Breach of post completion contractual obligations

Howard -Jones v Tate [2011] EWCA Civ 1330 (24 November 2011)
Introduction
Solicitor and partner Mr Anis Waiz of Mohindra Maini LLP continues his critical review of current case law.  This is a very important decision  which  considered the remedies available following a  breach of a post-completion condition in a contract for the sale of land.
Gunatunga v DeAlwis (1996) 72 P&CR 161 is cited by Megarry & Wade, The Law of Real Property, 7th ed (2008) paragraph 15-091 for the proposition that a purchaser can terminate the contract even after completion for breach of an obligation by the vendor.
Two issues arose
1.  If the defendant and  vendor, Mr Tate, committed breaches of the contract which went to its root, whether the  purchaser, Mr Howard-Jones, was entitled to rescind the contract
2.  If Mr Howard-Jones was not entitled to rescind the contract, whether it was nevertheless appropriate to award him damages which had the effect of  restoring him to his original pre-contractual position.
Background
In November  2007, Mr Howard-Jones agreed to buy a property in  Lincolnshire ("the Property") from Mr Tate for the sum of £140,000. The Property lay to the north of a  Farmhouse, which at that time was owned by Mr Tate’s son.
Prior to the agreement, the Property was supplied with water and electricity from the farm  The arrangements for the supply of these services were  temporary . Mr Howard-Jones agreed to buy the Property on the basis that Mr Tate would arrange, at his own expense, for the Property to be provided with a new directly metered electricity supply and a separately metered mains water supply.
The contract of sale included a special condition 12:
Mr Tate shall at his own expense and no later than six months from the Completion Date:
(a)  provide a new directly metered single phase electricity supply to the building [the warehouse] forming part of the Property;
(b)  provide a separately metered water supply (mains) to the building forming part of the Property.
Completion took place in  November 2007. By  May 2008, Mr Howard-Jones was of the view Mr Tate had still not provided the services in accordance with his obligations under special condition 12.
Mr Howard-Jones’ solicitors wrote  in May 2008 requesting that the necessary works be completed within seven days. No reply to that letter was ever received. A further letter was sent in  June 2008,  giving formal notice that if Mr Tate did not comply with his obligations by 30 June 2008, Mr Howard-Jones would rescind the contract and issue proceedings claiming return of the purchase price of £140,000 and costs and damages.
No further work was carried out by 30 June 2008.  By  letter dated 2 July 2008, Mr Howard-Jones’ solicitors purported to give notice that the contract was rescinded.
In October  2008, Mr Howard-Jones issued proceedings seeking an order for rescission of the contract and damages. By his defence , Mr Tate asserted that he had provided a new separately metered water supply in accordance with his obligations under the contract but accepted that, despite his best efforts, he had not installed an appropriate single phase electricity supply.
He contended that he had, however, offered an electricity supply from his barn on his adjoining property. He also asserted that damages were an adequate remedy and that rescission was not appropriate.
The Decision
At first instance the court noted
1.  Mr Tate had installed a water supply of sorts in that he had run a flexible pipe from his barn to the warehouse. This was not however found to be a separately metered water supply; nor was it a supply to the Property.
2.  As to the electricity supply Mr Tate had failed to install an electricity supply, whether metered or therwise, by 1 May 2008 or, indeed, by 2 July 2008, the date Mr Howard-Jones purported to rescind the contract.
3.  Mr Tate had subsequently instructed a supplier  to install an electricity supply, it was not completed until April 2009; moreover, although this supply was provided to the Property, it terminated at a junction box some distance away.
4.  Thus Mr Tate was in clear breach of the contract in failing to provide an appropriate water supply and electricity supply to the Property. These breaches arose after completion and went to the root of the contract and rendered the Property worthless to Mr Howard-Jones because, without water and electricity, he could not use the Property for the purpose of carrying on his business.
5.  However  Mr Howard-Jones was not entitled to rescind the contract from the beginning. Rather, Mr Tate was liable to Mr Howard-Jones for damages.
6.  As to the damages Mr Howard-Jones was entitled to return of the purchase price of the Property but  had to re-convey the Property to Mr Tate. he was also entitled to consequential damages being his mortgage lender’s survey fee; his solicitors’ fees in respect of the purchase and mortgage of the Property; his mortgage arrangement fees; his accountant’s fees; the charges he had incurred for early redemption of the mortgages; his mortgage interest payments; the building insurance premium; and his Council tax. In total, Mr Tate was ordered to pay to Mr Howard-Jones in excess of £190,000.
The Appeal
Counsel for Mr Tate submitted that , notwithstanding the court’s  finding that Mr Howard-Jones was not entitled to rescind the contract, the court  proceeded to assess damages on the basis that he was.
Rescission
The starting point was the issue of Rescission.  The  distinction between rescission and discharge by breach was explained by the House of Lords in Johnson v Agnew [1980] AC 367.  In that case the sale of land was  subject of a number of mortgages. The price which the purchaser agreed to pay was in excess of the sums required to discharge the mortgages and a loan raised by the vendors to enable them to buy another property.
The purchasers failed to complete and the vendors obtained an order for specific performance. However, before the order for specific performance was carried out, the mortgagees of the property enforced their securities by selling the properties. The vendors therefore went back to court and asked for the order of specific performance to be dissolved, for the contract to be terminated or rescinded, and for an order for damages. The House of Lords held that although the vendors had secured an order for specific performance, if the order was not complied with, they were entitled to damages for breach .
The house of lords set out some important propositions of law
1.  In  a contract for the sale of land, after time has been made, or has become, of the essence of the contract, if the purchaser fails to complete, the vendor can either treat the purchaser as having repudiated the contract, accept the repudiation, and proceed to claim damages for breach of the contract, both parties being discharged from further performance of the contract; or he may seek from the court an order for specific performance with damages for any loss arising from delay in performance. This is simply the ordinary law of contract applied to contracts capable of specific performance.
2.  The vendor may proceed by action for the above remedies (i.e.  specific performance or damages) in the alternative. At the trial he will however have to elect which remedy to pursue.
3.  If the vendor treats the purchaser as having repudiated the contract and accepts the repudiation, he cannot thereafter seek specific performance. This follows from the fact that, the purchaser having repudiated the contract and his repudiation having been accepted, both parties are discharged from further performance.
4.  Although the vendor is sometimes referred to in the above situation as "rescinding" the contract, this so-called "rescission" is quite different from rescission ab initio (from the beginning) , such as may arise for example in cases of mistake, fraud or lack of consent..It  is clear, under the general law of contract, that acceptance of a repudiatory breach does not bring about "rescission ab initio"
Applying these principles the Court of Appeal in this case noted
1.  Rescission ab initio is very different from a failure of performance which entitles the innocent party to treat the contract as discharged.
2.  A failure of performance , though still sometimes referred to as "rescission" does not have the consequence that the contract is treated as never having come into existence. Rather, the parties are absolved from future performance and the innocent party may claim damages for breach.
3.  In July 2008, Mr Howard-Jones was entitled to and did elect to treat the contract as at an end. At that moment all the unperformed primary obligations of the parties were discharged and there was substituted a secondary obligation on Mr Tate to pay monetary compensation to Mr Howard-Jones for the losses he had sustained by reason of Mr Tate’s breaches of the contract.
Counsel for Mr Howard-Jones sought to persuade the court that a condition of sale remained outstanding after completion and , in such a case, a right of rescission was  available . He relied upon Gunatunga v DeAlwis (1996) 72 P&CR 161.  The reader is referred to the Judgment for the court’s consideration of that authority.  Suffice to say the court distinguished this case from  Gunatunga.
In contrast to the position in Gunatunga, this was not  a case where Mr Tate was in repudiatory breach of a condition which became operative on completion. Mr Tate was not obliged to provide a separately metered water supply and a directly metered single phase electricity supply until six months after completion.
Here Mr Tate failed to comply with a post-completion obligation. Thus one had to  apply the principles explained by the House of Lords in Johnson v Agnew and, more recently, in Photo Productions v Securicor Transport. Mr Tate’s repudiatory breaches rendered him liable in damages but did not entitle Mr Howard-Jones to rescind the contract from the beginning.
Mr Tate was not in breach of his obligation to provide the appropriate water and electricity supplies until six months later. Upon breach of that obligation, which it was accepted  upon the Appeal  went to the root of the contract, Mr Howard-Jones became entitled to treat himself as discharged. After discharge, he was no longer bound to accept the further performance by Mr Tate of his obligations. But he was not entitled to recover all the moneys he had paid under the contract unless he could say that the consideration for his payment had wholly failed.
Damages
Given the  Court of Appeal agreed  with the first instance decision that  Mr Howard-Jones was not entitled to rescission ab initio, what  losses  did  Mr Howard-Jones suffer? 
The Court held those losses would include the costs to Mr Howard-Jones of having the services installed for himself within a reasonable time after his acceptance of Mr Tate’s repudiation, together with any other losses he has suffered as a result of the services not being installed in due time.
However the Court of Appeal held that the issue of damages had been incorrectly assessed . They had been awarded not on the basis  of  damage which Mr Howard-Jones had suffered as a result of Mr Tate’s breaches of the contract, but rather  the cost of putting Mr Howard-Jones back into the position he would have been in had the contract never been entered into., That was incorrect.
Lord Justice Lloyd noted in this case the decision in Gunatunga v DeAlwis (1996) 72 P&CR 161, of which he  was unaware prior to the Appeal and which does  not appear to have been cited in any subsequent judgment until now.
Conclusion
This cases raised the vital distinction and one often misunderstood between rescission and a failure to perform a contract giving a claim in damages.
Lord Justice Lloyd puts it so concisely in this judgment
The  idea that a contract can be discharged retrospectively, after completion, on the ground of the vendor’s fundamental breach of contract is  inconsistent with the decision of the House of Lords in Johnson v Agnew.
It harks back to the use of the word rescission which Lord Wilberforce deprecated in Johnson v Agnew because it confuses a remedy available only for such wrongs as misrepresentation, under which what had already been done might be undone, with the case of discharge for breach on the basis of accepting a repudiation of the contract, which can only operate prospectively.
Sir Christopher Slade spoke, correctly, of the plaintiff being entitled "to treat the contract as at an end and of being "discharged from further performance of the contract" (page 171 of the report, in the quoted passage) but went on from the latter proposition to add "and entitled to rescind".
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