Samarenko v Dawn Hill House Ltd  EWCA civ 1445 (01 December 2011)
WardblawG is pleased to welcome secured lending litigation solicitor and partner Mr Anis Waiz of Mohindra Maini LLP as he continues his critical review of current case law. This article regarding the Samarenko case was first published on leading case law resource, CaseCheck.
This case raised an important yet common issue . If a purchaser failures to pay a deposit on time under a contract for the sale of land does that lead to a repudiatory breach of contract entitling the seller to terminate the contract?
In law if the answer is no but the contract makes time of the essence, is the seller entitled to terminate the contract?
This case provides an excellent review of key elements at common law and equity of contractual terms.
The court noted that the basis upon which it is said that time is made of the essence of a contractual time limit is that (a) the time limit is regarded at common law as a condition of the contract (b) in the event of delay in performance equity will intervene to prevent the injured party from treating the delay as a breach of condition but (c) equity will cease to intervene once notice of a reasonable length has been served. Once the notice has expired the position reverts to that at common law, namely that time limits are regarded as conditions of the contract.
The Claimant Mr Samarenko was the vendor. The defendant Dawn Hill House Ltd was the purchaser. The purchase price was £5 million with a deposit of £500,000 to be paid in accordance with the contract.
The contract incorporated the Standard Conditions of Sale (4th edition). Clause 15 of the special conditions noted the contract was conditional on the buyer obtaining planning permission and obtaining the consent of a third party.
The contract included a provision that the deposit would be paid to the Seller’s solicitors to be held as stakeholders in accordance with 2.2 of the Standard Conditions of Sale.
The defendant obtained planning permission . However it was not the permission envisaged by the contract . The parties renegotiated the same and entered into a supplemental agreement. The purchase price was reduced to £4.5 million.
The supplemental agreement went on to provide:
“2 For the purposes of clause 16 of the Contract, the Deposit to be paid shall be reduced to £450,000 and is now due to be paid to the Seller’s solicitors on 3rd March 2011 (being 60 working days after the grant of the Original Permission).
3 For the purposes of clause 17 of the Contract, the sum of £4,050,000 shall be substituted for the sum of £4,500,000 and shall be paid to the Seller’s Solicitors on 13th April 2011 …
4 In all other respects the Contract is confirmed and is now to be deemed to be unconditional.”
The claimant’s then solicitors sent an e mail to the defendant’s solicitors requesting them to ensure they were in funds. They sent a further e mail re the deposit . No deposit was paid by the defendant.
A letter was then sent to the defendant’s solicitor alleging breach of contract and stating:
“Our client is prepared to allow you 5 working days from today within which the pay the deposit, failing which our client will treat the contract with you as repudiated.
On behalf of our client we therefore demand payment of £450,000 to us in cleared funds by no later than 5 pm on Wednesday 16 March, 2011, as to which deadline time shall be of the essence.” (the Letter)
No payment was made and the claimant sought to terminate the contract. The defendant alleged they had been waiting for the results of the soil survey, of which the claimant was aware.
The defendant noted an inspection was needed both for its bank and also for their own purposes. The defendant appointed new solicitors, who wrote to the claimant solicitor recording a conversation between the lawyers. The letter asked for confirmation that the valuer would be allowed access.
The defendant’s solicitors wrote a second letter noting the Claimant had refused access. It was alleged there was an implied term of the contract for the purposes of business efficacy that the claimant would facilitate any reasonable requirements of the defendant towards achieving completion.
At first instance the court granted summary judgment to the claimant. The defendant appealed on three grounds
1 Time was not of the essence of the contractual timetable for payment of the deposit
2 Although the Claimant was entitled to serve notice making time of the essence of the revised deadline for payment of the deposit a failure to comply with that deadline did not necessarily amount to a repudiatory breach of contract;
3 The time given by the Letter purporting to make time of the essence was too short in all the circumstances of the case.
1 As to whether a time limit is of the essence in a contractual provision is a question of interpretation. In Bunge Corp v Tradax Export SA  1 WLR 711 Lord Wilberforce said:
“As to such a clause there is only one kind of breach possible, namely to be late, and the questions to be asked are: first what importance have the parties expressly ascribed to this consequence? And, second, in the absence of expressed agreement, what consequence ought to be attached to it having regard to the contract as a whole?”
The court noted that Equity had a tendency to regard time stipulations as not being of the essence of the contract. However it is clear that even in equity any presumption that time was not of the essence could be rebutted, either by express words or by necessary implication see United Scientific Holdings Ltd v Burnley BC  AC 904, 930.
The maxim that time is not of the essence “never had any application to cases in which the stipulation as to time could not be disregarded without injustice to the parties, when, for example, the parties, for reasons best known to themselves, had stipulated that the time fixed should be essential, or where there was something in the nature of the property or the surrounding circumstances which would render it inequitable to treat it as a non-essential term of the contract” see Stickney v Keeble  AC 386, 416.
2 The Court of Appeal considered the nature of a deposit. The classic definition was noted in Howe v Smith (1884) LR 27 Ch D 89. Cotton LJ said (p. 95) that the deposit was “a guarantee that the contract shall be performed.”
The court noted that In the vast majority of conveyancing transactions the seller will simply refuse to exchange contracts until the deposit monies are safely in his own hands or the hands of a stakeholder.
in Myton Ltd v Schwab-Morris  1 WLR 331 Goulding J held that even though contracts had in fact been exchanged the contract was not binding when the cheque tendered for the deposit was dishonoured.
Goulding J went on to consider whether a failure to pay the deposit on or before signing the contract was a repudiation of that contract. He held that it was; and that there was no need for the seller to give notice to the buyer calling upon her to remedy the default. He said:
“If payment of a deposit was not a condition precedent to the obligation to grant the lease, it was at any rate, in my judgment, a term of so radical a nature that the defendant’s failure to comply with it would entitle the plaintiff company to renounce further performance. The same argument on the character and importance of a deposit, which persuaded me on the first point that the clause was a condition precedent, goes far to show that if it is not such a condition, then it is at any rate a fundamental term in the sense that I have indicated.”
Thus Goulding J in effect characterised the payment of the deposit (including the time of payment) as a condition of the contract, any breach of which would amount to a repudiation.
The Court of Appeal considered a number of authorities including Portaria Shipping Co v Gulf Pacific Navigation Co Ltd  2 Lloyd’s Rep 180 and Millichamp v Jones  1 WLR 1422 to which the reader is referred to.
Lord Justice Lewison held in this case that failure to make payment on time of a deposit amounted to a repudiatory breach of contract.
Any presumption that time was not of the essence was rebutted. He held that in the ordinary case the requirement to pay a deposit, including the time of payment, is a condition of the contract or, to use the phrase used in courts of equity, that time is of the essence of the date for payment.
Lord Justice Etherton agreed and noted that given the importance of a deposit it is difficult to imagine that a contractual obligation to pay a deposit will ever be anything other than a term of fundamental importance in the contract. In other words a term which would be regarded at common law as a fundamental term or condition, rather than a warranty, and any breach of it would entitle the innocent party to treat the contract as at an end: comp. Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd  2 QB 26.
On the First issue by failing to pay the deposit the defendant had committed a repudiatory breach of contract.
The court also considered the effect of making time of the essence of payment of the deposit. The reader is referred to the judgment which set out the classic contractual position re breach namely a contractual stipulation was either a condition (sometimes called a condition precedent) or a warranty. The difference is encapsulated in the well-known judgment of Bowen LJ in Bentsen v Taylor, Sons & Co  2 QB 274, 281
At common law the time for completion of a contract for the sale of land was a condition of the contract. In Howe v Smith, Fry LJ said (p. 103):
“In my opinion, the time fixed by a contract for the payment of the balance of the purchase money and the completion of the contract was, according to the law as it stood before the Judicature Act, 1873, of the essence of the contract, so that non-payment on that day, provided it was not caused by the default of the vendor, authorised the vendor at law to treat the contract as rescinded.”
The defendant was unsuccessful in its appeal The court noted that in the present case the contract was a contract to buy a property for £4.5 million. The price was payable in two parts: the deposit and the balance.
The buyer either refused to pay the full price; or refused to pay it in two parts. The issue in law was whether that demonstrate a refusal to perform the contract? The Court of Appeal held it did. It demonstrates a willingness to proceed with a contract but not with the contract that the parties entered into.
Counsel for the defendant concede that five days’ notice was sufficient to make time of the essence. Given that lawyers for the claimant had sent two reminders to the defendant’s before the due date for payment of the deposit, the court held that there was nothing in the complaint that five days’ notice was too little.
This case is a valuable reiteration of the law and practice. A contractual obligation to pay a deposit is as most lawyers have always considered a term of such fundamental importance in the contract. In law it is in pure parlance treated as a fundamental term or condition.