In an ideal world persons would protect themselves by not investing time and/or money in a project without a contract having been drawn up and executed. However the reality is that persons do often invest time and/or money without a contract, particularly in a domestic or family context; and they depend upon another party’s honour to not deal with them unfairly in relation to that project in the future.
Legal principles of equitable estoppel may come to the aid of a person who has been left “high and dry” in these circumstances. Equitable estoppel will operate where there has been “the creation or encouragement by the defendant in the plaintiff of an assumption that a contract will come into existence or a promise be performed or an interest granted to the plaintiff by the defendant, and reliance on that by the plaintiff, in circumstances where departure from the assumption by the defendant would be unconscionable.” (Austotel Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582 per Priestley JA)
The recent case of Construction Technologies Australia v Doueihi & 4 Ors  NSWSC 1717 provides a timely reminder of how equitable estoppel can operate to come to the aid of a party that has acted to its detriment and does not have a contract to rely upon.
The plaintiff, Construction Technologies Australia (“CTA”), assisted in identifying a suitable property for the defendants to purchase in Seven Hills, designing commercial premises for that property and supervising the construction of those premises. CTA did all these things on the assumption that it could have exclusive possession part of the premises for 5 years with an option to extend for a further 5 years, at a rental of $120,000 a year. CTA proceeded to invest almost $1 million on the installation of its plant and equipment in the premises. When CTA later suggested that the parties enter into a lease the defendants said they were prepared to offer CTA a lease for 2 years, with no option for renewal, at a rental of $200,000 per annum plus GST.
CTA COMMENCED PROCEEDINGS IN THE SUPREME COURT OF NEW SOUTH WALES
Its claim in contract was rejected on the basis that all essential terms of an agreement for lease had not been agreed between the parties; nor was there any objective indication that the parties intended to enter into binding legal relations.
Alternatively, CTA claimed to be entitled to an interest in the Seven Hills property by way of a long-term lease to secure its occupation based upon principles of equitable estoppel.
The trial judge, White J, found the requirements to establish an equitable estoppel were satisfied as follows:
- Creation or encouragement of assumption: the defendants encouraged CTA to assume that an interest would be granted to it, namely that it could have exclusive possession of a certain part of the premises for 5 years with an option to extend that period for a further 5 years if it paid the rent that had been agreed.
- Reliance: CTA relied upon that assumption through the expenditure of labour and skill in contributing to the design of the premises and supervising its construction, and also by installing its plant and equipment (which was expensive to install and would be expensive and disruptive of its business to remove).
- Unconscionability: It would be unconscionable for the defendants to depart from the assumption that CTA was induced to adopt because they took advantage of CTA’s efforts, they knew of CTA's expenditure, they accepted CTA as a tenant and accepted its rent being aware that CTA would expect to be able to occupy the premises for a long term. Further, although CTA might be regarded as being careless in protecting its own interests, in all the circumstances, including that the practice of the defendants was to never drew up leases, the requirement of reasonable reliance was satisfied (i.e it was reasonable for CTA to rely on the assumption that it would have a lease of the premises that would give it long-term security).
CTA was therefore successful in obtaining an order that that the defendants execute a lease on certain terms based upon principles of equitable estoppel.
However it is important to note, and it is clear from the reasons for judgment, that the fact that:
- CTA did not expect to formalise the relationship by entering into a contract, and
- this case fell within a domestic or family context (due to there being a familial connection between a director of CTA, who was also the company’s major shareholder, and the defendants) rather than in a purely commercial (and therefore arm’s length) setting,
were both critical to CTA’s success. Otherwise, CTA’s claim would have almost certainly failed notwithstanding that it had spent almost $1 million on installing plant and equipment in the Seven Hills property.
Equity will come to the aid of the vulnerable who have been preyed upon, but not those who have acted foolishly.