of HSE being in a position to agree to drop all the breaks as you propose in your letter.” Mr Pollard did not forward that letter to Mr Adler. 16. Also on the same day contracts were exchanged for the sale of the property for £3.6 million by Highcliff to Steelville Limited (“Steelville”), the single property purchase vehicle being used by Mr Adler for this transaction. Under that contract completion was fixed for 12 May 2005. Post-contractual events 17. Negotiations continued between Mr Pollard and the HSE through Donaldsons. The HSE offered to waive 4 of the break clauses, on terms, but this was not satisfactory to Mr Adler. The date for completion passed without completion and Highcliff served a notice to complete. Mr Adler then attempted to sell the property by auction with a guide price of £4.2 million, but there were no bidders. News of the auction reached the freeholder, who was angry to learn that the property was being offered for auction, at a higher price, before Mr Adler owned it. On Steelville’s failure to complete the purchase within the period set by the notice to complete, the freeholder’s solicitors gave notice that the freeholder was treating the contract as rescinded and forfeiting the deposit. The litigation 18. This action was begun on 19 December 2005. Ananhall claimed 1% of the purchase price (£36,000) either as money due under the introductory agreement or as damages for breach of an implied term of it, and an additional £75,000 as money due under the agreement. Mr Adler denied that Ananhall was entitled to any sum either under the agreement or as damages for breach of it. 19. In defence and counterclaim, Mr Adler and Steelville alleged that Ananhall through Mr Pollard had been guilty of fraudulent misrepresentation, for which Steelville claimed damages of £180,000 in respect of its lost deposit under the Grove House contract and an indemnity against its outstanding liabilities to the vendor under that contract. Mr Adler relied on Ananhall’s alleged misrepresentations as an additional ground of defence to the claim made against him under the introductory agreement. 20. The issues before the judge, and before this court, fall into two parts: construction and misrepresentation. Construction – the judge’s findings 21. The judge rejected Ananhall’s primary argument that the word “completion” in the introductory agreement referred to the substitution of Mr Adler (or a company nominated by him) as a potential purchaser of Grove House and not to completion in the normal conveyancing sense. But he accepted Ananhall’s alternative argument that there must be implied into the agreement a term that Mr Adler would not willingly impede the sale so as to prevent the earning of commission by Ananhall. In support of that finding he referred to the decisions of this court in CEL Group Limited v Nedlloyd Lines [2003] EWCA Civ 1716 and Bournemouth and Boscombe FC Limited v Manchester United FC Limited (unreported 21 May 1980). He found that Mr Adler was in breach of the implied term and that Ananhall was therefore entitled to the amount of its lost commission as damages for the breach. 22. As to the claim for £75,000, Ananhall argued that either the failed auction or the failure to complete with the resulting rescission of the contract amounted to the “pulling” of instructions by Mr Adler. The judge rejected the argument that the auction involved a tacit withdrawal of instructions but accepted that the conduct of Mr Adler which resulted in the non-completion of the contract and its rescission amounted to a “pulling” of instructions within the meaning of the letter of 31 March. He held that Mr Adler was therefore liable to Ananhall for a further £75,000 on that basis. Misrepresentation – the judge’s findings 23. The main allegation of misrepresentation (and the only allegation which has been pursued on this appeal) is that Mr Pollard misrepresented to Mr Adler the state of his negotiations with the HSE and suppressed the true facts. In his witness statement (which Mr Adler adopted in his evidence), he said: “Mr Pollard told me that he was in an advanced state of negotiations with the Health and Safety Executive (HSE) for the removal of the break clauses which were exercisable by the HSE in June 2007. Mr Pollard told me that he had a very good rapport with the HSE. The way in which Mr Pollard was talking about his negotiations, I thought that the removal of the break clauses with HSE was as good as done.” 24. The judge, who was critical of Mr Adler’s evidence in a number of respects, summarised his case on misrepresentation and set out his findings as follows: “45. Mr Adler’s case as to the removal of break clauses is that he was told it was a virtual certainty and that the real prospects were concealed from him. It is certainly the case that Mr Pollard did not forward to Mr Adler the…letter from Donaldsons which had been received before the 31 March agreement letter but this does not amount to deceitful concealment or form part of a pattern of misrepresentation…If Mr Adler had really thought that the break clauses were all in the bag before the contracts were exchanged I do not think for one moment that he would have offered such a generous success fee or delayed completion as he did. … 47. In summary, I do not consider on the evidence that Messrs Pollard and Gillis were guilty of any of the misrepresentations alleged by Mr Adler.” 25. He therefore rejected misrepresentation as a defence to Ananhall’s claim and dismissed the part 20 claim by Steelville. 26. Mr Adler appeals against the judge’s findings on both the construction and misrepresentation issues. Construction – discussion and conclusion 27. Mr Booth QC sensibly did not seek to challenge the judge’s finding that the word “completion” in the introductory agreement meant completion in the normal conveyancing sense. So the only issue before this court in relation to Ananhall’s claim for 1% commission is whether the judge was right to find that the agreement contained an implied term that Mr Adler would not willingly impede the sale so as to prevent the earning of commission by Ananhall. 28. On this issue we were referred to a number of authorities in addition to those cited by the judge in his judgment, including Luxor (Eastbourne) Limited v Cooper [1941] AC 108, Alpha Trading Limited v Dunnshaw-Patten Limited [1981] 1 QB 290 and Marcan Shipping (London) Limited v Polish Steamship Co (The “Manifest Lipkowy”) [1989] 2 Ll Rep 138. 29. The authorities establish two general principles. The first principle is that the test for implying a term into a contract is not whether the suggested term would be reasonable but whether it is necessary in order to give effect to the parties’ obvious but unspoken intentions or for the contract to be able to work as the parties must be taken to have intended (or, put more shortly, to give business efficacy to the contract). 30. The second principle is that in applying this test it is essential to concentrate on the particular words and particular circumstances of the individual contract. This point was emphasised in Luxor (Eastbourne) Limited v Cooper and has been repeated in later authorities including CEL Group Limited v Nedlloyd Lines. 31. Mr Freedman QC in his skeleton argument pithily and accurately summarised the circumstances in which Ananhall approached Mr Adler as follows: “This case is not analogous to that of the introduction agent [such as an estate agent] who earns his commission by having opportunities to provide to others. This is a case of a dealer who had run out of time and the opportunity to make use of his lockout period.” 32. Mr Adler was asked to step in at short notice. During the period between 23 and 31 March 2005 he was able to take some steps to assess the potential profitability of the purchase. He visited the premises and asked local surveyors to research rents of comparable properties. Importantly, however, he was being asked to take over the purchase before knowing the HSE’s response to Mr Pollard’s proposal that it should agree to waive the break clauses in its leases. As already noted, Mr Pollard received the HSE’s initial response to his proposals through Donaldsons’ letter dated 31 March 2005, but he did not see fit to pass it on to Mr Adler. With no explicit indication from the HSE as to its position, Mr Adler had to gamble on a matter critical to the yield value of the property. 33. In such uncertain circumstances it is no wonder that the operative words of Mr Adler’s letter dated 31 August 2005 were not: “In consideration of your introduction of this property we will pay you 1% of the amount of the purchase price on completion of the transaction…” but: “If we complete this transaction we understand that a 1% of purchase price fee will be payable to yourselves…” 34. In short, the promise of payment was expressly conditional on Mr Adler or his company completing the transaction and his letter offered no assurance that this would necessarily happen. In those circumstances I see no room for implying a term which would have entitled Ananhall to payment of commission if Mr Adler or his company did not complete the transaction. But out of respect for the judge and courtesy to Mr Booth, I should address specifically the arguments advanced by Mr Booth in support of the conclusion of the judge. 35. Mr Booth submitted that where an intermediary has acted for A in brokering a purchase agreement with B, in return for a commission, there is an important difference between implying a term which would require A to enter into a contract with B and implying a term which would stop A from breaching a contract made with B. His reasoning was based on obiter dicta of Lord Wright in Luxor (Eastbourne) Limited v Cooper which were applied by the Court of Appeal in Alpha Trading Limited v Dunnshaw-Patten Limited. In Luxor (Eastbourne) Limited v Cooper a commission agent introduced a willing purchaser for property at a price which the vendor had instructed the agent to obtain; but the vendor had a change of mind and no contract of sale was made. It was held that there was no implied term of the commission agreement which required the vendor to accept the purchaser’s offer. 36. Mr Booth relied on the following passages of the speech of Lord Wright: “…if the negotiations between the vendor and the purchaser have been duly concluded and a binding executory agreement has been achieved, different considerations may arise. The vendor is then no longer free to dispose of his property. Though the sale is not completed the property in equity has passed from him to the purchaser. If he refuses to complete he will be guilty of a breach of agreement vis-a-vis the purchaser. I think, as at present advised, that it ought then to be held that he is also in breach of his contract with the commission agent, that is, of some term which can properly be implied. But that question and possibly some other questions do not arise in this case and may be reserved.” (page 142) and: “It may well be, as I have already stated, that as soon as a binding executory contract is effected between the employer and the purchaser, a different state of things arises. The property is transferred in equity and the seller can be specifically ordered to complete. The agent may then fairly claim that he is entitled to his commission or at least to substantial damages and a term of that nature may , I think, as at present advised be implied in the contract. It cannot have been contemplated that when a binding contract with the purchaser has been made on the agent’s mediation, the principal can as between himself and the agent break that contract without breaking his contract with the agent.” (pages 149-150) 37. These passages have to be read in the context of the general principles set out by Lord Wright earlier in his speech about the power of the court to imply terms in contracts. He said: “It is agreed on all sides that the presumption is against the adding to contracts of terms which the parties have not expressed. The general presumption is that the parties have expressed every material term which they intended should govern their agreement, whether oral or in writing. But it is well recognised that there may be cases where obviously some term must be implied if the intention of the parties is not to be defeated, some term of which it can be predicated that “it goes without saying”, some term not expressed but necessary to give to the transaction such business efficacy as the parties must have intended. This does not mean that the court can embark on a reconstruction of the agreement on equitable principles, or on a view of what the parties should, in the opinion of the court, reasonably have contemplated. The implication must arise inevitably to give effect to the intention of the parties.” (page 137) 38. Lord Wright’s rationale for his suggested implied term where an executory contract has been made between a principal and a third party was that it could not have been contemplated that in such circumstances the principal might break that contract without breaking his contract with the agent. But whether that could or could not have been contemplated in a particular case must depend on the language of the contract and the circumstances in which it was made. 39. In this case, for reasons which I have stated, both the language and the circumstances of the introductory agreement militate against the making of any assumption that Ananhall could rely on Mr Adler to complete the transaction or would be entitled to payment of commission if he did not. 40. If the proverbial bystander had asked the parties on 31 March 2005 whether Ananhall was to receive payment of 1% if Mr Pollard decided not to complete the transaction after he knew more about the HSE’s position and had had a fuller opportunity to assess the profitability of the contract, it is far from obvious that both parties (and particularly Mr Adler) would have answered him in the affirmative. Nor is it necessary to imply the term found by the judge in order to make the introductory agreement workable. Mr Adler was unlikely to forgo lightly the £180,000 deposit paid to Highcliff. If the proposed purchase was likely to be profitable, as Mr Pollard hoped, it would be in Mr Adler’s commercial interest to proceed with it. In that event Ananhall would gain. By negotiating this arrangement at a time when Highcliff had lost patience with him, Mr Pollard was able to preserve the possibility of making a significant profit. I can see no necessity for implying a term which would require Mr Adler to pay a substantial sum to Ananhall for the introduction if Mr Adler came to the view, prior to completion, that the likely outcome of the deal was such that he would be better to forfeit the deposit of £180,000 than proceed to completion. 41. Mr Booth also conjured various scenarios involving sharp practice by Mr Adler, designed to obtain value from the agreement for the purchase of Grove House by methods which would not involve the conveyance of the property to Steelville, in order to avoid the payment of commission to Ananhall. He submitted that the term implied by the judge was necessary to prevent such behaviour which would otherwise be capable of undermining the business efficacy which the parties consistently with good faith must have intended. Where a party is guilty of bad faith, special considerations arise and the courts can be adept at fashioning appropriate remedies. (In this context, I note that in Bournemouth and Boscombe FC Limited v Manchester Untied FC Limited Brightman LJ, who delivered a cogent dissenting judgment, added that the position would be entirely different if there had been an allegation and finding of bad faith against Manchester United.) The examples postulated by Mr Booth were entirely hypothetical. Arguments of a similar kind could be advanced in many disputes about contractual construction. The court should be cautious about such arguments when they do not arise on the facts. There are several reasons for this. First, hypothetical examples tend to lack detail. Secondly, to construe an ordinary commercial contract where there is no allegation of bad faith through the lens of imaginary cases of bad faith is liable to have a distorting effect. Thirdly, where there is bad faith, as already stated, there may be a remedy appropriate to the particular facts. I am unpersuaded that the hypothetical examples suggested by Mr Booth make it necessary to imply a term of the generality found by the judge. 42. For those reasons I respectfully disagree with the judge’s conclusion about the need to imply into the agreement a term that Mr Adler would not impede the sale. 43. As to the claim of £75,000 for “pulling” the instructions to Ananhall to negotiate the removal of the HSE break clauses, these instructions were also expressed to be conditional on the completion of the transaction, although unsurprisingly the negotiations continued for a period after exchange of contracts between Highcliff and Steelville (not least because it was in Ananhall’s interest that Steelville should complete the purchase). As I would interpret the introductory agreement, Ananhall’s entitlement to a fee beyond 1% of the purchase price was conditional on the completion of the purchase agreement as well as on the break clause negotiations either being successful or being terminated by Mr Adler “pulling” the instruction of Ananhall prior to a satisfactory outcome. In any event, if Mr Adler owed no obligation to Ananhall to complete the purchase, I do not consider that his failure to do so could properly be interpreted as “pulling” Ananhall’s instructions within the meaning of the agreement. It would be odd to interpret the introductory agreement in such a way that non-completion of the purchase agreement by Mr Adler would have the effect that Ananhall would not be entitled to its fee of 1% of the purchase price but would be entitled to £75,000. The reference in the introductory agreement to “a further £75,000”, meaning further to the fee of 1% of the purchase price, provides a clear indication of a contrary intention. 44. The judge approached the claim for £75,000 having found in favour of Ananhall on its claim for 1% of the purchase price. Approaching the matter as I do on the basis that Ananhall was not entitled to payment of 1% of the purchase price, I would hold that it was not entitled to payment of a further £75,000. Misrepresentation – discussion and conclusion 45. Mr Freedman submitted that the judge failed to deal adequately with Mr Adler’s case on oral misrepresentation. He contrasted what Mr Adler said in his witness statement (in the passage which I have set out in paragraph 23) with the judge’s summary in the first sentence of paragraph 45 of the judgment (“Mr Adler’s case as to the removal of break clauses is that he was told it was a virtual certainty and that the real prospects were concealed from him”). Mr Freedman complained that the judge failed to deal specifically with Mr Adler’s evidence that Mr Pollard told him that he was in an advanced state of negotiations with the HSE, and failed to make a finding as to what was said. 46. I regard this as a barren argument. The judge succinctly summarised Mr Adler’s case on oral misrepresentation in the first sentence of paragraph 45 of his judgment. He had heard evidence from both Mr Adler and Mr Pollard. Mr Adler’s oral evidence was that the way in which the matter was presented to him by Mr Pollard was that the removal of the HSE break clauses was “as good as done”. Mr Pollard denied doing so. The judge rejected Mr Adler’s evidence on this point, as is plain from his express findings in paragraphs 45 and 47 of his judgment. 47. Mr Freedman also submitted that the judge wrongly failed to deal with another part of Mr Adler’s pleaded case, to which he submitted that there was no answer on the objective material available to the court. The argument was based on Mr Pollard’s letter to Mr Adler dated 27 March 2005, the material parts of which I have set out. 48. In Mr Adler’s defence it was pleaded that by that letter Mr Pollard represented that he had reasonable grounds for believing that the HSE would agree to remove the break clauses from its leases. 49. Ananhall’s reply contained the following admission: “It is admitted that [Ananhall] thereby represented that there were reasonable grounds to believe that the HSE would agree to remove some or all of the break clauses from its leases, but that the terms which the HSE would exact as a price for doing so were as yet undetermined”. 50. Mr Freedman argued that this representation became false, to the knowledge of Ananhall, when Mr Pollard received Donaldsons’ letter dated 31 March 2005, which stated that there was no realistic prospect of the HSE agreeing to drop all the breaks in its leases. It was true that Donaldsons held out the prospect that the HSE might be willing to drop the break clauses in some of its leases, but Mr Freedman submitted that Ananhall could no longer honestly represent that it had reasonable grounds for believing that the HSE would agree to remove “some or all of the break clauses from its leases”. The word “some” was justifiable but not the words “or all”. 51. Mr Booth argued that the phrase had to be read as a single phrase and that its effect was not to admit that Ananhall represented that it had reasonable grounds to believe that HSE would agree to the removal of “all” of the break clauses. The representation was true as long as Ananhall had reasonable cause to believe that the HSE would agree to the removal of at least some of the break clauses. 52. Rather than bandy argument about the proper construction of Ananhall’s pleading, I think that it is more important to examine the letter said to give rise to the representation. I do not see that there could properly be extracted from that letter a representation that Ananhall had cause to believe that the HSE would agree to waive the break clauses in all the leases. Therefore, although the judge did not directly deal with this point (probably because it was not argued before him in the same way that it has been argued before us) I am not persuaded that it provides any valid ground for disturbing the judge’s dismissal of the case on misrepresentation. Result 53. I would allow Mr Adler’s appeal in relation to Ananhall’s claim for the payment of 1% commission on the sale price and £75,000, but uphold the judge’s dismissal of the misrepresentation claim. Lord Justice Goldring: 54. I agree. Lady Justice Arden: 55. I also agree.
