Pooni & Anor v Nazran

Written contracts must be construed objectively by assessing the words used against the background reasonably available to the parties. Background and commercial purpose may assist interpretation, but they do not permit the court to disregard clear contractual language or improve the bargain made. Where a party undertakes to hold money for a specified purpose, payment for a different purpose is a breach unless the contract permits that use.

A claimant must take reasonable steps to mitigate loss, but the obligation arises only when the claimant knows that loss has been suffered. It does not ordinarily require a claimant to surrender valuable contractual rights in exchange for a doubtful claim against another party.

The claimants paid £200,000 to the defendant under two agreements relating to the proposed purchase of two apartments in a Dubai development. The defendant undertook to use the money for acquiring the apartments and imposed further conditions on its release.

The defendant paid the money to the development company as a contribution towards the purchase of the development site. The claimants alleged breach of contract and breach of trust. The defendant relied on the proper construction of the agreements and contended that the claimants had failed to mitigate their loss by refusing proposed repayment arrangements.

The central issues were whether the agreements permitted the payment towards the site and whether the claimants acted unreasonably in declining the proposed settlements.

1. Construction. The court applied the objective principles of contractual construction identified in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896. The words used remain critical. Background and commercial purpose assist in identifying meaning, but the court cannot rewrite the agreement or substitute a more commercially convenient bargain.
2. The relevant provisions, read according to their ordinary meaning and the known background, required the defendant to use the claimants’ money only for acquiring the identified apartments. They did not permit payment towards the purchase of the development site. The agreements also contemplated that the money would not be released until the contractual conditions concerning the apartments had been satisfied. The defendant’s payment towards the site therefore breached the agreements and the corresponding trust obligations.
3. The defendant’s reliance on the development agreement did not assist him. The wording that the purchaser would have the right to sell was directed to a later stage, after payment of the purchase price, and did not establish an existing right to sell the site.
4. Mitigation. The duty to mitigate requires reasonable steps to reduce loss. It did not require the claimants to release the defendant from his personal liability in return for a speculative and conditional claim against the development company. An obligation to mitigate could not arise before the claimants knew that their money had been paid away in breach and that they had suffered loss. No failure to mitigate was established.
5. Judgment was entered for the claimants for £200,000, with simple interest from 10 December 2005 to judgment at 1 per cent above base rate.

Not stated in the judgment.