2011 Q3 Conveyancing Periodical - Prevention of Frauds and Perjuries

October 2011 

by Julian Farrand QC LLD

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A simplistic history with an unhappy ending?

In 1677 a statute was enacted the ghost of which still haunts conveyancers: the Statute of Frauds.  This was expressly passed: "For prevention of many fraudulent Practices which are commonly endeavoured to be upheld by Perjury and Subornation of Perjury".  The major mischief was the unreliability of oral evidence: one man's word against another's as to a variety of property transactions gave rise to dubious decisions because courts could believe the wrong word.  Amongst these transactions were alleged contracts for the sale of land.  The preventative measure was to require written evidence.  Section 4 provided:

"And bee it further enacted by the authoritie aforesaid That ... noe Action shall be brought ... to charge any person ... upon any Contract or Sale of Lands Tenements or Hereditaments or any Interest in or concerning them ... unlesse the Agreement upon which such Action shall be brought or some Memorandum or Note thereof shall be in Writeing and signed by the partie to be charged therewith or some other person thereunto by him lawfully authorized."

Equitable evasions

Nevertheless, courts of equity were persuaded that this measure might be unfair and invented a doctrine of part-performance. By virtue of this doctrine, a court could believe oral evidence about an alleged contract in pursuance of which one of the parties had acted and find that it would promote rather than prevent fraud to insist on the statutory requirement that there must be a signed memo evidencing a genuine contract.  There was nothing in the Statute of Frauds 1677 Act allowing this judicial evasion of its preventive provisions but when s.4 was repealed and replaced in substantially the same terms by s.40 of the Law of Property Act 1925 it was expressly added that the section "does not affect the law relating to part performance".

Judicial dodges

However, the courts were not satisfied with just one dodge round the spirit of the statutory requirement.  So sellers were able to forfeit deposits despite the lack of sufficient evidence in writing since this was not technically enforcing the alleged contract "by action".  Similarly, either party could enforce an alleged contract even though the written evidence was only signed by the other party who would not, therefore, also have a reciprocal right to enforce the contract between them.  Again, if a term of an alleged contract was omitted from the writing, it was held possible for one party unilaterally either to waive it or to submit to performing it and then enforce the contract as adjusted.  Then worst of all, the Court of Appeal decided that an alleged oral  contract could unintendedly and prematurely become enforceable merely through the inadvertent creation by one party's conveyancer of written evidence of the utmost informality, e.g. by a deposit receipt or subsequent correspondence accidentally excluding "subject to contract" (see Law v Jones [1974] Ch. 112,  and Tiverton Estates Ltd v Wearwell Ltd [1975] Ch. 146).

Reform recommended

All this created uncertainty and the resulting litigation led the Law Commission to recommend that the statutory requirement for sales of land should be reformed: instead of requiring evidence in writing of a contract for it to be enforceable the contract itself ought actually to be made in writing for it to be valid at all.  The primary purpose was still, essentially, the prevention of fraud and perjury in relation to the most important transactions of most people's lives, ie buying and selling their homes.  But it was more than this.  In a recent case, Mr Justice Briggs explained:

"The injustices identified by the Law Commission included not merely uncertainty (with the consequential need for expensive litigation) but also lack of mutuality (inherent in the concept of enforceability by one, but not both parties to the contract) and also the tendency of the then law to allow contracts to become enforceable inadvertently, or to allow people who had genuinely contracted to escape their contractual obligations.

(North Eastern Properties Ltd v Coleman & Quinn [2010] EWCA Civ 277 at paras 39-43).

The recommendations made by the Law Commission were implemented by s.2 of the Law of Property (Miscellaneous Provisions) Act 1989, as follows:

"(1) A contract for the sale or other disposition of an interest in land can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document or, where contracts are exchanged, in each.

(2) The terms may be incorporated in a document either by being set out in it or by reference to some other document.

(3) The document incorporating the terms or, where contracts are exchanged, one of the documents incorporating them (but not necessarily the same one) must be signed by or on behalf of each party to the contract."

As readers will readily appreciate, these subsections really require no more than proper compliance with standard conveyancing practice.  The section makes no exception for the doctrine of part-performance because an oral agreement is not simply unenforceable but does not constitute a contract capable of any performance.  However, there is a hostage to fortune provision that "nothing in this section affects the creation or operation of resulting, implied or constructive trusts" (s.2)5)).

Confusing judgments

The quoted provisions of s.2 of the 1989 Act appear clear but have the judiciary got the message that they say what they mean and mean what they say?  Regrettably, confusion reigns.  Deprived of the doctrine of part-performance as a way of evading the statutory requirements, some of the judges found estoppel a useful escape route.  The leading case became Yaxley v Gotts [2000] Ch. 162, where Mr Gotts had resiled from a "gentleman's agreement"-nothing in writing-with his friend Mr Yaxley that, in return for building work on a house "the ground floor would be his 'for ever'".  The Court of Appeal, in effect, enforced the oral agreement by upholding an order that Mr Yaxley should be granted a rent-free 99-year lease of the ground floor.  Lord Justice Beldam observed (at page 182): "I do not think it inherent in a social policy of simplifying conveyancing by requiring the certainty of a written document that unconscionable conduct or equitable fraud should prevail."

But the policy was not just simplification but also certainty and, in order to reach this decision, the Court of Appeal had differed from an earlier decision which should have constituted a binding precedent.  In Godden v Merthyr Tydfil Housing Association (1997) 74 P. & C.R. D1 the Court of Appeal had rejected an estoppel by convention argument on the ground that it would be contrary to public policy thereby to render valid that which the legislature has ruled invalid.  The trick in Yaxley v Gotts was to find proprietary estoppel giving rise to a constructive trust (saved by s.2(5)).

And then the position was made even less clear by a decision of the House of Lords.  As if setting an examination question, Lord Scott stated the facts as follows at the beginning of his opinion in Cobbe v Yeoman's Row Management Ltd [2008] UKHL 55 (para.2):

"A is the owner of land with potential for residential development and enters into negotiations with B for the sale of the land to B. They reach an oral agreement in principle on the core terms of the sale but no written contract, or even a draft contract for discussion, is produced. There remain some terms still to be agreed. The structure of the agreement in principle that A and B have reached is that B, at his own expense, will make and prosecute an application for the desired residential development and that, if the desired planning permission is obtained, A will sell the land to B, or more probably to a company nominated by B, for an agreed up-front price, [£12 million]. B will then, again at his own expense, develop the land in accordance with the planning permission, sell off the residential units, and, when the gross proceeds of sale received by B equals [£24 million], any further gross proceeds of sale will be divided equally between A and B. Pursuant to this agreement in principle B makes and prosecutes an application for planning permission for the residential development that A and he have agreed upon. B is encouraged by A to do so. In doing so B spends a considerable sum of money as well, of course, as a considerable amount of time. The application is successful and the desired planning permission is obtained. A then seeks to renegotiate the core financial terms of the sale, asking, in particular, for a substantial increase in the [up-front price to £20 million].... B is unwilling to commit himself to the proposed new financial terms and A is unwilling to proceed on the basis of the originally agreed financial terms. So B commences legal proceedings.

At first instance and in the Court of Appeal, the "agreement in principle" had been enforced on the basis of proprietary estoppel because of A's unconscionable conduct. But this was reversed by the House of Lords principally because a narrow view was taken of the elements of proprietary estoppel.  But Lord Scott went on to say (at para.29):

"The question arises, therefore, whether a complete agreement for the acquisition of an interest in land that does not comply with the section 2 prescribed formalities, but would be specifically enforceable if it did can become enforceable via the route of proprietary estoppel. It is not necessary in the present case to answer this question, for the [agreement in principle] was not a complete agreement and, for that reason, would not have been specifically enforceable so long as it remained incomplete. My present view, however, is that proprietary estoppel cannot be prayed in aid in order to render enforceable an agreement that statute has declared to be void. The proposition that an owner of land can be estopped from asserting that an agreement is void for want of compliance with the requirements of section 2 is, in my opinion, unacceptable. The assertion is no more than the statute provides. Equity can surely not contradict the statute."

Lord Scott made no mention of the Court of Appeal in Yaxley v Gotts, which cannot, therefore, be treated as overruled.  Also Mr Justice Bean has recently considered and not applied what was said by Lord Scott - could he have been influenced by the fact that Lord Scott has now retired?  This happened in Whittaker v Kinnear [2011] EWHC 1479, where Bean J accepted (at para,30) counsel's submission that proprietary estoppel in a case involving a sale of land has survived the enactment of s 2 of the 1989 Act.

New tricks

But proprietary estoppel is not the only novel tool adopted in courts for the evasion of the statutory requirement of writing.  Having referred briefly to the injustices leading to the present provision, Mr Justice Briggs proceeded to conclude (in North Eastern Properties Ltd v Coleman & Quinn [2010] EWCA Civ 277 at para.s 39-43) that: "...it was no part of Parliament's intention by enacting section 2 of the 1989 Act to make it easier for people who have genuinely contracted to escape their contractual obligations."  But this begs the question: if the section has not been complied with there cannot legally be a so-called genuine contract.  Just as bad was Lord Justice Longmore who pronounced tendentiously (at para.81):

"This section is not intended to be a charter for those wishing to disown apparent contracts for the sale of property to go behind the document and search for statements made in pre-contract negotiations, then to claim that they were intended to be terms of the contract and thus bring the whole contractual edifice crashing to the ground."

But if such a claim is well-founded so that a term has actually been omitted from the document, the contract will only be apparent, not real in law, and may legitimately be disowned.

This blatant bias on the part of judges against people wishing to have s.2 of the 1989 Act applied according to its clear terms should not be accepted as consistent with Parliament's evident intention in enacting the requirement that a contract for the sale of land "can only be made in writing and only by incorporating all the terms which the parties have expressly agreed in one document" (as provided by subs.(1) of section 2).  Indeed, the judicial undermining of the section might well be criticised as an irresponsible encouragement of litigation which has done nothing for the prevention of frauds and perjuries.

Entire agreement clauses

On the facts of the case, the particular decision in North Eastern Properties Ltd v Coleman & Quinn [2010] EWCA Civ 277 might appear unobjectionable.  The case concerned 11 contracts for the sale of flats with the documentation omitting, at the purchasers' request, a provision for payment of a 2 per cent "finder's fee".  It was the purchasers who contended that this omission rendered the contracts for sale void under s.2 of the 1989 Act and, not surprisingly, the court treated this as unmeritorious.  In order to decide in accordance with the perceived merits, the court found that the finder's fee term was part of a larger composite transaction between the parties but not part of the contracts for sale although they were a part of that transaction.

The contracts all included an express term that: "this Agreement contains the entire agreement between the parties", which enabled Longmore LJ to add (at para.82):

"The matter is put beyond all doubt, however, by the presence of clause 16.3-the entire contract clause. If the parties agree that the written contract is to be the entire contract, it is no business of the courts to tell them that they do not mean what they have said."

Unfortunately, perhaps, the new set of Standard Conditions of Sale (5th ed 2011) does not include an entire contract clause and The Law Society's new Conveyancing Protocol (2011) generally precludes the addition of any Special Conditions of Sale.

Julian Farrand QC LLD, is a solicitor and consultant to First Title Insurance plc

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