Mr and Mrs Jones (J), and Mr and Mrs Oven (O), inhabited neighbouring properties at Little Baddow, Chelmsford, Essex. Originally, both plots had been owned by J. In November 2002, J had sold two plots of land – which would later go on to become O’s land – to a developer (D). One sale was unconditional (“the Unconditional Contract”); one was conditional on the grant of planning permission to develop a residential property (“the Conditional Contract”).
The two Contracts imposed restrictive covenants, both on the land being sold and the land being retained. In summary, the land being sold was not to be used other than for residential purposes (“D’s restrictive covenants”). The land being retained was not to be used for the sort of agricultural activities which would be incompatible with having a residence next door (“J’s restrictive covenants”). In particular, the keeping of livestock on the retained land (save for horses) was forbidden.
The Conditional Contract also contained a provision requiring D to reconvey to J a strip of land (“the Strip”), measuring 4 x 40m, if a particular barn on the Strip was demolished. But it did not provide that, on reconveyance, the Strip would become subject to J’s restrictive covenants.
Planning permission was duly granted and the conditional sale was completed in 2003. The house was built. In 2005, D sold both plots to O as a single parcel. O inherited the benefit of J’s restrictive covenants, and the burden of D’s restrictive covenants. O also agreed with D that they would reconvey the Strip to J, should the conditions for doing so be fulfilled.
In 2009, O demolished the barn, triggering the obligation to reconvey the Strip.
O expressed themselves ready, willing and able to effect the reconveyance. For some time, however, the reconveyance was held up, because J was not prepared to accept the Strip unless it was freed from D’s restrictive covenants.
While this impasse was being debated, O became aware that J was keeping pigs on the retained land, in breach of covenant. On one occasion, J allowed the pigs to go onto the Strip.
After this had come to light, J provided a signed transfer, albeit they maintained that they were entitled to the Strip free from D’s restrictive covenants. O refused to transfer unless J accepted that J’s restrictive covenants would apply to the Strip.
This dispute could not be resolved and in 2015 J brought proceedings for specific performance and damages. They maintained that the Strip was essential for the development of an equine livery business which they had intended to develop, and that the inability to do so had caused them significant loss.
O counterclaimed, seeking a declaration that the definition of “retained land” in the unconditional contract included the Strip (with the result that the Strip was subject to J’s restrictive covenants). A claim for rectification was initially pleaded, but abandoned.
The matter came for trial before HHJ Paul Matthews sitting as a Judge of the Chancery Division. The issues were:
- whether, on the proper construction of the conditional contract, the definition of “retained land” to which J’s restrictive covenants would apply included the Strip;
- if not, whether a term should be implied to that effect;
- whether specific performance of the obligation to transfer the Strip should be granted, and if so on what (if any) terms;
- whether J had suffered loss as a result of the non-performance of that obligation.
The Judge held:
- while on its literal meaning the Conditional Contract plainly did not include the Strip within the definition of the retained land, any construction which excluded it gave rise to the absurdity that the land closest to O’s residence, and thus most in need of the protection of J’s restrictive covenant, would not have it, and could therefore be used for any purpose including unsociable agricultural activities. This was such an absurd outcome that it could not have been intended. Accordingly, the term “retained land” would be construed as including “the Strip”.
- even if that was wrong, the Court would have implied a term requiring J to observe the terms of J’s restrictive covenant in relation to the Strip.
- there was, however, no defence to the claim for specific performance; in particular, it was not appropriate for the Court to rewrite the parties’ bargain by imposing terms.
- J had failed to prove their intention to develop and equine livery business and in any case the losses claimed were too remote. Thus J would be awarded nominal damages of £2.
The case is of interest for many reasons.
First, it is a rare example of a Court construing an unambiguous contract other than in accordance with its literal meaning. Usually in such disputes, judges are confronted with ambiguous contracts and called upon to construe them in a commercially sensible way; but this case is a reminder that parties will not be bound by the literal meaning even of an unambiguous contract, if that would give rise to absurdity.
Second, it illustrates the application of the test of “necessity” in relation to implied terms. The Conditional Contract would have been quite capable of being performed in accordance with its literal meaning. It was not in any sense unworkable. But had it been implemented in that way, the scheme of covenants would have lacked “commercial or practical coherence” – the reworking of the test of necessity proposed by Lord Sumption in Marks & Spencer plc –v- BNP Paribas  AC 742. In the Judge’s view, that justified the implication of a term.
Third, it highlights the limitations of the jurisdiction to grant specific performance on terms. The view of the Judge was that (contrary, on this issue, to O’s case) had the contract been as J contended, it would not have been the function of the Court to do anything other than enforce it. It could not rewrite the parties’ bargain in a way that it considered reasonable. The jurisdiction to grant specific performance on terms was limited, in the Judge’s view, to situations where events since the contract was entered into have changed the position as between the parties, so that ordering the full contract without any alteration would cause hardship or injustice. That was not this case.
Fourth, while the failure of J’s damages claim turned on the facts, the remoteness issue was of some interest. J was not a party to the contract between D and O whereby O agreed to reconvey the Strip to J. There was no question but that J could enforce it under the Contracts (Rights of Third Parties) Act 1999, and that that right extended (under s.1(5)) to the right to specific performance. But the Act says nothing about how the usual concepts of remoteness should be applied to a third party claim. Who, when third parties are involved, are the parties in whose “reasonable contemplation” the loss should be? The Judge seems to have taken the view, albeit without finding in terms, that the relevant parties for this purpose were the immediate parties to the contract, and not the third party. Having adopted that approach, he held that where the land was capable of a wide variety of uses there must be “something particular to show that a party undertaking a liability to transfer land is aware that the proposed recipient intends to use it in any particular way”. There was no such factor in this case and accordingly on that basis (as well as on the basis of the failure of J to prove their intention) the claim for damages failed.
Andrew Butler was Counsel for the successful Defendants.
A link to the judgment can be found here.