The recent decision of Nolan v Nolan1in the Supreme Court of Queensland has sparked concern amongst rural families and rightly so. The court found that the former wife of the rural property owners’ eldest son was entitled to almost a quarter of the value of the family enterprise and land.

The case involved the Nolan family who were successful farmers in the Darling Downs region for over five decades. Brian and Majella purchased “Kitcombe” in 1985 from their own resources. It was clear from the facts of the case that they had worked very hard all their lives to build up the farming business. Their eldest son, Tony, commenced a relationship with their daughter-in-law, Donna, in 1985 and they married in May of 1991. Tony and Donna subsequently separated in 2009 and divorced in 2011. During their 18 year marriage they lived and worked on Kitcombe for Brian and Majella.

Donna’s claim for acknowledgement of her contribution to the family farm was argued on two different bases. Those being:

  1. Equitable estoppel founded on Donna’s expectation that she and Tony would obtain the future ownership of the farm, farming enterprise and the spraying business; or
  2. Alternatively, that Tony, Donna, Brian and Majella were all engaged in a common endeavour at Kitcombe in relation to the farming enterprise and the spraying business.

Equitable Estoppel Claim

To establish an equitable estoppel in the circumstances, Donna needed to prove:

  1. That she acted in reliance upon an expectation that she would acquire an interest in Kitcombe;
  2. That Brian and Majella acquiesced in or by their conduct reinforced her expectation, and thereby encouraged the detrimental reliance by Donna, or failed to deny the expectation with knowledge that Donna was relying on it to her detriment; and
  3. That the expectation could be fulfilled only by transfer of the defendant’s property, a diminution of the defendants’ rights or an increase in the defendants’ obligations.

Interestingly the evidence used to assess whether an expectation was created included previously privileged communication between Brian, Majella and their estate planning solicitors at the time. That evidence came before the court by way of an order made in May of 20132 also by Justice Lyons where she determined on an application brought by Donna for production of documents that the privilege had been waived. The evidence for which privilege had been waived included a letter to Brian and Majella from their former estate planning solicitor, dated 8 April 1998 enclosing draft wills for them both. The letter read:

“Your first concern is to make adequate provision for Tony and Donna in the event of your joint deaths, in order to recognise the commitment made by them in the management of the farms, given that they have worked for less than standard commercial rates of reward, and they have willingly shared the farm debt load personally.”

Subsequently in June 2000, Brian and Majella made new wills which made some provision for Donna. This evidence was pivotal in discrediting Tony’s argument which was essentially that he was simply a farm hand working for wages on his parents’ property and had no expectation that they (he and Donna) would one day take over the property.

In her Honour’s reasons the 1998 and 2000 wills were considered to have acknowledged Donna’s contribution to the farming enterprise and constituted independent evidence of an acknowledgement by Brian and Majella of Donna and Tony’s detriment.

Despite this, no estoppel was found to arise. Donna was unable to prove that the detriment suffered was actually a consequence of a clear representation made by Brian and Majella or that there was a clear and common expectation.

Common endeavour claim

Donna’s claim succeeded on the alternative claim for a constructive trust arising from a common endeavour existing between all the parties. Evidence which went towards establishing a common endeavour was the inclusion of Donna into the family’s operating structure over the course of the 18 year marriage. The court found the course of events being:

  1. In 1985, shortly before they purchased Kitcombe, Brian and Majella incorporated the company Nolan & Son Pty Ltd and established the B&M Trust, of which Nolan & Son Pty Ltd was appointed the corporate trustee.
  2. On acquiring Kitcombe, a farming partnership called “BK & MA Nolan & Son” was established between Brian, Majella and Nolan & Son Pty Ltd as trustee of the Trust. This partnership operated until 30 June 1993.
  3. The farming partnership rented the land from Brian and Majella personally and conducted a crop growing business on the land.
  4. On 1 July 1993, being 2 years into their 18 year marriage, Donna and Tony were each made one-quarter partners in the BK & MA Nolan & Son partnership with the remaining one-half continuing to be held by Nolan & Son Pty Ltd as trustee of the Trust. This was despite the fact that neither Tony nor Donna paid money to join the partnership.
  5. In 1996 the company Nolan Ag Spray Pty Ltd was incorporated with one-half of the shares owned by the Trust and the other half by a trust controlled by Brian’s brother (Tony’s uncle). Tony and his brother Michael were the directors of Nolan Ag Spray and conducted its business.
  6. In 2001, the Trust became the sole owner of Nolan Ag Spray, Tony’s brother Michael resigned as a director and Donna was made a director in his place.
  7. In December of 2004 the farming partnership “BK & MA Nolan & Son” ceased conducting the cropping business and was replaced by the Trust. Shortly after on 6 January 2005, Donna and Tony become equal  shareholders of the trustee company Nolan & Son Pty Ltd with Brian and Majella. Donna and Tony were also appointed as directors of Nolan & Son at this time.

Other considerations that the Court found went to proving that a common endeavour existed included:

  1. The assets and liabilities of Brian, Majella, Donna, Tony, the B&M Trust and Nolan Ag Serv Pty Ltd were considered collectively and referred to as the “Nolan Group” for the purposes of tax planning, applications to the Queensland Rural Adjustment Authority and other banks and institutions;
  2. Donna was co-borrower and guarantor on bank loans and various finance facilities for farm machinery and vehicles; and
  3. Farm Management Deposits were established in Donna’s name.

Her Honour ultimately concluded that from at least 1993, when Donna was made a partner of the farming partnership, “BK & MA Nolan & Son”, there was a common endeavour which involved a partnership between her, Tony and Nolan & Son Pty Ltd as trustee. Her Honour was satisfied that it would be unconscionable for Brian, Majella and Tony to receive the benefit of Donna’s contribution to the farming enterprise without some compensation to her.

Relief granted

In 2006 Kitcombe had been listed for sale. At that time Brian, Majella, Tony and Donna had agreed on an allocation of the sale proceeds and the various farming and business equipment. It was not followed through because the offers received for Kitcombe were lower than expected.

In her Honour’s view the 2006 arrangement indicated the parties had reached an agreement on how all their various contributions should be recognised. On the basis of a net value of approximately $1.6m to $1.7m for Kitcombe, the farming business and the spraying equipment, an amount of $810,000 would have gone to Tony and Donna if the sale had proceeded. Her Honour therefore held that Donna should be paid $405,000 (being 50% of that allocation) less an adjustment of approximately $70,000 for the four and a half years she lived on the farm rent free following their separation.

Commentary

It is unremarkable that over such a period of time the incremental accumulation of evidence favouring Donna would not have occurred to Brian and Majella. A very concerning aspect of the outcome in Nolan v Nolan is that, by awarding a monetary amount to Donna as against Brian, Majella, Tony and Nolan & Son Pty Ltd (as trustee), the court has effectively busted through strict legal distinctions between personal ownership, partnerships and a discretionary trust. This has significant implications for any family business, not just rural businesses. Accountants and solicitors advising clients in similar situations must be aware that no amount of technical legal structuring of trusts and businesses will be fool-proof where the evidence of how those structures have operated over time conveys to the outside world a common endeavour by the parties.