Meretz Investments NV & Anor v ACP Ltd. & Ors

This appeal concerned (i) whether the developer (ACP) and its parent-guarantor (FP) were liable in substantial damages for failure to perform a contractual "leaseback option" (clause 12.4.2 of the preliminary agreement) once FP had exercised its mortgagee power of sale, (ii) claims in economic torts (conspiracy and inducing breach of contract) arising from the sale to a purchaser (Mr Tamimi), and (iii) a dispute about the scope of an account ordered for Meretz’s commission. The court held that, on the true construction of the parties’ arrangements, ACP remained liable for non-performance of the leaseback option and FP was liable under its guarantee for ACP’s failure once performance had been made impossible by FP’s sale of the lease. The court rejected claims in economic torts, applying and analysing the House of Lords’ decision in OBG v Allan and earlier authorities: the respondents genuinely believed they were entitled to act as they did (relying on legal advice that the mortgagee’s enforcement would overreach the option), and the exercise of the power of sale was not unlawful means; accordingly there was no requisite intention to injure or unlawful means to ground liability. The court also refused to allow reopening of matters merged in an earlier judgment for the purposes of the account ordered in favour of Meretz.

This appeal arose from complex development agreements made to construct penthouses on Albert Court, London. The principal contractual documents were a 1996 preliminary agreement (under which ACP obtained a development lease and undertook to develop within a timetable, with a leaseback option in clause 12.4.2 in favour of the freeholder Britel if ACP defaulted), an introduction agreement conferring commission rights on Meretz, and various charges and deeds of priorities. FP, the parent of ACP, provided finance and took a charge over the development lease and also gave a guarantee of ACP’s obligations.

The development ran into financial difficulty. FP exercised its power of sale under its charge and sold the development lease to Mr Tamimi. That sale prevented ACP from granting the sublease required by the leaseback option after Britel attempted to exercise it. The claimants sued for damages for breach of the leaseback option and for conspiracy and inducing breach of contract. There was also a dispute about the basis of an account ordered for Meretz’s lost commission.

The case reached this court on appeal from Lewison J (Chancery Division) ([2006] EWHC 74 (Ch)). The Court of Appeal addressed three main issues:

• Whether ACP (and FP under its guarantee) were liable in damages for non-performance of clause 12.4.2 once FP’s exercise of its power of sale made performance impossible. The court concluded that the contractual obligation to grant the development sublease remained enforceable in damages: by consenting to the priority of the FP charge the claimants had accepted that, if the charge were enforced, their only remedy against ACP would be damages, but that did not absolve ACP (and FP under its guarantee) from liability in damages for non-performance.
• Whether the defendants were liable in economic tort (conspiracy by unlawful means and inducing breach of contract). The court applied OBG v Allan and related authorities, holding that the respondents acted in reliance on legal advice (notably advice that a proper exercise of the power of sale would overreach the leaseback option), genuinely believed they were entitled to act, and that the mortgagee’s sale was not unlawful means. There was therefore no requisite intention to injure and no accessory inducement of breach.
• Whether Meretz could reopen inquiries into deductions from sale proceeds that had been the subject of an earlier judgment. The court refused to reopen matters merged in the prior judgment and dismissed this part of the appeal.

The court therefore allowed the appeal only on the first issue, remitting assessment of damages for ACP’s breach (and FP’s liability under the guarantee), and dismissed the appeal on the tort claims and on the account point.

Appeal allowed in part. The Court of Appeal held that ACP was liable for damages for failure to perform the leaseback option once FP’s lawful exercise of its power of sale made performance impossible, and FP was liable under its guarantee for that failure. Claims in conspiracy and inducing breach of contract failed: the respondents genuinely believed they were entitled to act (relying on legal advice that enforcement would overreach the option), the exercise of the power of sale did not constitute unlawful means, and the requisite intention to injure for the economic torts was absent. The judge’s refusal to permit reopening of matters merged in an earlier judgment was upheld.

Appeal from High Court of Justice (Chancery Division), Lewison J [2006] EWHC 74 (Ch). The judgment considered and applied prior Court of Appeal decisions arising from the same factual matrix, notably Britel Corporation NV v First Penthouse Ltd [2002] EWCA Civ 1350 and Channel Hotels & Properties (UK) Ltd v First Penthouse Ltd [2004] EWCA Civ 1072, both of which had earlier determined that FP could exercise its power of sale notwithstanding the preliminary agreement and the leaseback option.