Sharma & Anor v Simposh Ltd

A deposit paid under an oral agreement concerning the sale of land is not automatically recoverable merely because Law of Property (Miscellaneous Provisions) Act 1989, section 2, renders the agreement void.

Recovery for failure of consideration depends on whether the expected return or state of affairs forming the payment’s basis failed. A void agreement remains relevant evidence of that factual basis. Where the recipient performs the agreed acts and fulfils the payer’s expectations, retention of the deposit is not unjust enrichment.

Property in money may pass despite the transaction’s contractual invalidity. A prospective purchaser may therefore lose a clearly stipulated, non-returnable deposit linked to a precisely defined condition.

The claimants paid £55,000 under an oral agreement which gave them an option to buy a development for £1.1 million. The defendant agreed to complete the development, withdraw it from the market and keep its offer open. Although the defendant performed those acts, the claimants withdrew after financial markets deteriorated.

The agreement was void under section 2 of the Law of Property (Miscellaneous Provisions) Act 1989. Mr Recorder Whitehurst nevertheless found that the payments were intended to be non-refundable. Leicester County Court ordered repayment, apart from an undisputed initial £1,600, because the money had been paid under a void contract.

The defendant appealed. The central issue was whether the agreed consideration had failed so as to establish an entitlement to restitution.

1. Appeal allowed unanimously. The judgment ordering repayment was set aside. The claimants had received what they paid for, so there was no failure of consideration and no unjust enrichment.

2. An agreement rendered void by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 has no contractual effect. That does not automatically entitle a payer to restitution. Failure of consideration concerns the failure of the expected performance or state of affairs forming the payment’s basis, rather than the absence of an enforceable contractual promise.

3. The void agreement remained highly relevant as evidence of the parties’ expectations and the purpose of the payment. The defendant completed the development, withheld it from the market and maintained its offer at the fixed price. Those acts fulfilled the claimants’ expectations. The transaction was commercial, with no inequality of bargaining power or overbearing conduct affecting the justice of retention.

4. Contractual invalidity does not prevent property in a deposit from passing. Whether the recipient must return the money depends on the intention accompanying payment. A payment conditional upon completion must be returned if the contemplated transaction fails. An unconditional payment passes prima facie for the recipient to retain, subject to any established ground of restitution.

5. The court explained Chillingworth v Esche [1924] 1 Ch 97 as recognising that the terms of a non-contractual arrangement may make a deposit non-refundable. It approved Robert Walker LJ’s analysis in Gribbon v Lutton [2002] QB 902 and rejected Laddie J’s contrary interpretation. A non-returnable deposit linked to a clearly defined condition may be retained when the condition is not met. The necessary intention must be expressed with great precision and clarity.

6. The difficult question whether estoppel can modify or counteract section 2 did not require determination.

1. Court of Appeal (Civil Division): The defendant’s appeal was allowed unanimously and the County Court judgment was set aside: [2011] EWCA Civ 1383.

2. Leicester County Court: Mr Recorder Whitehurst held that the claimants could recover the payments, apart from £1,600, as money paid under a void contract.