Brexit and the doctrine of frustration

March 31, 2019

Introduction

In Canary Wharf (BP4) T1 Ltd v European Medicines Agency ([2019] EWHC 335) Marcus Smith J considered the claim of the European Medicines Agency (‘the EMA’) that Brexit (should it occur) would be an event that would frustrate the EMA’s lease of its office premises in Canary Wharf.

Marcus Smith J first considered the juridical basis of the doctrine of frustration. He then  considered whether either a ‘No Deal Brexit’ or Brexit under the terms of the Withdrawal Agreement negotiated between the British Government and the European Union would frustrate the lease.

This blog post outlines the general discussion of the law of frustration. A second blog post will look at how Marcus Smith J. applied the law to the facts of this case.

Brief outline of the facts of the case

Canary Wharf granted EMA a lease of office premises in Canary Wharf (‘the premises’) for a term of 25 years from 21 October 2014. The EMA could assign or sub-let the premises, subject to compliance with the provisions in the alienation clause in the lease.

The EMA wrote to Canary Wharf on 2 August 2017 informing Canary Wharf that, ‘when Brexit occurs, we will be treating the event as a frustration of the lease’. Canary Wharf sought a declaration that Brexit (the withdrawal of the United Kingdom from the European Union) would not cause the lease to be frustrated.

The doctrine of frustration

‘The doctrine of frustration operates to bring a contract prospectively to an end because of the effect of a supervening event’ ([21]).

While there is no numerus clausus of frustrating event, they include:

  • frustration of a common purpose; and
  • subsequent legal changes and supervening illegality ([41])

Frustration of a common purpose

The essence of the doctrine is that a contract is frustrated when performance would be ‘radically different’ from what the parties had envisaged ([27]; Davis Contractors v Fareham UDCNational Carriers v Panalpina).

The search then is for what the parties have promised and whether performance would fall within the scope of their promises. Contractual interpretation is highly relevant to the question of whether a supervening event means that performance goes beyond what has been promised. Many disputes will turn out to be about contractual interpretation.

In frustration cases, however, the search is for ‘something much more elemental’ which can be described as the parties’ ‘common purpose’ ([29]).

In Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd
(The “Sea Angel”),
Rix LJ said:

‘In my judgment, the application of the doctrine of frustration requires a multi-factorial approach. Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances    …. there has to be as it were a break in identity between the contract as provided for and contemplated and its performance in the new circumstances’ ([111]).

This multi-factor approach (in particular the third factor) goes beyond what would be relevant if the question were purely one of contractual interpretation.

Marcus Smith J. refers to Krell v Henry to illustrate the sort of case in which the parties could have been said to have a common purpose underlying their contract:

‘Their common purpose was just that: whilst the parties surely would have been in opposition in bargaining on price, the thing that they were bargaining about was predicated on the procession taking place. Matters would have been very different had the room been a hotel room charging a higher rate because of the higher demand for rooms on that particular day due to the Coronation.’ ([37]).

The ‘demands of justice’ are a factor:

‘If the provisions of a contract in their literal sense are to make way for the absolving effect of frustration, then that must, in my judgment, be in the interests of justice and not against those interests’ (Edwinton Commercial Corporation v Tsavliris Russ (Worldwide Salvage & Towage) Ltd (The “Sea Angel”) at [112]).

Subsequent legal changes and supervening illegality

Marcus Smith J explained that:

‘The EMA’s contention that the Lease was frustrated by supervening illegality, taken at its highest, involved the proposition that, after withdrawal of the United Kingdom from the European Union, it would no longer be lawful for the EMA to pay rent to CW pursuant to the Lease. The payment of rent would be unlawful because the EMA would – in paying rent – be acting ultra vires or without capacity’ ([96]).

Outlining the relevant law, he noted that:

‘Supervening illegality means more than simply Patel v. Mirza type illegality: it can arise where the performance of a contract becomes unlawful for one party by reason of a supervening change in law or by reason of a supervening change of circumstance rendering that which was previously lawful unlawful’ ([170]).

Where the illegality is the result of a foreign law

Marcus Smith J. considered the EMA’s case on the assumption that it had made out its case that the payment of rent would be ultra vires the EMA. This illegality would arise from EU law:

‘This is a case where the supervening illegality arises under a foreign law that is not the applicable law. Generally speaking, the validity and enforceability of a contract governed by English law is not as a general rule affected by the question whether the contract would be regarded as valid or whether its performance would be lawful according to the law of another country. The English law of frustration discounts illegality arising under a foreign law, save for certain limited exceptions.’ ([187])

Thus:

‘The question, then, is whether – assuming that the EMA is right as regards the points it makes on vires – these are relevant for the purpose of frustration by way of supervening illegality. The question is whether the English law of frustration, which has regard to questions of legality where the performance of the contract would be unlawful according to the law of the place of performance, should also have regard to the law of incorporation, at least where this affects the capacity of a party to continue to perform obligations under a transaction lawfully entered into by it.’ ([188])

Marcus Smith J. declined to extend English law in this way ([189]).

What if performance was ultra vires and this was relevant in English law?

Even if the EMA had succeeded on supervening illegality thus far, that would not be the end of the analysis:

‘for supervening illegality to frustrate, it must remove all or substantially all of the benefit that one party receives from the contract.’ ([195])

Self-induced frustration

‘Self-induced frustration’ does not frustrate the contract:

’43 Of the five propositions identified by Bingham LJ in The Super Servant Two as not open to question, two might be said to relate to self-induced frustration:
(1) Proposition 4, that frustration should not be due to the act or election of the party seeking to rely on it; and
(2) Proposition 5, that the frustrating event must take place without blame or fault on the side of the party seeking to rely upon it.

44 Whether frustration is self-induced does not turn on technical questions of duty of care or fault.’

Marcus Smith J. said:

‘When considering whether there has been a frustrating event, it is quite clear that the courts consider the conduct of the party alleging frustration broadly and ask the broad question of whether the supervening event was something beyond that party’s control or within it. “Self-induced frustration” is something of a misnomer. It is simply a reference to post-contractual events and actions which indicate that certain options – that might have ameliorated the frustrating event – have been closed off by the acts or omissions of the party claiming frustration.’ ([206]).

Next posts

The judgment in this case is long, detailed and closely-argued. This post describes the relevant legal principles as articulated in the judgment. Subsequent posts will describe how the law was applied to the facts of this case.

Michael Lower

 

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Regency Villas: the validity of a recreational easement

February 22, 2019

The issue

In Regency Villas Title Ltd v Diamond Resorts (Europe) Ltd ([2018] UKSC 57) the UK Supreme Court had to consider the validity of a recreational easement. The question was whether the right of timeshare owners to enjoy ‘the free use of sporting and recreational facilities provided in a country club environment’ was capable of being an easement (Lord Briggs at ([1]).

The transfer of a timeshare apartment building contained a right for the timeshare owners:

‘to use the swimming pool, golf course, squash courts, tennis courts, the ground and basement floor of the Broome Park Mansion House, gardens and any other sporting or recreational facilities on the Transferor’s adjoining estate.’

The facilities included a restaurant, gymnasium and sauna. After the transfer, there were changes to the facilities provided.

Lord Briggs gave a judgment with which the majority of the other members of the Supreme Court agreed.

Interpretation of the right granted

Lord Briggs reached the following conclusions as to the construction of the relevant terms of the transfer:

  1. the parties intended to create an easement, not a purely personal right ([25]);
  2. the right granted was ‘a single comprehensive right to use a complex of facilities’ including not only the facilities as they existed at the time of the transfer but also any later replacements or additions ([26]);
  3. the grant was not conditional on the grantees making a financial contribution to the operating, maintenance or updating of the facilities ([30]).

The essential characteristics of an easement

In re Ellenborough Park, the English Court of Appeal accepted that easements must have the following characteristics:

  1. there must be a dominant and a servient tenement;
  2. an easement must accommodate the dominant tenement;
  3. the dominant and servient owners must be different persons; and
  4. a right over land cannot amount to an easement unless it is capable of forming the subject matter of  grant.

Did the rights to use the sporting and recreational facilities accommodate the dominant tenement?

Lord Briggs noted that the dominant tenement in this case was a development of timeshare apartments, typically used for holidays. The grant of rights to use the neighbouring facilities was, ‘of service, utility and benefit to the timeshare apartments as such’ ([53]).

Were the rights capable of forming the subject matter of a grant?

Step-in rights and the ouster principle

If the rights granted were an easement the dominant owner would have the right to enter the servient land to maintain the facilities so that they were capable of use if the servient owner failed to do so (‘the step-in right’).

The argument was that the exercise of the step-in right would deprive the servient owner of lawful possession and control of the servient land and so infringe the ouster principle.

The ouster principle was explained in these terms (referring to the speech of Lord Scott in Moncrieff v Jamieson):

‘the ouster principle rejects as an easement the grant of rights which, on one view, deprive the servient owner of reasonable beneficial use of the servient tenement or, on the other view, deprive the servient owner of lawful possession and control of it’ ([61]).

Lord Briggs rejected the proposition that the exercise of the step-in rights would amount to an ouster:

  1. the question was whether the grant itself (not the step-in right) would be an ouster ([64]);
  2. in any event, the step-in right allowed the dominant owner to do no more than what was sufficient to enable the rights granted to be exercised ([65]).

An easement can only demand ‘mere passivity’ on the part of the servient owner

An easement cannot require the servient owner to take positive action (Moncrieff v Jamieson at [47]). This principle was not infringed; although there was a commercial expectation that the servient owner would maintain the facilities there was no obligation to do so. The continued, meaningful use of the rights did not depend on the servient owner carrying out works of management, maintenance, repair and renewal ([71]).

Lord Carnwath’s dissent concerning the ‘mere passivity’ point

In his dissenting judgment, Lord Carnwath argued that the enjoyment of the right to use the facilities required the servient owner to manage and maintain them ([95]). The right claimed ‘is not a simple property right, but permanent membership of a country club ([96]).

Should these recreational rights be accepted as easements?

The easement claimed was, ‘a recreational right pure and simple’ ([75]). It went beyond Re Ellenborough; should the right be accepted as an easement provided that the Re Ellenborough criteria were satisfied ([74])?

Lord Briggs thought that it should be:

‘Where the actual or intended use of the dominant tenement is itself recreational, as will generally be the case for holiday timeshare developments, the accommodation condition will generally be satisfied.’ ([81]).

Michael Lower

 

 

 

 

 

Right of way and lost modern grant

February 7, 2019

Introduction

In Yik Wai Pong v Yick Pak Kin the Court of First Instance was asked to consider whether the plaintiff had acquired a right of way over an access road on the defendant’s land under the doctrine of lost modern grant.

Facts

The plaintiff and defendant were relatives and owned neighbouring areas of land. The plaintiff claimed to have acquired a right of way over an access road on the defendant’s land leading to the public highway.

The law

Wilson Chan J. summarised the relevant principles:

‘(1) If the owner of land uses a road as a means of access to, and egress from, his land for more than 20 years “as of right”, then, at least in the absence of special circumstances, he will obtain a right of way over the land for the benefit of his land.
(2) Whether the use is “as of right” depends on the claimant showing that it had been nec vi (without force), nec clam (without stealth) and nec precario (without permission from the owner).’ (at [73])

Reasons for the failure of the claim

Failure to establish user for a 20 year period

The plaintiff lived in the UK until 2002, only visiting the property for a week or so every few years. This was not sufficient user of the road to count for this purpose. The relevant use only began in 2002 and so the twenty year period had not been completed.

User with consent

It was doubtful whether even the post 2002 use was ‘as of right’. There was an implicit permission given the family relationship between the plaintiff and defendant ([79]).

The defendant gave the plaintiff a key so that the plaintiff could use the access road. In providing this key, the defendant could be said to be giving express permission for the plaintiff to use the road ([79]).

Michael Lower

 

Satisfying the equity in proprietary estoppel

January 12, 2019

Moore v Moore

In Moore v Moore ([2018] EWCA Civ 2669) a father (Roger) and son (Stephen) carried on a farming business in partnership; each owned one half of the business. Roger assured Stephen that Stephen would inherit Roger’s share in the business. Relations between the two broke down and Roger sought to dissolve the partnership.

In the ensuing litigation, Stephen relied on proprietary estoppel. He was able to establish the elements of a proprietary estoppel claim. The question then arose as to the approach to be taken to the relief to be granted.

Relief in proprietary estoppel: expectations, detriment or somewhere in between?

When the elements of a proprietary estoppel claim are established, deciding how to satisfy the equity ‘is a retrospective exercise looking backwards from the moment when the promise falls due to be performed’ (Davies v Davies [2016] EWCA Civ 463 at [38] per Lewison J). There is debate as to whether expectations or detriment ought to provide the measure for relief in proprietary estoppel cases (Davies v Davies at [39]) and often each of these factors will have a part to play.

In Jennings v Rice ([2002] EWCA Civ 159) Robert Walker LJ referred to a category of cases where ‘the assurances, and the claimant’s reliance on them, have a consensual character falling not far short of an enforceable contract’. Here, expectations are more likely to set the measure of equitable relief (Jennings v Rice at [45]). These cases are referred to below as ‘consensus’ cases).

Where, however, expectations are uncertain or incommensurate with the assurances given then expectations are no more than a starting point and the court is more likely to search for ‘the minimum equity to do justice to the plaintiff’ (Crabb v Arun District Council [1976] Ch. 179 at 198 per Scarman LJ).

In an important passage in Jennings v Rice, Robert Walker LJ said:

‘It would be unwise to attempt any comprehensive enumeration of the factors relevant to the exercise of the court’s discretion, or to suggest any hierarchy of factors. In my view they include, but are not limited to… misconduct of the claimant… or particularly oppressive conduct on the part of the defendant… To these can safely be added the court’s recognition that it cannot compel people who have fallen out to live peaceably together, so that there may be a need for a clean break; alterations in the benefactor’s assets and circumstances, especially where the benefactor’s assurances have been given, and the claimant’s detriment has been suffered, over a long period of years; the likely effect of taxation; and (to a limited degree) the other claims (legal or moral) on the benefactor or his or her estate. No doubt there are many other factors which it may be right for the court to take into account in particular factual situations.’ (Jennings v Rice at [52])

Application of the principles to Moore v Moore

At first instance

The first instance judge decided that the right approach was for Stephen to take over the farming business and assets (including houses on the farm) immediately. This would give effect to the clear intention that Stephen should be sole owner of the farm on his father’s death (to keep the farm in family ownership). He thought this meant that Roger and his wife should continue to receive what they had expected to receive from the farm during their lifetimes.

Specifically:

  1. Roger’s interest in the farm was to be transferred to Stephen immediately;
  2. Roger and his wife were to be granted irrevocable licences to live free of charge in one of the houses on the farm for the rest of their lives;
  3. Stephen was to make a weekly payment of GBP200 to Roger and his wife for the rest of their lives;
  4.  Stephen was to pay the reasonable costs of residential care for Roger and / or his wife should the need arise.

In the English Court of Appeal

Henderson LJ, with whom the other members of the English Court of Appeal agreed, thought that there were serious difficulties both with the first instance approach and with the scheme to which it gave rise ([90]):

  1. Roger (as Stephen must have appreciated) intended his wife to be the beneficial owner of his half share in the farm, with access to capital and income, during her life ([91]);
  2. Roger’s assurances to Stephen assumed that the partnership between them would remain a harmonious relationship. This was no longer the case so that the need for a ‘clean break’ became a paramount consideration. The first instance order, however, created an ongoing state of financial dependence on Stephen ([93]);
  3. It was a dangerous over-simplification to regard this case as a paradigmatic example of a consensus case. Referring back to paragraph 52 of Jennings v Rice (see above), there had been ‘alterations in the benefactor’s assets and circumstances’. The personal and commercial relationship had broken down. Roger’s health had broken down; he had Alzheimer’s disease and lived in a care home ([94]);
  4. The first instance judge had taken a minimalist view as to the provision to be made for Roger and his wife. The judge should, rather, have considered the minimum award to satisfy the equity. The decision to order an immediate transfer to Stephen made it all the more important ‘to provide full and generous protection for Roger and Pamela during the remainder of their lives, and to reflect as far as possible the provision that Roger would have wished to make for Pamela on his death’ ([95]);
  5. The judge had also failed to take account of ‘the likely effect of taxation’ (Jennings v Rice [52]). The first instance judge had been provided with no guidance on this issue: ‘this should be as unacceptable in a substantial proprietary estoppel
    case as it would be in a big money divorce case’ ([96]). The order made at first instance would have seriously adverse taxation consequences.
  6. The judge had failed to consider the effect of any costs order on the financial arrangements he had provided for. Where, for example, was Roger to find the money to meet any such order once he had transferred his assets to Stephen and had only the weekly payment from Stephen to call on ([97]).

The order made at first instance could not stand and the case was remitted for a further hearing as to how the equity was to be satisfied with the benefit of the Court of Appeal’s guidance ([101] – [108]). While the order for an immediate transfer to Stephen should stand, there should be more generous provision for Roger and his wife (both in terms of capital and income) to allow for a clean break.

To this end, the order should require Stephen to pay a considerable (GBP 1 million – 2 million) lump sum to Roger and his wife. While Stephen should assume responsibility for his father’s health costs, the lump sum would allow his wife to pay for her own health care needs.

Comment

Moore v Moore offers detailed guidance as to how the court should approach equitable relief and the requirement to ‘satisfy the equity’. Paragraph [52] in Jennings v Rice emerges as a significant source detailing the factors to be borne in mind.

Moore v Moore illustrates the need for careful consideration of the nature of the expectations generated by the assurances given, the context in which they were given and any changes in that context at the time when effect is to be given to the assurance.

In general it illustrates the potential for proprietary estoppel to combine remedial flexibility with a degree of predictability as to the factors that the court will take into account when granting relief.

This approach might well, in time, give proprietary estoppel the edge over the common intention constructive trust when dealing with the property and financial aspects of a relationship breakdown. Crucially, it is possible to have regard to the state of the relationship between the parties and their circumstances both at the time that the order is made and thereafter.

Michael Lower

 

 

 

 

Misrepresentation: misleading descriptions of a flat

December 10, 2018

A contract can be set aside if the purchaser was induced to enter into it by a misleading description of the property to be sold. The false statement may be made either by the seller or the seller’s agent. The false ‘statement’ may be a series of statements which cumulatively convey a misleading impression of the property.

Facts

In Joytex Development Ltd v Super Homes Ltd ([2018] HKCFI 2286) C acquired Joytex as the vehicle for the purchase of a flat in Conduit Road, Mid-Levels from its developer Super Homes Ltd (‘SHL’).

Joytex alleged that its purchase of the flat was the result of representations (which proved to be false) that the flat would have an open kitchen layout and that all necessary government approvals for implementing this layout had been, or would be, obtained.

The sales agent’s statements

W worked for the estate agent appointed as sole sales agent by SHL. W gave C a brochure. W also told C that the flat would have an open kitchen layout. C was buying the flat as an investment. W told C that the likely category of tenant for the flat would find the open kitchen layout attractive.

The floor plan in the sales brochure

The floor plans for the flat in the brochure showed an open kitchen layout but there was qualifying wording to the effect that they were ‘only for reference’. SHL had approved the contents of the brochure. C noted the floor plan but did not read the brochure in detail and did not notice the qualifying words.

The 2009 side letter (signed at the time of the provisional sale and purchase agreement)

C signed a side letter (about fixtures and fittings to be installed in the flat). The attached plans showed both open and closed kitchen designs.

The solicitor’s statement

C agreed to instruct SHL’s solicitors to act for him in the purchase. A conveyancing clerk, L, handled the transaction. The plan attached to the sale and purchase agreement did not show an open kitchen. L assured C that SHL would change the kitchen to an open kitchen layout. The assignment, like the agreement, showed a closed kitchen layout.

No approval for the open kitchen layout

It later turned out that there was no Government approval for the kitchen layout and no likelihood that such an approval would be obtained. C sought the rescission of the contract and damages on the grounds that he had entered into the contract in reliance on SHL’s misrepresentation.

The legal issues

Whether SHL made representations that the flat would have an open kitchen layout

SHL had made representations. The court could have regard to the cumulative effect of a series of events ([80]). The representation in the floor plan in the brochure was not enough since there was a statement qualifying the plan (it was for reference only) ([84] on the legal effect of qualifying statements).

On the other hand, the 2009 side letter conveyed the impression that the flat could have an open kitchen layout ([87]). SHL approved its terms ([89]). W’s statements were representations that the flat would have an open kitchen layout. The fact that her employers were the sole sales agents of SHL was relevant  ([96] – [97]). While W may have exceeded her actual authority in some of the statements she made, she was acting within the scope of her ostensible authority ([100] – [101]). L was acting within the scope of his authority when he made the relevant representations to C.

The cumulative effect of all of the factors in the previous paragraph was that SHL had represented to C that the flat would have an open kitchen layout ([110]).

Reliance

Although C was an experienced and successful businessman, he had relied on SHL’s representations. Deputy Judge Stock SC said, ‘if the effect of a contract has been misrepresented, it is not necessarily an answer to say that had the representee read the contract, he or she would have discovered the true position’ ([116]).

The qualifying words ‘in rather small print’ in the brochure were not sufficient to defeat the claim ([117]).

Falsity

The representations were false. Joytex could not establish that the misrepresentations were fraudulent.

Remedies

Joytex was entitled to rescind the contract and to recover the price paid with interest on assigning the flat to SHL.

Joytex was entitled to damages for non-fraudulent misrepresentation. The aim is to put the purchaser in the position it would have been had the contract not been made. SHL was not able to show that it had reasonable grounds for believing, and that it did believe, in the truth of the representations.

Joytex was not entitled to damages for the alleged loss of profit from an alternative investment. This required the plaintiff, ‘to show on a balance of probabilities that it would have entered into the alternative and more profitable transaction, and a real and substantial chance (as opposed to a speculative one) that the relevant third party would have transacted.’ ([151]). Joytex was unable to meet this requirement; there was no evidence to show that it viewed any other property or that it would have retained such a property had it done so ([160]).

Joytex was, however, entitled to damages to cover, for example, legal costs and stamp duty and the management fees it had paid as the owner of the property.

Michael Lower

Family home legally owned by company controlled by one of the spouses

November 18, 2018

Introduction

Section 6 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) empowers the court, in divorce proceedings, to require the transfer  of the property of one party (A) to the other (B). This order can only relate to property to which A ‘is entitled, either in possession or reversion’.

How does this operate with regard to property legally owned by a company controlled by A? Does section 6 empower the court to order the company to transfer the property to B? If so, on what basis?

This was the question considered by the UK Supreme Court in Prest v Petrodel Resources Ltd ([2013] UKSC 34).  It is of considerable practical importance to B, especially where much of A’s wealth is tied up in the company. It is true that the court could order A to transfer the shares in the company to B but, as Lord Sumption observed, ‘ this will not always be possible, particularly in cases like this one where the shareholder and the company are both resident abroad in places which may not give direct effect to the orders of the English court.’ ([40]).

Thus, the court has to confront the important legal question as to whether it is entitled to pierce the corporate veil and whether there is any special jurisdiction to pierce the corporate veil in matrimonial proceedings.

No special jurisdiction to pierce the corporate veil in matrimonial proceedings

The UK Supreme Court laid to rest the idea that England’s family law courts had any special power to pierce the corporate veil. The English equivalent to section 6 of the MPPO (which is in identical terms to the Hong Kong provision) was not open to this interpretation ([37] – [42] Lord Sumption).

If the courts have the power to order the transfer of the property to B it will either be because: (i) the company holds the property on trust for A so that the order can relate to A’s equitable interest; or (ii) the case is one where it is appropriate, applying general principles, to pierce the corporate veil.

Where the company is trustee for A

In Prest, there were several properties which A had either transferred to a company controlled by him for no consideration or where A had supplied the company with the funds to make the purchase and there was no evidence that this was by way of loan or in return for shares in the company. Thus, on general equitable principles, the company held the properties on trust for A. A could be, and was, ordered to exercise his control over the company to procure the transfer of the legal title to the properties to B.

In an important passage, Lord Sumption said:

‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership’ ([52] emphasis added).

Similarly, Lady Hale said that the power in section 6 MPPO  ‘is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case ([93] emphasis added).

Piercing the corporate veil

The Supreme Court rejected the idea that the English equivalent of section 6 of the MPPO created a right to pierce the corporate veil. The court could only pierce the corporate veil if there were some general principle that allowed it to do so. Lord Sumption thought that such a principle did exist:

‘I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality ([35]).

This principle did not come into play here. There was nothing on the facts of Prest that allowed the court to invoke this principle.

Michael Lower

 

Does the voice of the trustee in bankruptcy of one co-owner carry greater weight when considering an order for sale?

October 18, 2018

In Lo Yau Shing (a bankrupt) ([2018] HKCFI 1574) the court was asked by the trustee in bankruptcy of one co-owner of a flat to grant an order for sale. This was resisted by the other co-owner.

B (the bankrupt) and F (his father) were joint tenants of the flat in which F lived with his wife. B’s bankruptcy gave rise to a severance of the joint tenancy (Re Dennis). B’s trustee in bankruptcy applied for an order for sale under section 60 of the Bankruptcy Ordinance and section 6 of the Partition Ordinance.

In Wong Chun Kei v Poon Vai Ching it was held that the court should make an order for sale unless either: (a) the order would not be beneficial to all co-owners; or (b) the order would result in very great hardship to one co-owner. The burden of proof was on the owner resisting the sale. Hardship could be physical or practical. The voice of the trustee in bankruptcy did not carry greater weight than that of the other co-owner.

The court refused to grant the order for sale. F and his wife were both very elderly and in very poor health. If the order were made:

‘The choices faced by Lo Senior and his wife will be to rent a modest room as residence, move into a residential home for the elderly run by charities (if one can be found) or hope for a big rise in social welfare payouts from the Government, which is unlikely.’ ([93])

In these circumstances, it would be unjust to make an order for sale, balancing the interests of F against those of the creditors. Further, it would cause very great hardship to F and his wife.

If the test were whether the circumstances were exceptional (Re Bremner; Everitt v Budhram) the outcome would be the same.

Michael Lower

No presumption of advancement between siblings

September 16, 2018

In Lee Yee Yan Eva v Lee Tak Gate Richard ([2018] HKCFI 1137) a flat was bought in the joint names of a sister and brother (E and R). E provided the entire purchase price. R refused to comply with E’s request to transfer the legal title into her sole name.

Peter Ng J. saw this as a classic purchase price resulting trust. He referred to Lord Browne-Wilkinson’s statement of the law:

‘Under existing law a resulting trust arises in two sets of circumstances: (A) where A … pays (wholly or in part) for the purchase of property which is vested … in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the … property is held on trust for A (if he is the sole provider of the money) … It is important to stress that this is only a presumption, which presumption is easily rebutted either by the counter-presumption of advancement or by direct evidence of A’s intention to make an outright transfer.’ (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 708A-B).

It all depended on E’s subjective intention ([38]) and, as to this, the evidence supported E’s case; there was no suggestion that she intended R to be an equitable co-owner.

Peter Ng J. also pointed out that there was no authority for the idea of a presumption of advancement between siblings ([27]).

R was ordered to convey the property to E.

Michael Lower

 

Waiver, mandatory injunctions and building schemes

August 18, 2018

Introduction

A building scheme (such as the scheme embodied in a Deed of Mutual Covenant) creates a local law for the estate it governs. The scheme may require owners of property within the scheme to obtain the consent of a common landlord (in a scheme established for leasehold properties) or of some other body (such as a Management Committee) before making alterations or additions to the property. This arrangement envisages the formal submission of plans as the start of a process leading to consent or refusal to give consent. Carrying work out without the requisite consent is a breach of covenant and can lead to an action for a declaration, damages and the grant of an injunction.

What if an owner makes alterations to property without obtaining the formal consent required but either: (a) the person or body with the capacity to give the consent knew of the work and failed to object to it; or (b) the person or body with the capacity to give consent has repeatedly failed to enforce the restriction with regard to alterations made to other properties within the scheme? Would it be inequitable either to allow the enforcement of the covenant or, if it is enforceable, to grant an injunction requiring the property to be reinstated?

These questions were considered by the Privy Council in Singh v Rainbow Court Townhouses Ltd ([2018] UKPC 19), on appeal from the Court of Appeal of the Republic of Trinidad and Tobago.

 

Singh v Rainbow Court Townhouses Ltd

Mrs. Singh owned a house in the Rainbow Court estate. She held the property under a lease for 199 years. The lease contained a recital to the effect that all of the units in Rainbow Court would be sold under a building scheme under which the covenants would be mutually enforceable. Rainbow Court Townhouses Ltd (‘the company’) was a company formed for the purpose of managing the development.

The lease contained a tenant’s covenant not to make any alteration or addition to the property without the prior written approval of the landlord and of the company. Mrs. Singh carried out works at her house without either consent. The company sought mandatory injunctions requiring Mrs. Singh to remove the alterations she had made.

 

Acquiescence or waiver

Mrs. Singh argued that the landlord and the company had acquiesced in the breach of covenant since: (a) (through its officers and employees) it knew of the work that was to be carried out for several days before it began and had not objected; and (b) the owners of ten other properties within the building scheme had carried out unauthorised alterations to their properties and neither the landlord nor the company had done anything to enforce the covenant against them.

On waiver, Lord Carnwath (with whom the other members of the Privy Council agreed) approved this statement:

‘It is in all cases a question of degree. It is in many ways analogous to the doctrine of estoppel, and I think it is a fair test to treat it in that way and ask, “Have the plaintiffs by their acts and omissions represented to the defendant that the covenants are no longer enforceable and that he is therefore entitled to use his house as a guest house.’

(Chatsworth Estates Co v Fewell [1931] 1 CH 224 at 231 per Farwell J.)

Lord Carnwath commented:

‘The issue was not whether breaches had been overlooked in individual cases but whether these omissions could be said to amount in effect to a representation that the covenants were no longer enforceable.’ ([32]).

The informal exchanges with the company’s employees and officers were not a waiver:

‘The mere failure of two officers to make immediate objection in October 2014 when notified of works due to start within in about a week, without any detailed information of their nature cannot be interpreted as a representation of any kind on behalf of the company.’ ([33])

The courts below had, however, failed to adequately investigate the allegations that the landlord and the company had not objected when other owners within the scheme had carried out unauthorised alterations:

‘On the face of the pleadings there was an arguable case that these were no different in kind to works which had been accepted without objection on other properties. Whether or not this gave rise to a case of waiver in the sense defined by Farwell J, they were at least arguably relevant to the scope of any mandatory order. It is difficult to see how fairness … would be served by an order which required the Appellant to carry out such works without any investigation of their significance, or how they compared to works accepted without objection on other properties on the estate.’ ([35])

The appeal was allowed and the case was remitted to the High Court.

Michael Lower

 

 

No oral modification clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 2)

July 14, 2018

In Rock Advertising Ltd v MWB Business Exchanges Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effectiveness of a No Oral Modification (‘NOM’) clause (see here for Part 1 of the blog post about this case setting out the facts and the decision). This post considers the underlying principles that the judgments had to confront.

The clause in question provided:

‘This Licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

The UK Supreme Court had to consider whether the parties were bound by an orally agreed modification of the licence agreement between them.

There were two aspects to this question: (1) was the clause binding according so that oral modifications were of no legal effect; and (2) if the clause did not preclude oral modifications, whether a subsequent oral agreement purporting to modify the original agreement indicated an intention to dispense with the NOM clause.

When parties who have accepted a NOM clause agree to an oral modification, they have expressed two conflicting intentions. Which is to prevail? If the courts give effect to a NOM clause are they respecting or denying freedom of contract?

The essential objection to the idea that the clause always precludes effective oral modifications is that this would contravene freedom of contract: ‘Those who make a contract may unmake it. The clause which forbids a change may be changed like any other (Beatty v Guggenheim Exploration Co (1919) 225 NY 380, 387 – 388, Cardozo J.).

Nevertheless, Lord Sumption (and the majority of the Supreme Court) thought that the NOM clause was effective and that the subsequent oral modification was of no effect: ‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows … The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.’ ([11])

Lord Sumption saw three good commercial justifications for NOM clauses:

  1. ‘it prevents attempts to undermine written agreements by informal means’;
  2. ‘it avoids disputes not just about whether a variation was intended but also about its exact terms’; and
  3. giving effect to NOM clauses: ‘makes it easier for corporations to police internal rules restricting the authority to agree [variations]’.

Lord Sumption thought that these justifications should carry weight since ‘the law of contract does not normally attempt obstruct the legitimate intentions of businessmen except for overriding reasons of public policy’ ([12]).

If the parties were to act on an oral variation in the belief that it was effective then estoppel might come into play but:

‘the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA’ ([2003] 2 AC 51′ ([16]).

Lord Briggs took a different line on the first of the two questions. He thought that it was conceptually impossible for the parties to impose a formalities requirement on themselves, ‘not to be free, by unanimous further agreement, to vary or abandon [the contract] by any method, whether writing, spoken words or conduct, permitted by the general law’ ([26]).

On the other hand, turning to the second question, Lord Briggs was of the view that ‘an agreed departure [from the NOM clause] will not lightly be inferred, where the parties merely conduct themselves in a non-compliant manner’ ([27]). So normally, as in the present case, the approach of the majority and that of Lord Briggs would lead to the same conclusion.

Where, however, there are circumstances, such as an urgent need to agree a variation without waiting for the production of a written variation, then Lord Briggs thought that an agreement to depart from the NOM clause might be inferred ([30]).

Michael Lower