Key Points:

A recent court decision has recognised an estoppel in favour of a plaintiff with less than clean hands. Does this open up the possibility for more cases to be argued on estoppel grounds in the future?

Business prudence ordinarily requires that commercial leases be formalised, the terms clearly outlined and agreed between the parties, and any agreement recorded in writing. However in practice, especially in relationships between friends or family where a certain level of trust exists, parties are willing to make significant commitments on the basis of an informal or unwritten agreement. The case of Construction Technologies Australia Pty Ltd v Doueihi [2014] NSWSC 1717 addresses the issue of whether principles of equity protect parties where there is an expectation on the part of one party induced by the other, but formal legal requirements have not been complied with.

In the Doueihi case, the plaintiff, a company that manufactures tile adhesives, was leasing commercial premises from the defendants. The plaintiff alleged that there was an understanding between the parties that it would have a lease for a term of five years with an option for a further five years, even though no formal lease was ever entered into between the parties.

Despite the absence of a long-term lease, the plaintiff made a significant financial investment, including constructing a manufacturing plant on the premises, on the understanding that it would be able to occupy the site for an extended period of time. The defendants subsequently served a notice to quit. As there was no written lease, the plaintiff had a mere tenancy at will, which is determinable by either party with one month's notice. While certain oral agreements may give rise to statutory legal leases, the facts in this case did not meet the statutory requirements.

Estoppel

The plaintiff submitted that the defendants were estopped from denying the existence of an equitable lease and sought an injunction to restrain the defendants from interfering with its possession of the property. The plaintiff alleged that it had been induced to rely on an assumption to its detriment that a lease would be granted in the future, relying on the judgment in Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387.

In considering the plaintiff's claim, Justice White conducted a detailed review of the case law since Waltons Stores, including the criteria essential for the establishment of an equitable estoppel, and the distinction between promissory and proprietary estoppel. His Honour refuted the defendants' submission that "equity does not create rights but recognises and assists with the enforcement of existing rights" as a general proposition. Justice White noted a "controversial" previous decision by the NSW Court of Appeal in Saleh v Romanous (2010) 79 NSWLR 453, in which the Court held that promissory estoppel cannot act as a positive source of new rights. He concluded, however, that the same limitation has never been held to apply to proprietary estoppel, which is a broader concept. In Attorney-General of Hong Kong v Humphreys Estate [1987] AC 114, Justice Brennan described proprietary estoppel as "the equity [that] binds the owner of property who induces another to expect that an interest in the property will be conferred on him." The plaintiff's claim was based upon proprietary estoppel by encouragement, and not subject to any limitation of the kind discussed in Saleh.

Unreliable evidence

Justice White conducted an in-depth analysis of the facts and concluded that there were significant deficiencies in the evidence before him, and the credibility of key witnesses. He found that not only did the testimonies of all the parties differ significantly in respect of what was agreed, the credit of each party as witnesses was called into question. Justice White even commented that he "[did] not consider any of the witnesses to be reliable." Both the plaintiff and the defendants presented evidence which was inconsistent with either prior statements they had made or other documentary evidence. Both parties relied significantly on a recalled conversation from several years previous.

In the absence of detailed contemporaneous evidence, it was necessary for Justice White to rely principally on the parties' testimonies and a sparse string of contemporaneous emails to third parties to determine the true intentions of everyone involved. He also looked to subsequent conduct as an interpretive aid.

Does equity always require clean hands?

It is often stated that in order to enliven a claim for equitable relief, a party must come to equity with clean hands. In the ordinary course, this doctrine requires that there be a connection between the plaintiff's unclean act and the rights he or she wishes to enforce. The Doueihi case raises the question of whether a party which deposes unreliable testimony merits the protection of the courts of equity.

Despite his methodical examination of all of the evidence and identification of that which he was satisfied with as being truthful, Justice White did not expressly state that the unreliability of the parties' depositions would have any effect on the merits of the claim in equity.

In response to the plaintiff's claims, the defendants submitted that any equitable relief was barred because the plaintiff had unclean hands. This submission was not based on the reliability of the plaintiff's testimony. Rather, the facts showed that the plant which the plaintiff had constructed did not have the requisite statutory planning approval. Further, the Court found that the plaintiff had knowledge of false information being provided on its behalf to the Council about the output capacity of the plant, which affected the planning permission required. Nevertheless, Justice White held that these factors would not preclude a successful claim in equity, illustrating that a party's hands need only be partially clean.

Decision

What further complicates the case is that the plaintiff, who was originally content to lease the property on an informal basis, later sought to procure a written legal lease. There were various motivating factors behind the plaintiff's actions, including the fact that the person who owned the plaintiff company had familial ties with several of the defendants which had altered. When the defendants were reticent on the matter, the plaintiff continued to pursue the idea of executing a formal lease. The Court found that this demonstrated the plaintiff was very much aware that it had no legal rights and, contrary to its initial submission, had never originally expected a legal lease would be executed in the future. In response, the defendants served a notice a quit, alleging that they were within their rights to do so. If the plaintiff had no long-term legal lease and was aware of this, on what grounds does it have a claim in equity to possession of the land?

After a lengthy discussion of the authorities, Justice White relied on a principle enunciated by Justice Priestley in Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582. In that case, Justice Priestley held that a key requirement for equitable estoppel is encouragement of the innocent party to adopt an assumption that causes it to suffer detriment. Justice White looked at the facts of the case holistically and ultimately determined that the defendants had encouraged the plaintiff by allowing it to expend money and time constructing a plant on the premises with the expectation of a long term tenancy.

While the Doueihi decision does not significantly develop the law of equitable estoppel, or clarify the distinction between the various categories of equitable estoppel, it does demonstrate that its application may be construed quite broadly. Even though the plaintiff was aware that it had no legal rights, and in spite of the fact that the plaintiff had seemingly acted inconsistently in both its testimony and in its dealings with the Council, the Court still found in its favour. It was held that the plaintiff was entitled to an equitable remedy, and that the defendants were required to grant it a legal lease subject to its remedying the issue of planning permission for the plant.

What is the significance of this case?

The complex factual matrix of this case may render its application to subsequent cases somewhat difficult.

Nevertheless, although the Doueihi decision largely restates the rules of equity as they currently stand, and does not significantly expand the application of the doctrine of estoppel, it is significant in that it does appear to reflect a relaxation of the requirement that the claimant come to the Court with "clean hands". The case does suggest that parties may have available to them an estoppel argument where other claims might not succeed, and that a certain latitude may be granted to them by the courts in relation to their own conduct and its relationship to the rights that they seek to enforce.

In a construction law context, disputes where the facts could give rise to an estoppel case may also satisfy the requirements for a statutory misrepresentation case. While a misrepresentation claim brought under statute may have greater prospects of success (especially given the reversal of onus effected by clause 4 of the Australian Consumer Law), parties should keep in mind the additional protection that the doctrine of estoppel might provide.

While major construction projects will almost invariably have thorough and heavily negotiated contracts with mechanisms for changed circumstances, equity may still prove a useful aid. For example, a party might rely on a representation that liquidated damages might be waived, or a representation that formal notification obligations are not required, or an agreement to grant an extension of time in relation to a delayed project. Such reliance might take the form of not increasing resources or working extended shifts to overcome any project delay. In these situations (depending on the particular facts), if the representing party later tries to deny the waiver or the extension, and the injured party has relied on their representations to its detriment, it could seek to estop them from doing so.