Little v Courage Ltd
Court of Appeal
President, Kennedy, and Millett L.JJ.
December 21, 1994
Nicholas Chambers, Q.C. and Mark Brealey for the appellant.
Kim Lewison, Q. C. and Martin Rodger for the respondent.471
The appellant, Mr Little, is the tenant of The Alexandra, a public house in Norwich. The respondent Courage Ltd is his landlord. Mr Little became the tenant in 1986. His lease was for five years and expired in 1991. It contained an option to renew for a further five years. Mr Little attempted to exercise the option. Courage declined to grant him a further lease and Mr Little brought proceedings for specific performance. Courage asserted that a condition precedent to the exercise of the option had not been fulfilled and a preliminary issue was directed to be determined. In a reserved judgment given on December 21, 1993, Ferris J. determined the preliminary issue in favour of Courage and dismissed the action. He said that he reached his conclusion with a good deal of regret since it meant that the parties' evident intention that Mr Little should have an effective right of renewal had been frustrated.
The question on this appeal is whether Ferris J. was right in his conclusion. The case is of considerble importance, since Mr Little's lease was in the standard form employed by Courage, which is a well-known brewing company, and there are understood to be many other cases where a similar issue arises.
The facts have been carefully set out by the judge and I need not repeat them. I must, however, set out at length the provisions of Clause 26 of the Lease which contains the option to renew:
26.Option to Renew
(1) If the Lessee shall wish to take a Lease of the Premises and enter into a Business Agreement for a further term of five years from the expiry of the Term at the rent and on the terms and conditions hereinafter mentioned and
(a) the Lessee shall have paid the rent and all monies due under the Lease and the Business Agreement to the Company and have performed and observed all the obligations on his part thereunder up to the end of the Term and
(b) the Lessee shall have purchased from the Company or his Nominated Supplier at least the minimum barrelage of the designated Beers in draught or packaged form and the minimum gallonage of the designated Liquors in each year of the Term and
(c) the Lessee shall have agreed with the Company a further Business Plan and a further Business Agreement and
(d) the Lessee shall be not more than 60 years of age at the expiry of the Term and
(e) the Lessee shall not more than 12 months nor less than six months before the expiry of the Term give notice to the Company of his wish to take a further Lease of the Premises
then the Company will lease the Premises to the Lessee for a further term of five years from the expiry of the Term at a rent to be determined in manner hereinafter provided and subject in all respectsto the same obligations and stipulations as are herein contained except this clause for renewal but with the substitution of the then Company's current products lists for beers and for liquors.
(2) In the event of the Company granting a new lease as hereinbefore provided the Company and the Lessee shall also enter into a new 472 Business Agreement agreed between the Company and Lessee as referred to in sub clause 1(c) above
Subclauses (3) to (5) deal with the fixing of the rent payable during the further term, including a provision for this to be fixed by an independent valuer if the parties are unable to agree. This applies only in respect of rent. It does not apply to any failure to agree the terms of a new Business Agreement or Business Plan.
The Lease forms Part II of the document described as a Lease and Business Agreement which Mr Little executed on August 1, 1986. The original Business Agreement which Mr Little entered into forms Part III of the document. Part I contains an Initial Occupation Licence. These are preceded by a preliminary part which contains definitions for the purpose of both the Lease and the Business Agreement and which provides that the Lease and the Business Agreement shall for all purposes be construed as two separate agreements notwithstanding that they are contained in one deed.
The Business Agreement contains detailed provisions concerning the tenant's obligations to conduct the business of a tied public house on the premises and to obtain beer and liquor exclusively from Courage or its nominated suppliers. It is stated to be a condition of the Lease that the tenant shall enter into a Business Agreement with Courage. In fact the Lease and the Business Agreement are contained in the same document and by a single execution the tenant automatically entered into both. The whole document, both Lease and Business Agreement, was in Courage's standard form and was not negotiable.
The Business Plan is defined in the document as:
The plan for the operation of the Business as agreed between the Company and the Lessee at any time
It is a term of the Business Agreement that the tenant will implement the Business Plan as discussed and agreed with Courage with a view to developing the potential of the business, and that the tenant will meet with representatives of Courage as and when required to discuss the implementation of the Business Plan and to review and update it at least once a year. The Business Plan sets out target figures for turnover sales volume and profit which the tenant should try to achieve. This too was a standard form employed by Courage which was intended to be completed by the tenant after discussion with Courage's representatives. While the actual figures to be entered on the form were a matter for discussion, however, there is no suggestion that the contents of the form were negotiable.
Within the period prescribed by Clause 26(1)(e) Mr Little gave notice to Courage of his wish to enter into a new Lease and Business Agreement. For the purposes of the preliminary issue it is accepted that at the material times all the conditions specified in Clause 26(1) were satisfied except condition (c) relating to the agreement of a further Business Agreement and a further Business Plan. No attempt was made to agree either. Courage was at first willing in principle to grant a new five year lease subject to agreement of the rent and a new Business Agreement and Business Plan, and put forward its proposals for a new rent for consideration by Mr Little. Neither party expected that there would be any difficulty in agreeing a new Business Agreement or Business Plan. Shortly afterwards, however, Courage adopted a different attitude. Rightly or wrongly it decided that it was 473 precluded by a change in the law from renewing any of the five year leases of the kind which had been granted to Mr Little. It decided instead to allow tenants to continue in possession under new 20 year leases. Through its managing agents Courage notified Mr Little that it was unable to renew the Lease for a further five years but that it was willing to enter into negotiations for the grant of a 20 year lease on substantially different terms. As it has candidly admitted throughout, Courage refused to enter into negotiations for a new Business Agreement or Business Plan and Mr Little was given no opportunity to agree either.
Mr Little brought proceedings to enforce the option and obtain a new five year lease. Courage put forward a number of defences. These included the assertion that:
by reason of Clause 26(1)(c), Clause 26 of the said Lease is void for uncertainty and/or unenforceable in law.
An order was made for the trial as a preliminary issue of the question:
Whether by reason of Clause 26(1)(c) of the Lease in question the whole of Clause 26 is void for uncertainty or unenforceable.
In the course of argument before the judge it became clear that this did not encapsulate the real issue between the parties and it was agreed that the question for determination should be reformulated as follows:
Whether the defendant, having refused to agree or to offer to enter into a new Business Agreement or a new Business Plan, is entitled to refuse to grant to the plaintiff a new lease in accordance with clause 26(1) of the Lease and Business Agreement dated 1st August 1986 on the ground that the condition precedent contained in clause 26(1)(c) has not been satisfied.
Mr Little submitted that its refusal to agree a Business Agreement or Business Plan was a cynical device by Courage to deny Mr Little that to which he would otherwise be entitled, that is to say a renewal of his Lease. This is not entirely accurate. It is evident that Courage either could not or would not renew the Lease, and that its decision not to do so was based upon legal advice. It can be inferred from the history of the proceedings that the advice which it received was that the option to renew was void for uncertainty or was otherwise unenforceable. Given that it has been advised that it need not renew the Lease and that it had decided not to renew it, I infer that it declined to discuss the terms of a new Business Agreement because it considered that there was no point in doing so, and not as a cynical device in order to frustrate the option and avoid its legal obligations. But if the judge was right in his conclusion the effect would have been the same whatever Courage's motivation. If Courage could avoid its obligation to renew the Lease simply by refusing to enter into a new Business Agreement or Business Plan, then Mr Little's option to renew was illusory.
Courage accepted this but argued that it was irrelevant. The sole enquiry was whether the condition specified in Clause 26(1)(c) had been satisfied. To this there could be only one answer; to this day no Business Agreement or Business Plan has been agreed. It was useless, Courage submitted, for Mr Little to claim that a party cannot rely on his own wrong to defeat a condition precedent; Courage was under no obligation, express or implied, to agree or try to agree anything. Mr Little responded by submitting that by failing to 474 discuss a new Business Agreement or Business Plan Courage was in breach of an implied term in the Lease and could not take advantage of its own wrong. Before examining these submissions I propose to set out the general principles which I consider to be applicable to the present question.
The doctrine of fictional fulfilment of a condition precedent which is found in the civil law forms no part of English law. The only questions which fall to be answered in English law are whether on the true construction of Clause 26(1) of the Lease and in the events which have happened
(i) the condition precedent in paragraph (c) has been satisfied and
(ii) if not whether in the circumstances it needed to be satisfied.
The process of construction includes, where applicable, the necessary implication of unexpressed terms and the doctrine that a man may not take advantage of his own wrong.
The latter doctrine is confined to the case where a party seeks to take advantage of his own breach of a legal obligation owed by him to the party opposite. Where, in breach of a contractual obligation,express or implied, a party has prevented the fulfilment of a condition precedent, he may not only be liable in damages for the breach but may also be precluded from claiming that the condition has not been fulfilled. But nothing less than breach of a legal obligation will do: see Cheall v. Association of Professional Executive Clerical and Computer Staff.
An option to renew a lease, like any other option, is a unilateral contract under which the grantor undertakes to do something if, but only if, certain conditions are satisfied. If those conditions are not satisfied the grantor is not obliged to do anything. If they are satisfied the grantor must comply with his undertaking, and in the meantime, so long as it remains possible that the conditions will be satisfied, he must not put it out of his power to perform his undertaking when the time comes. This apart, however, he is under no obligation to do anything. In particular, he is under no obligation to try and bring about the fulfilment of the conditions, or not to try to frustrate them. For these propositions, see the analysis of Diplock L.J. in United Dominion Trust (Commercial) Ltd v. Eagle Aircraft Services Ltd.It is in general impossible to imply terms (that is to say terms which impose legal obligations) into a unilateral contract. This would be to imply a contractual obligation on a person who ex hypothesi is not yet a party to any contract and therefore not yet subject to any contractual obligations on the ground that it is necessary in order to bring a contract into existence. This is wrong in principle: See Aotteara International v. Scancarriers.
These principles are equally applicable to an option or other unilateral contract which forms part of a bilateral contract such as a lease. An option to renew a lease was given as the archetypal example of unilateral contract in United Dominion Trust (Commercial) Ltd v. Eagle Aircraft Services Ltd. Such an option is usually found as one of the terms of a lease, but its proper construction cannot depend on whether it is included as a term of a lease or is granted by a separate document.475
It is, therefore, impossible to imply any terms into Clause 26 of the Lease which import a legal obligation on Courage to do or to refrain from doing anything until its obligation to grant a further term has arisen. It follows that there is no room for the doctrine that a man cannot take advantage of his own wrong.
Whether an obligation to grant a further term has arisen depends on the true construction of Clause 26. The ordinary process of construction, however, may involve reading words into the clause, and provided that they do not import a legal obligation on the part of the grantor this is no more difficult in the case of a unilateral contract than in the case of a bilateral contract.
In construing an option the court will endeavour to ascertain the true intentions of the grantor as expressed in the words which he has chosen. The whole point of an option is that the grantor undertakes to grant an interest to the grantee in the future if the grantee calls on him to do so, whether the grantor is then willing to grant it or not. The court will struggle to avoid a construction which would render the option illusory by making it impossible for the grantee to exercise it unless the grantor were willing to grant the interest anyway.
Mr Little has put forward a variety of terms to be implied. They are;
(a) that Courage would not prevent the fulfilment by Mr Little of condition (c);
(b) that Courage would take all reasonable steps to reach agreement with Mr Little on a further Business Agreement and Business Plan;
(c) that Courage would use its best endeavours to reach agreement with Mr Little on a new Business Agreement and Business Plan;
(d) that Courage would produce and offer to enter into a new Business Agreement and a new Business Plan in a form to be determined by Courage acting reasonably.
Each of these terms would impose a contractual obligation on Courage in relation to the possible renewal of the Lease before it was a party to any contract at all in relation to its renewal. For the reasons I have already given, no such term can be implied. The judge rejected them for a different reason. He considered that each of the suggested terms was either by its express words or on analysis a term which required the parties to negotiate or reach agreement on the contents of the Business Agreement and the Business Plan. Such a term has no legal content and will not be implied.
I agree with the judge that none of the suggested terms can be implied for this reason also. Unlike some systems of law, English law refuses to recognise a pre-contractual duty to negotiate in good faith, and will neither enforce such a duty when it is expressly agreed nor imply it when it is not: See Walford v. Miles . The reason why such a term cannot be implied was explained by Lord Ackner:
The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours […] A duty to negotiate in good faith is as unworkable in practice as it is 476 inherently inconsistent with the position of a negotiating party […]. While negotiations are in existence either party is free to withdraw from those negotiations at any time and for any reason. There can be thus no obligation to continue to negotiate until there is a “proper reason” to withdraw. Accordingly a bare agreement to negotiate has no legal content.
The first of the suggested terms, as the judge pointed out, is only another way of putting second. What is alleged to have prevented the fulfilment of condition (c) is Courage's refusal to negotiate. If it was under no obligation to negotiate in order to enable the condition to be fulfilled, it could be under no obligation not to prevent the fulfilment of the condition by refusing to negotiate.
Before us Mr Little has put the third of the suggested terms in the forefront of his argument and has relied on the observation of Lord Ackner in the passage cited that an agreement to use best endeavours does not suffer from the defect of uncertainty. The fallacy in the argument was exposed by Goff L.J. in IBM United Kingdom Ltd v. Rockware Glass Ltd , where he said :
In Bower v. Bantam Investments Ltd I was not in any way suggesting that an obligation to use best endeavours is uncertain and cannot be enforced. The difficulty over uncertainty in Bower's case was that the object which the best endeavours were to be used to achieve was left wholly indefinite.
An undertaking to use one's best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one's best endeavours to agree, however, is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable legal obligation.
The fourth suggested term requires Courage to act reasonably in putting forward the necessary documents for agreement. This is no different from requiring it to act reasonably in the course of negotiations, or to use reasonable endeavours to reach agreement, and is equally open to objection.
In my judgment it is impossible to imply into Clause 26 of the Lease any legal obligation on the part of Courage to do or to refrain from doing anything. It follows that there is no basis for invoking the doctrine that a man will not be allowed to take advantage of his own wrong. Has the condition been satisfied?
In an attempt to avoid the difficulties inherent in implying additional terms into Clause 26, Mr Little submitted that, on the true construction of the Clause, condition (c) had been satisfied. The argument ran as follows:
(1) Clause 26 expressly provides that, if the preceding conditions are satisfied, Courage will lease the premises to Mr Little for a further term of five years at a rent to be determined and “subject in all respects to the same 477 obligations and stipulations as are herein contained” with only two exceptions: (i) the omission of Clause 26 of the Lease and (ii) the substitution of Courage's current products lists for beer and liquors.
(2) The Lease contains no mention of Courage's products lists for beer or liquors: the only reference to them is in the Business Agreement.
(3) Accordingly the word “herein” in the passage cited from Clause 26 must mean “in this document” rather than “in this Lease”. On the true construction of the Clause; therefore, the new Business Agreement is to contain the same obligations and stipulations as the old with the sole exception of the substitution of Courage's current products list.
(4) It follows that all that Mr Little is required to do is to express his willingness to take a new lease and enter into a new Business Agreement on the same terms as the Lease and the existing Business Agreement save for the rent, the omission of the option to renew, and the substitution of the current products list. That Mr Little has done; and by doing so he has necessarily agreed the terms of the new lease and Business Agreement and thereby satisfied condition (c).
The judge did not accept any of this, and nor do I. It makes a nonsense of the way in which Clause 26 is drafted and makes condition (c) superfluous. The Clause clearly contemplates a new Business Agreement which may differ in its terms from the existing one, and envisages three separate stages. First, the tenant must wish to take a new lease and enter into a new Business Agreement. Next, he must agree a new Business Agreement and Business Plan with Courage. And finally, when the new lease is granted, Courage and the tenant must formally enter into the new Business Agreement in the terms agreed.
In my judgment the submission fails to take account of the problem which faced the draftsman of Clause 26. Clause 13 of the Lease requires the tenant to comply with the provisions of the Business Agreement , that is to say the Business Agreement which forms Part III of the document. Clause 4 of the Business Agreement inter alia restricts the tenant's freedom to buy liquors from sources other than Courage by reference to Courage's current products list for liquors. That expression is defined for the purpose of both the Lease and the Business Agreement as the list current at the date when the tenant went into occupation of the premises. Accordingly, the Lease indirectly imposes obligations on the tenant by reference to the products lists which were current when the tenant first went into occupation. If the conditions prescribed by Clause 26 are satisfied, Courage is obliged to renew the Lease on the same terms as before. Unless specifically otherwise provided, Courage would have no right to insist on substituting the current products lists. Of course, in theory this could have been done by agreement in the course of negotiating the new Business Agreement; but since it was something which Courage knew it would require, it was obviously more appropriate to provide for it at the outset. Moreover, as will be seen, the parties did not contemplate a process of negotiation but a process in which Courage would put forward what it wanted and the tenant would signify his acceptance.
Accordingly, there is in my judgment no basis for construing Clause 26 as requiring the new Business Agreement to be in the same terms as the old subject only to the substitution of the current products lists. On the contrary, it was obviously important to Courage to be able to update the Business Agreement from time to time, and the renewal of an existing lease was seen 478as an opportune occasion for doing so. This removes the whole basis on which the submission was founded.Did the condition need to be satisfied?
It follows that condition (c) has not been satisfied. That, however, is not an end of the matter. There still remains the question whether, on the true construction of Clause 26 and in the events which have happened, it is necessary for the condition to have been satisfied.
To answer this question it is, I think, necessary to have regard to what the parties in 1986 must have contemplated would happen if Mr Little wished to renew the Lease. Some assistance in this respect can be obtained from the course of events when he took the Lease. He had, of course, met representatives of Courage and expressed his desire to take a lease, and he had discussed and agreed with them a Business Plan aimed at developing the potential of the premises. He then received a single document comprising the counterpart of the Lease and Business Agreement in Courage's standard form for signature. The document was enclosed with a covering letter, probably also in standard form, in which he was advised to read the document carefully and if necessary take advice before signing and returning it. It was clearly not intended to be negotiable.
The inference is irresistible that the parties contemplated that the same procedure would be adopted when it came to the renewal of the Lease. Mr Little would express his wish to take a new lease; Courage would send him a document in the standard form then current, containing both the new lease and the new Business Agreement; and Mr Little would sign it. He was not expected to have any input; the document was not negotiable.
Much the same applies to the new Business Plan. Here, of course, the tenant could have some input, but its extent should not be exaggerated. The document is in Courage's standard form. It contains the targets at which the tenant is to aim. It is prepared as the result of discussions between the tenant and Courage's representatives and is regularly up-dated. But the targets are those which Courage sets for the tenant. They are not merely a management tool for his benefit. Courage makes its profits from supplying beers and liquors to tenants, and is much concerned to ensure that they are well motivated and are set high targets to achieve. It employs experienced staff who can judge as well as and often better than the tenant what sales and profits are capable of achievement if the business is properly run.
Again, I have little doubt that, if Courage had not decided against renewing Mr Little's Lease, the process would have been essentially one-sided. At some stage Courage's representatives would have attended at the premises and discussed the business with Mr Little. As a result of what they learned they might have suggested some updating to the Business Plan. There would have been no negotiation to speak of; the process would be essentially one by which the representatives obtained information to enable them to enter realistic figures in the form. They would then have submitted the form, complete with figures, for Mr Little's acceptance.
I have little doubt, therefore, that the parties did not contemplate negotiation and agreement, but rather acceptance by Mr Little of what Courage put before him. This is consistent with the language of condition (c), which does not require the parties to negotiate or reach agreement, but requires Mr Little to agree the new Business Agreement and Business Plan with Courage.479
What, then, if Courage had changed its policy and decided to dispense with Business Agreements and Business Plans? Would this mean that Mr Little would no longer have the right to renew the Lease? If the officious bystander had asked the parties this question in 1986, they would have told him not to be silly. The Business Agreement contained the tie, and both documents were essentially for Courage's benefit. There could be no possibility of Courage ever dispensing with either. But legal problems are often most easily solved by considering what would happen in improbable events. The hypothetical bystander mustbe persistent as well as officious. If he had persisted in his question, I have no doubt what answer the parties would have made. Of course Mr Little could still exercise the option to renew. Courage had to give Mr Little something to sign. If Courage did not want him to agree anything, there was nothing for him to agree.
In my judgment effect can be given to the parties' obvious intentions by construing condition (c) as if it read:
(c) the Lessee shall if so required have agreed with the Company a further Business Plan and a further Business Agreement.
These words impose no obligation on Courage. It is free to require the tenant to agree a new Business greement and Business Plan or not. Failure to do so would not involve Courage in any breach of obligation. But it would not prevent the fulfilment of the conditions precedent to Courage's obligation to grant a new term.
Whether Courage had required the tenant to agree a new Business Agreement or a new Business Plan would be a question of fact in each case. It is not one which should cause any difficulty. The requirement would, of course, have to be made in good faith, and one means of proving that would be for Courage to show that it had submitted for the tenant's acceptance a Business Agreement and Business Plan into which it was itself willing to enter. In the present case it was not willing to grant a new lease and accordingly did not want a new Business Agreement or Business Plan. It follows that condition (c) did not need to be satisfied.
I would allow the appeal, set aside the judge's answer on the preliminary issue, and substitute an appropriate declaration in conformity with this judgment.Appeal allowed with costs in the Court of Appeal and in the court below. Leave to appeal to the House of Lords refused.