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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Sharma & Anor v Simposh Ltd [2011] EWCA Civ 1383 (23 November 2011) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2011/1383.html Cite as: [2013] Ch 23, [2011] EWCA Civ 1383, [2012] 3 WLR 503, [2012] 1 P&CR 12, [2011] 48 EG 8, [2012] 6 EG 92, [2012] 2 All ER (Comm) 288, [2012] 1 EGLR 113

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IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM LEICESTER COUNTY COURT
MR RECORDER WHITEHURST
08LE04729

		Royal Courts of Justice Strand, London, WC2A 2LL
		23/11/2011

Lord Justice Toulson :

Introduction

1. This case is about a deposit paid in connection with an abortive property transaction. The claimants paid money to the defendant under an oral agreement giving the claimant an option to purchase property then under construction at an agreed valuation. Under the agreement the defendant was to complete the construction within an agreed timescale and in the meantime was not to market the property elsewhere. The agreement was void because it was oral, but the defendant honoured it by proceeding to complete the construction and refraining from attempting to market the property elsewhere. In the event the claimants decided not to proceed because of turmoil in the financial markets and they reclaimed the money paid under the agreement. The judge (Mr Recorder Whitehurst) found that the payments were agreed to be non-refundable, but he held that in law the money was refundable. The defendant appeals against that decision.

Facts

2. The case concerns a block of eight flats at 213 Loughborough Road, Leicester. The defendant company is a property developer. It acquired the Loughborough Road site with a view to its redevelopment in phases. Phase one was to be the conversion of an existing building into the eight flats. The company had two directors, Mr Holland and Mr Postlethwaite. Mr Holland was in charge of the building and construction side and Mr Postlethwaite was responsible for sales and administration. The company's dealings with the claimants were mainly through Mr Postlethwaite.
3. In September 2007 the second claimant had discussions with Mr Postlethwaite about buying the whole of phase one. It had still to be completed but a show flat had been opened to the public. Mr Postlethwaite indicated that the company would be prepared to accept £1.1 million, which was a discount on the asking prices for the individual flats.
4. The second claimant needed to consider how she would raise the finance. On 12 September 2007 she and the defendant agreed that she would pay to the defendant a non-refundable deposit of £1,600 in order to secure a period of two weeks in which to consider how she could carry out the purchase. That sum was paid on 16 September 2007 and there is no dispute about the company's entitlement to retain it. The second claimant then approached the first claimant and they agreed to become joint partners in the purchase.
5. Between 12 and 26 September 2007 the claimants agreed orally with the defendant that if the claimants paid a total of £55,000 (including the initial payment of £1,600) by 26 September, the defendant would complete phase one, would refrain in the meantime from offering it for sale to anyone else and would keep open its offer to sell the completed development to the claimants for £1.1 million.
6. The claimants paid £25,900 to the defendant on 20 September 2007. They were not able to pay the full £55,000 by 26 September, but the balance of £27,500 was paid on 31 October and was accepted by the defendant.
7. The judge found that the defendant honoured the agreement and that finding was not challenged on the appeal.
8. By the end of 2007 there had been a sharp fall in the financial market and the claimants ultimately decided not to proceed with the purchase.
9. The judge characterised the agreement as "an attempt to create an option giving the claimants the right to buy phase one within the period leading to its completion for an agreed price in exchange for a non-refundable payment." There is no challenge to that description.

1989 Act

10. Section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 provides:

"(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each."

The section implemented the recommendations of the Law Commission in its report on Transfer of Land (1987) Law Com 164.

11. In Spiro v Glencrown Properties Limited [1991] Ch 537 Hoffmann J held that an option granted by a vendor of land is a "contract for the sale or other disposition of an interest in land, within the meaning of the section". This accorded with the view which the Law Commission had expressed (paragraph 4.3).
12. Section 2 replaced section 40 of the Law of Property Act 1925, under which an oral contract for the sale or other disposition of land was unenforceable by action but was not void. Under section 40, as the Law Commission noted in paragraph 1.3, if a purchaser paid a cash deposit to the vendor under an oral contract but did not proceed with the purchase, the vendor was entitled to keep the deposit.
13. Under the new section, as the Law Commission explained at paragraph 5.2:

"…where an anticipated contract is void because not made in accordance with statutory formalities, it does not follow that the parties will simply be left remediless by the law. Apart altogether from any possibilities there may be of suing for damages in tort (e.g. deceit or negligence), either of the parties would where appropriate be able to seek restitution. Thus if money has been paid as a deposit or part of the price by a prospective purchaser, recovery would generally be permitted because there would be a total failure of consideration."

14. The words "where appropriate" and "generally" are significant. The Law Commission did not suggest that restitution would automatically or always be available to a purchaser who had paid a deposit. It would depend on the proper application of the principles of restitution.

Pleadings

15. The claimants' particulars of claim alleged that the parties agreed that the money paid by the claimants, other than the initial payment of £1,600, should be refundable if the claimants did not proceed with the purchase. The particulars of claim did not plead an alternative case that the money was refundable if, as the judge found, the parties agreed that it should not be refundable.
16. The defence was much amended. It alleged, correctly, that the parties agreed that the money paid by the claimants was not to be refundable if the claimants failed to proceed with the purchase. In anticipation of a possible claim that the money was nevertheless repayable, the defendants advanced a defence of estoppel and other defences.
17. In their written closing submissions the claimants argued that if, contrary to their primary case, the court found that it was agreed between the parties that the deposit was non-refundable, the deposit should still be returned as there was no enforceable contract between the parties. Although their claim had not been put in that way in their pleadings, this did not take the defendants by surprise. It was right in all the circumstances for the judge to entertain the argument. By this time the pleadings were rather confusing.

Judgment

18. The judge found the facts with admirable clarity. On the law, the ratio of his judgment was that the claimants were entitled to the return of their deposit (less the £1,600 which was not disputed) as money paid under a void contract. In reaching that conclusion he considered and rejected the defence of estoppel and other arguments advanced by the defendant.

Arguments on appeal

19. The defendant's written submissions advanced a number of points. In particular, it was submitted that the agreement, although void as a contract, amounted to a representation by the claimants that the payment of £55,000 was to be non-refundable, that the defendant changed its position and acted to its detriment in reliance on that representation by taking the property off the market and keeping it available for the claimants to purchase, and that in those circumstances the claimants were estopped from claiming repayment. The claimants responded that this was an impermissible way of attempting to circumvent the effect of section 2; the defendant was trying to convert a void promise to regard the payment as non-refundable into an obligation to do so by characterising it as a representation. Mr Small submitted that on the authorities a vendor could not advance a non-contractual right to retain a pre-contract deposit.
20. It appeared to this court that the essential question was not whether the claimants were estopped from advancing a restitutionary claim. It was a more basic question whether there had been a failure of consideration entitling the claimants to restitution on the facts found by the judge.

Discussion and conclusion

21. The agreement between the parties lacked formal validity and so had no contractual effect. It was no more than a mutual declaration of intent. An important part of the law of restitution is concerned with money paid or benefits conferred in respect of legally ineffective transactions. Goff & Jones' text book on the Law of Restitution 7^th ed, 2007, begins its treatment of the subject with this important statement of general principle (para 19-001):

"Transactions may be or become ineffective for a variety of reasons. But the reason why the courts will award restitution is in each case fundamentally the same, namely, that the plaintiff's expectations have not been fulfilled."

22. In relation to money paid, the authors continue (para 19-002):

"If money has been paid under a contract which is or becomes ineffective, the recipient is evidently enriched. It is a distinct question whether that enrichment is an unjust enrichment…In most of the situations, however, the ground of recovery is that the expected return for the payment, or consideration, as it is confusingly called, has failed."

23. The confusion is caused by the fact that the term "consideration", when used in the phrase "total failure of consideration" as a reason for restitution, does not mean quite the same thing as it does when considering whether there is sufficient "consideration" to support the formation of a valid contract. Viscount Simon LC, explained this in Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1943] AC 32, 48:

"In English law an enforceable contract may be formed by the exchange of a promise for a promise or by the exchange of a promise for an act…but when one is considering the law of failure of consideration and the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise that is referred to as the consideration but the performance of the promise."

24. A succinct summary of the meaning of failure of consideration was given by Professor Birks in his Introduction to the Law of Restitution (1989), page 223:

"Failure of the consideration for a payment…means that the state of affairs contemplated as the basis or reason for the payment has failed to materialise or, if it did exist has failed to sustain itself."

25. It is easy to see why the Law Commission suggested that a purchaser who pays a deposit under an oral agreement for the purchase of land will generally be entitled to recover his deposit if the sale does not go ahead, for the state of affairs contemplated as the reason for the payment will have failed to materialise, but that is a generalisation and, like all generalisations, it is subject to the facts of the particular case.
26. In the present case the judge found that the claimants got what they paid for; as agreed, the defendant took the property off the market pending its completion and kept open its offer to sell it to the claimants at a fixed price. The claimants' expectations were therefore fulfilled and there is no injustice in the defendant retaining the sums paid to it. The agreement did not amount to a legally binding contract, but is nevertheless highly relevant as a matter of fact to the question whether there was a failure in the fulfilment of the parties' expectations such that denial of repayment would leave the defendant unjustly enriched. There is no suggestion in this case of any inequality of bargaining power or overbearing behaviour which might be relevant when considering the justice of the defendant's position. It was a commercial transaction between people able to look after themselves.
27. Mr Small submitted that it was unjust for the defendant to retain the money because it had no contractual right to it. He submitted that a vendor cannot lawfully retain a deposit paid by a prospective purchaser in respect of an intended purchase of land under a non-contractual agreement (i.e. an agreement made "subject to contract" or an agreement rendered void by the operation of section 2) in the event of the purchase not proceeding. He relied in support of that submission on the combined effect of the decisions of the Court of Appeal in Chillingworth v Esche [1924] 1 Ch 97 and Gribbon v Lutton [2002] QB 902.
28. In order to follow the argument it is necessary to begin with an earlier decision of the Court of Appeal in Howe v Smith (1884) LR 27 Ch D 89. The case itself has no direct relevance to the issue, but it was referred to by Pollock MR in Chillingworth v Esche in a passage of his judgment which has given rise to controversy. In Howe v Smith there was a contract for the sale of land which required the purchaser to pay £500 "as a deposit and in part payment of the purchase money." The contract provided that if the purchaser failed to complete on time the vendor should be at liberty to resell and recover any deficiency in price as liquidated damages. The purchaser failed to complete and the vendor resold the property for the same price. The question considered by the Court of Appeal was whether the vendor was entitled to retain the £500, having suffered no loss.
29. The court held that this turned on the proper construction of the contract and, in particular, what was meant by the words "as a deposit and in part payment of the purchase money". It interpreted the contract as meaning that the payment was not to be merely a part payment but also a guarantee of performance, entitling the vendor to forfeit the payment if the purchaser failed to complete.
30. In Chillingworth v Esche the purchasers entered into a written agreement, dated 10 July 1922, to purchase land from the vendor "subject to a proper contract to be prepared by the vendor's solicitors" and they acknowledged having paid £240 "as deposit and in part payment of the said purchase money". A contract was prepared by the vendor's solicitors, approved by the purchasers' solicitor, executed by the vendor and tendered to the purchasers for execution. At that point the purchasers declined to proceed with the transaction and claimed the return of the deposit.
31. There were two issues before the Court of Appeal. The first was whether the written agreement was a binding contract. The second was whether the vendor was entitled to retain the money if the agreement was not a binding contract.
32. On the first issue the court held that the proper interpretation of the agreement was that the parties intended that there should be no binding contract until a contract prepared by the vendor's solicitors had been executed. On the second issue, Pollock MR said at pages 107-8:

"This case…does not involve a decision of what a deposit may be in all cases, but simply what it is in this particular case.

In Howe v Smith where the nature of a deposit was considered and the right of a purchaser to the return of it, Bowen LJ said: "The question as to the right of the purchaser to the return of the deposit money must, in each case, be a question of the conditions of the contract. In principle it ought to be so, because of course persons may make exactly what bargain they please as to what is to be done with the money deposited. We have to look to the documents to see what bargain was made." And Cotton and Fry LJJ say substantially the same thing. Therefore we have to consider what in fact was the effect of the document of July 10, 1922, not forgetting the contemporaneous documents, and to ask ourselves whether this deposit was by those documents intended to pass irrevocably to the vendor if the purchasers did not carry out the transaction. In all the circumstances of this case, I think the deposit is recoverable by the purchasers. There was no provision made in the documents which would justify the vendor in declining to return it; though if he had, by appropriate words, made provision for that in the document, such a provision could have been upheld."

33. There are two views about the meaning of this passage, particularly the final sentence. In Gribbon v Lutton Laddie J, sitting as a judge of the Court of Appeal, said at para 33:

"All the judge was saying was that if that [the 10 July document] had been a binding contract, suitable wording could have been inserted into it to make the deposit non-refundable."

34. Pill LJ at para 82 agreed with Laddie J's interpretation.
35. Jacob J, as the trial judge in Gribbon v Lutton, and Robert Walker LJ in the Court of Appeal interpreted Pollock MR's meaning differently. They took him to be saying that even if there was no contract, a prospective vendor might take a deposit from a prospective purchaser on terms such that the prospective purchaser's subsequent withdrawal did not entitle him to recover the deposit, provided that those terms were sufficiently clearly defined.
36. Assuming for the present that we are not bound to accept Laddie J's interpretation, with which Pill LJ agreed, I am unable to accept it for several reasons. Laddie J's interpretation involves reading into the last sentence of the disputed passage the words "if there had been a binding contract" so as to make it read:

"There was no provision made in the documents which would justify the vendor in declining to return it; though if it had been a binding document and if he had, by appropriate words, made provision for that [i.e. for the deposit to be non-refundable] in the document, such a provision could have been upheld."

37. The words interpolated were an important matter for Pollock MR to have omitted; and, if included, would have rendered what he in fact said empty. For if the document of 10 July had been a contractual document, there would have been no need for any additional words of the kind to which he referred. The words in the document "as deposit and in part payment of the said purchase money" were the same as had been held in Howe v Smith to make the deposit non-refundable.
38. Pollock MR cannot have been blind to this point. It was spelled out by Warrington LJ, who said in his judgment at page 112:

"If the document were a binding contract, there would of course be no doubt as to the result."

39. If indeed Laddie J were correct, the approach of the court to the second issue, i.e. the effect of the document if it was non-contractual, would have been different and much shorter. For, on Laddie J's approach, if the document was non-contractual, the vendor had no right to retain the deposit no matter how the document was phrased. That is not how the Court of Appeal approached the matter. All three members of the court proceeded on the basis that there were two construction issues to determine. The first question of construction was whether the document was contractual. The second was what meaning should be given to it if it was non-contractual. That was relevant to the question whether the deposit (which on this hypothesis was a non-contractual deposit) was intended to be conditional on the parties entering into a valid contract or not.
40. As to that, Pollock MR did not consider that the language was sufficiently clear to show an intention that the deposit should not be repaid if the purchasers failed to proceed with the purchase.
41. The other judgments were to the same effect. Warrington LJ said at page 111:

"Whether a vendor is entitled to retain a deposit depends in each case upon the construction of the document under which that deposit is made."

He concluded at page 112, that it was "a deposit paid in anticipation of a final contract and nothing more."

42. Sargant LJ agreed. He said at page 115:

"I look on the whole payment as being sufficiently explained as being an anticipatory payment intended only to fulfil the ordinary purpose of a deposit if and when the contemplated agreement should be arrived at."

43. Underlying the discussion about what the Court of Appeal meant in Chillingworth v Esche there is an important point of principle. Property may pass between parties who are involved in a purchase transaction which is contractually ineffective. Property may pass by delivery with the necessary intention, and that may occur even in the context of a contract which is void for illegality. In Singh v Ali [1960] AC 167, the plaintiff contracted to buy a lorry from the defendant. The contract of sale was unlawful, but the plaintiff paid for the lorry and it was delivered to him. Later the defendant removed the lorry from the plaintiff's possession and refused to return it. The plaintiff sued the defendant in detinue. In order to succeed he had to show that he had a right to immediate possession of the lorry. The defendant argued that because the contract was illegal and void, it could have no consequences in law and no property could pass to the plaintiff. The Privy Council rejected this argument. Giving the judgment of the Board, Lord Denning said at 176:

"Although the transaction between the plaintiff and the defendant was illegal, nevertheless it was fully executed and carried out: and on that account it was effective to pass the property in the lorry to the plaintiff."

44. In the present case the agreement was not illegal in the same sense as in Singh v Ali, but it was void for failure to comply with the formal requirements of section 2. As in the case of a contract void for illegality, so in the case of a contract void for lack of formal validity, it did not follow that property in the deposit could not pass to the defendant. That depended on the intention with which the payment was made. Was the payment intended to be conditional on the claimants completing the transaction or was it intended to be unconditional? If the former, the defendant would have obtained only a conditional title to the money and would have been bound to return it on the transaction falling through. If the property passed unconditionally, the defendant was prima facie entitled to retain it. In Chillingworth v Esche it was necessary to construe the document of 10 July for the purpose of determining the second issue, i.e. in order to decide whether as a matter of fact the payment of the deposit was intended to be conditional or unconditional. In many cases where a deposit is paid under a contract for the purchase of land which is void under section 2, and the transaction does not materialise, the purchaser will be entitled to the return of the deposit (as the Law Commission said) because the expectation which provided the reason for the payment would have failed, but that is a question of fact in each case.
45. Professor Birks gave contrasting illustrations in his Introduction to the Law of Restitution, pages 223-4, in a passage cited by Robert Walker LJ in Gribbon v Lutton at para 61:

"But the basis of a payment is not always specified in a contract or as a contractual reciprocation. Take the case in which I see a house which I want to buy. I immediately pay a small deposit, say £200. My intention is merely to show bona fides and establish good will. The payment is made 'subject to contract'. A month later I call the whole thing off; no contract materialises. I can recover the £200. There is no need to twist the facts into an implied contract under which you promise to repay in the event of the negotiations being aborted. That is one way to conclude for repayment, but the temptation to adopt that approach is a reflection of the old insecurity about all non-contractual analyses. It is quite sufficient to say that when my purchase goes off the consideration for the payment fails. There can be a consideration in this sense without there being a contract about the payment. The phrase 'subject to contract' means, as matter of construction, that my payment was conditional on the successful conclusion of the contract. That is, the only consideration for the payment was the making of that contract. Without that contract, the consideration failed. It would have been different if the exercise of construction had shown that the payment was intended to operate as a sanction against my withdrawal. If that had been the basis of payment, there would have been no failure of consideration when I did withdraw."

46. The examples taken were both cases in which there was no contract; they differed in whether there was a failure of consideration in the sense relevant for the purposes of restitution. Commenting on that passage Robert Walker LJ said at para 62:

"No direct authority is cited for the last proposition (the reader is invited to compare R v Smith (1884) 27 Ch D 89 and Mayson v Clout [1924] AC 980, both cases in which there was a concluded contract). But in principle the proposition must be right, if the sanction of forfeiture has been clearly stipulated."

47. Referring to the facts in Gribbon v Lutton, he said at para 64:

"If a prospective vendor has been as sorely tried as Mr Gribbon was by a prevaricating purchaser, and if he stipulates for the payment of a non-returnable deposit linked to a clearly-defined condition, the purchaser should lose any claim to the return of the deposit if he fails to meet the condition. I agree with the judge that Sir Ernest Pollock MR was right in his dictum in Chillingworth v Esche [1924] 1 Ch 97, 108" [which he then set out].

48. I return to the question of the status of the observations of the Court of Appeal in Gribbon v Lutton about Chillingworth v Esche. Gribbon v Lutton was a rather complicated case. Mr Gribbon negotiated a sale of property to a Mr Wynn. After some delay there was a meeting between the parties and their respective solicitors on 9 December 1993, at which Mr Wynn gave a cheque to Mr Gribbon's solicitor, Mr Lutton, on the basis that it would be non-refundable if Mr Wynn failed to enter into a conditional contract by 15 December. No such contract was made and each party claimed the deposit from Mr Lutton, who issued interpleader proceedings. The judge who tried those proceedings found that there was no consideration for the agreement to pay a non-refundable deposit and gave judgment for Mr Wynn.
49. Mr Gribbon then sued Mr Lutton for negligence in failing either to ensure that the agreement was enforceable or to advise Mr Gribbon that it was not. Mr Lutton defended the claim on the sole ground that the decision in the interpleader proceedings was wrong. Mr Gribbon contended that the decision was right but that in any event Mr Lutton was precluded from raising the point by the doctrine of issue estoppel. Jacob J decided that Mr Gribbon was wrong on both points and dismissed the claim.
50. The Court of Appeal was unanimous that Mr Gribbon was right on issue estoppel and allowed the appeal on that ground. On the question whether the decision in the interpleader proceedings had been wrong, and if so why, the members of the court reached three different conclusions. Laddie J considered that the decision was right. Robert Walker LJ and Pill LJ considered that it was wrong but on different grounds.
51. Pill LJ at para 86 agreed with Robert Walker LJ that, on the facts found by the recorder, the "prevaricating purchaser" should have lost any claim to the return of the money when he failed to enter into a contract with the "sorely tried" perspective vendor. However, he considered that the solution lay in contract. He said at para 81 that Mr Gribbon's attendance at the meeting on 9 December 1993 and his remaining there to give Mr Wynn a yet further opportunity to enter into a contract was consideration which rendered Mr Wynn's promise enforceable. He added, at para 86, that he saw difficulties in following a non-contractual route and that he would "consider taking it only in a case where the contractual route is closed". He did not therefore go so far as to exclude it. Robert Walker LJ did not consider that the solution depended on the existence of a contract. It was sufficient that the prospective purchaser had paid a non-returnable deposit on defined terms which he had failed to meet.
52. The ratio decidendi was that Mr Lutton was precluded from questioning the correctness of the decision in the interpleader proceedings by reason of issue estoppel. There is therefore nothing in the judgments which precludes this court from forming its own view about the proper interpretation of Chillingworth v Esche. As to that, I agree with the analysis of Robert Walker LJ and disagree with the analysis of Laddie J.
53. Mr Small properly drew the court's attention to the decision of the Court of Appeal in Robinson v Lane [2010] EWCA Civ 384. Sir Richard Buxton, giving a judgment with which Thorpe and Moore-Bick LJJ agreed, accepted that there may be circumstances, albeit very rare, where a pre-contract deposit is not returnable. Identifying the circumstances, he said at para 15:

"Those were summarised in the judgment of Sir Ernest Pollock MR in Chillingworth v Esche [1924] 1 Ch 97 at page 108, where he said that it was possible for the deposit not to be recoverable;

"If he had, by appropriate words, made provision for that in the document, such provision could have been upheld."

That formula was picked up by Robert Walker LJ in the case of Gribbon v Lutton & anr [2002] QB 902, where the Lord Justice said that:

"If the vendor stipulates with a payment of a non-returnable deposit linked to a very clearly-defined condition, the purchaser should loose any claim to return the deposit if he fails to meet the condition.""

54. Sir Richard Buxton added that there would have to be "an extremely precise and clear and express agreement to that effect." Like the dictum in Chillingworth v Esche to which Sir Richard Buxton referred, his own judgment on the point was obiter. He did not attempt a detailed analysis of the rival arguments, because it was not necessary to do so, but it accords with the view which I have expressed.
55. The fact that property was intended to pass and did pass does not, of course, exclude the possibility of a claim for restitution, but such a claim depends on the claimant being able to establish a recognised ground of restitution. In this case the only suggested ground is failure of consideration. Since the claimants obtained the benefit for which the payment was made, there is no merit in their claim and no injustice in the defendant retaining the money. The justice of the matter is entirely on the defendant's side.
56. The question whether and in what circumstances the doctrine of estoppel may operate to modify or counteract the effect of section 2 is a difficult topic: see the discussion in Yaxley v Gotts [2000] Ch 162. Although it was the subject of argument in the court below and in the parties' written submissions, it does not call for a decision in this case.
57. I would allow the appeal and set aside the judgment in favour of the claimants.

Lady Justice Black:

58. I agree.

Lord Justice Laws:

59. I also agree.