A recent High Court decision has considered the issue of estoppel based on representations made during commercial negotiations.

In Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26, the High Court considered whether a statement made in lease negotiations that a tenant would be “looked after at renewal time” if it carried out refurbishments, gave rise to an estoppel preventing the landlord from denying an obligation to offer a further five year lease on the same terms.

Hargrave J (in the Supreme Court of Victoria) said the landlord’s statement was no more than ‘vaguely encouraging’. While the tenant ultimately failed on its case that the landlord was obliged to offer it a renewed lease on the same terms, the Victorian Civil & Administrative Tribunal (VCAT), the Court of Appeal and at least one Justice of the High Court appear to suggest that, had the tenant’s case been less ambitious, the landlord would have been held to a more limited assumption, for instance, an obligation to renew on different terms.

Commercial negotiations

Conduct during commercial negotiations may have unintended consequences. Your representation by statements, actions, even silence may give rise to expectations and assumptions in the other party. Where you induce the other party to expect or assume that something will occur, and the other party relies on that expectation or assumption, you may be required to fulfil it or to compensate another party for its reliance on it.

In Crown, a majority of the High Court held that the statement made by the landlord’s representative, that the tenant would be ‘looked after at renewal time’ did not give rise to an estoppel because the representation was not capable of conveying to a reasonable person that the tenant would be offered a further lease on the same terms as the original lease.

To give rise to an estoppel, the majority said, in effect, that:

  • there was no requirement for the representation to rise to the level of certainty required for contractual variation;

  • even conduct capable of giving rise to more than one meaning may be sufficient to found an estoppel if it is capable of conveying to the reasonable person a meaning that gives rise to the assumption or expectation.

Put another way, is the representation capable of misleading a reasonable person in the way that the person relying on the estoppel claims he or she has been misled?

The High Court also made it clear that a party invoking promissory estoppel must establish actual reliance on the relevant assumption or expectation said to be induced.

In the words of French CJ, Kiefel and Bell JJ (at [39]), ‘it must be shown that [the] assumption [which the representation in issue was able to create] was in fact acted upon’.

In this case, the tenant said that it expected that it would be granted a further lease on the same terms as the original lease. VCAT (at first instance) and the Court of Appeal both found that the landlord’s conduct was capable of giving rise to a more limited assumption that the landlord would renew the leases on such terms as it chose. In the High Court, Nettle J also suggests that the landlord’s conduct was capable of giving rise to a more limited assumption.

The decision sounds a cautionary note for those involved in commercial negotiations not to make statements as to future intent by way of ‘vague encouragement’. The tenant in Crown may well have succeeded in establishing a more limited estoppel had it based its claim on an assumption that the landlord would grant a further lease on terms of its choosing.