Satisfying the equity in proprietary estoppel

January 12, 2019

Moore v Moore

In Moore v Moore ([2018] EWCA Civ 2669) a father (Roger) and son (Stephen) carried on a farming business in partnership; each owned one half of the business. Roger assured Stephen that Stephen would inherit Roger’s share in the business. Relations between the two broke down and Roger sought to dissolve the partnership.

In the ensuing litigation, Stephen relied on proprietary estoppel. He was able to establish the elements of a proprietary estoppel claim. The question then arose as to the approach to be taken to the relief to be granted.

Relief in proprietary estoppel: expectations, detriment or somewhere in between?

When the elements of a proprietary estoppel claim are established, deciding how to satisfy the equity ‘is a retrospective exercise looking backwards from the moment when the promise falls due to be performed’ (Davies v Davies [2016] EWCA Civ 463 at [38] per Lewison J). There is debate as to whether expectations or detriment ought to provide the measure for relief in proprietary estoppel cases (Davies v Davies at [39]) and often each of these factors will have a part to play.

In Jennings v Rice ([2002] EWCA Civ 159) Robert Walker LJ referred to a category of cases where ‘the assurances, and the claimant’s reliance on them, have a consensual character falling not far short of an enforceable contract’. Here, expectations are more likely to set the measure of equitable relief (Jennings v Rice at [45]). These cases are referred to below as ‘consensus’ cases).

Where, however, expectations are uncertain or incommensurate with the assurances given then expectations are no more than a starting point and the court is more likely to search for ‘the minimum equity to do justice to the plaintiff’ (Crabb v Arun District Council [1976] Ch. 179 at 198 per Scarman LJ).

In an important passage in Jennings v Rice, Robert Walker LJ said:

‘It would be unwise to attempt any comprehensive enumeration of the factors relevant to the exercise of the court’s discretion, or to suggest any hierarchy of factors. In my view they include, but are not limited to… misconduct of the claimant… or particularly oppressive conduct on the part of the defendant… To these can safely be added the court’s recognition that it cannot compel people who have fallen out to live peaceably together, so that there may be a need for a clean break; alterations in the benefactor’s assets and circumstances, especially where the benefactor’s assurances have been given, and the claimant’s detriment has been suffered, over a long period of years; the likely effect of taxation; and (to a limited degree) the other claims (legal or moral) on the benefactor or his or her estate. No doubt there are many other factors which it may be right for the court to take into account in particular factual situations.’ (Jennings v Rice at [52])

Application of the principles to Moore v Moore

At first instance

The first instance judge decided that the right approach was for Stephen to take over the farming business and assets (including houses on the farm) immediately. This would give effect to the clear intention that Stephen should be sole owner of the farm on his father’s death (to keep the farm in family ownership). He thought this meant that Roger and his wife should continue to receive what they had expected to receive from the farm during their lifetimes.

Specifically:

  1. Roger’s interest in the farm was to be transferred to Stephen immediately;
  2. Roger and his wife were to be granted irrevocable licences to live free of charge in one of the houses on the farm for the rest of their lives;
  3. Stephen was to make a weekly payment of GBP200 to Roger and his wife for the rest of their lives;
  4.  Stephen was to pay the reasonable costs of residential care for Roger and / or his wife should the need arise.

In the English Court of Appeal

Henderson LJ, with whom the other members of the English Court of Appeal agreed, thought that there were serious difficulties both with the first instance approach and with the scheme to which it gave rise ([90]):

  1. Roger (as Stephen must have appreciated) intended his wife to be the beneficial owner of his half share in the farm, with access to capital and income, during her life ([91]);
  2. Roger’s assurances to Stephen assumed that the partnership between them would remain a harmonious relationship. This was no longer the case so that the need for a ‘clean break’ became a paramount consideration. The first instance order, however, created an ongoing state of financial dependence on Stephen ([93]);
  3. It was a dangerous over-simplification to regard this case as a paradigmatic example of a consensus case. Referring back to paragraph 52 of Jennings v Rice (see above), there had been ‘alterations in the benefactor’s assets and circumstances’. The personal and commercial relationship had broken down. Roger’s health had broken down; he had Alzheimer’s disease and lived in a care home ([94]);
  4. The first instance judge had taken a minimalist view as to the provision to be made for Roger and his wife. The judge should, rather, have considered the minimum award to satisfy the equity. The decision to order an immediate transfer to Stephen made it all the more important ‘to provide full and generous protection for Roger and Pamela during the remainder of their lives, and to reflect as far as possible the provision that Roger would have wished to make for Pamela on his death’ ([95]);
  5. The judge had also failed to take account of ‘the likely effect of taxation’ (Jennings v Rice [52]). The first instance judge had been provided with no guidance on this issue: ‘this should be as unacceptable in a substantial proprietary estoppel
    case as it would be in a big money divorce case’ ([96]). The order made at first instance would have seriously adverse taxation consequences.
  6. The judge had failed to consider the effect of any costs order on the financial arrangements he had provided for. Where, for example, was Roger to find the money to meet any such order once he had transferred his assets to Stephen and had only the weekly payment from Stephen to call on ([97]).

The order made at first instance could not stand and the case was remitted for a further hearing as to how the equity was to be satisfied with the benefit of the Court of Appeal’s guidance ([101] – [108]). While the order for an immediate transfer to Stephen should stand, there should be more generous provision for Roger and his wife (both in terms of capital and income) to allow for a clean break.

To this end, the order should require Stephen to pay a considerable (GBP 1 million – 2 million) lump sum to Roger and his wife. While Stephen should assume responsibility for his father’s health costs, the lump sum would allow his wife to pay for her own health care needs.

Comment

Moore v Moore offers detailed guidance as to how the court should approach equitable relief and the requirement to ‘satisfy the equity’. Paragraph [52] in Jennings v Rice emerges as a significant source detailing the factors to be borne in mind.

Moore v Moore illustrates the need for careful consideration of the nature of the expectations generated by the assurances given, the context in which they were given and any changes in that context at the time when effect is to be given to the assurance.

In general it illustrates the potential for proprietary estoppel to combine remedial flexibility with a degree of predictability as to the factors that the court will take into account when granting relief.

This approach might well, in time, give proprietary estoppel the edge over the common intention constructive trust when dealing with the property and financial aspects of a relationship breakdown. Crucially, it is possible to have regard to the state of the relationship between the parties and their circumstances both at the time that the order is made and thereafter.

Michael Lower

 

 

 

 

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Misrepresentation: misleading descriptions of a flat

December 10, 2018

A contract can be set aside if the purchaser was induced to enter into it by a misleading description of the property to be sold. The false statement may be made either by the seller or the seller’s agent. The false ‘statement’ may be a series of statements which cumulatively convey a misleading impression of the property.

Facts

In Joytex Development Ltd v Super Homes Ltd ([2018] HKCFI 2286) C acquired Joytex as the vehicle for the purchase of a flat in Conduit Road, Mid-Levels from its developer Super Homes Ltd (‘SHL’).

Joytex alleged that its purchase of the flat was the result of representations (which proved to be false) that the flat would have an open kitchen layout and that all necessary government approvals for implementing this layout had been, or would be, obtained.

The sales agent’s statements

W worked for the estate agent appointed as sole sales agent by SHL. W gave C a brochure. W also told C that the flat would have an open kitchen layout. C was buying the flat as an investment. W told C that the likely category of tenant for the flat would find the open kitchen layout attractive.

The floor plan in the sales brochure

The floor plans for the flat in the brochure showed an open kitchen layout but there was qualifying wording to the effect that they were ‘only for reference’. SHL had approved the contents of the brochure. C noted the floor plan but did not read the brochure in detail and did not notice the qualifying words.

The 2009 side letter (signed at the time of the provisional sale and purchase agreement)

C signed a side letter (about fixtures and fittings to be installed in the flat). The attached plans showed both open and closed kitchen designs.

The solicitor’s statement

C agreed to instruct SHL’s solicitors to act for him in the purchase. A conveyancing clerk, L, handled the transaction. The plan attached to the sale and purchase agreement did not show an open kitchen. L assured C that SHL would change the kitchen to an open kitchen layout. The assignment, like the agreement, showed a closed kitchen layout.

No approval for the open kitchen layout

It later turned out that there was no Government approval for the kitchen layout and no likelihood that such an approval would be obtained. C sought the rescission of the contract and damages on the grounds that he had entered into the contract in reliance on SHL’s misrepresentation.

The legal issues

Whether SHL made representations that the flat would have an open kitchen layout

SHL had made representations. The court could have regard to the cumulative effect of a series of events ([80]). The representation in the floor plan in the brochure was not enough since there was a statement qualifying the plan (it was for reference only) ([84] on the legal effect of qualifying statements).

On the other hand, the 2009 side letter conveyed the impression that the flat could have an open kitchen layout ([87]). SHL approved its terms ([89]). W’s statements were representations that the flat would have an open kitchen layout. The fact that her employers were the sole sales agents of SHL was relevant  ([96] – [97]). While W may have exceeded her actual authority in some of the statements she made, she was acting within the scope of her ostensible authority ([100] – [101]). L was acting within the scope of his authority when he made the relevant representations to C.

The cumulative effect of all of the factors in the previous paragraph was that SHL had represented to C that the flat would have an open kitchen layout ([110]).

Reliance

Although C was an experienced and successful businessman, he had relied on SHL’s representations. Deputy Judge Stock SC said, ‘if the effect of a contract has been misrepresented, it is not necessarily an answer to say that had the representee read the contract, he or she would have discovered the true position’ ([116]).

The qualifying words ‘in rather small print’ in the brochure were not sufficient to defeat the claim ([117]).

Falsity

The representations were false. Joytex could not establish that the misrepresentations were fraudulent.

Remedies

Joytex was entitled to rescind the contract and to recover the price paid with interest on assigning the flat to SHL.

Joytex was entitled to damages for non-fraudulent misrepresentation. The aim is to put the purchaser in the position it would have been had the contract not been made. SHL was not able to show that it had reasonable grounds for believing, and that it did believe, in the truth of the representations.

Joytex was not entitled to damages for the alleged loss of profit from an alternative investment. This required the plaintiff, ‘to show on a balance of probabilities that it would have entered into the alternative and more profitable transaction, and a real and substantial chance (as opposed to a speculative one) that the relevant third party would have transacted.’ ([151]). Joytex was unable to meet this requirement; there was no evidence to show that it viewed any other property or that it would have retained such a property had it done so ([160]).

Joytex was, however, entitled to damages to cover, for example, legal costs and stamp duty and the management fees it had paid as the owner of the property.

Michael Lower

Family home legally owned by company controlled by one of the spouses

November 18, 2018

Introduction

Section 6 of the Matrimonial Proceedings and Property Ordinance (‘MPPO’) empowers the court, in divorce proceedings, to require the transfer  of the property of one party (A) to the other (B). This order can only relate to property to which A ‘is entitled, either in possession or reversion’.

How does this operate with regard to property legally owned by a company controlled by A? Does section 6 empower the court to order the company to transfer the property to B? If so, on what basis?

This was the question considered by the UK Supreme Court in Prest v Petrodel Resources Ltd ([2013] UKSC 34).  It is of considerable practical importance to B, especially where much of A’s wealth is tied up in the company. It is true that the court could order A to transfer the shares in the company to B but, as Lord Sumption observed, ‘ this will not always be possible, particularly in cases like this one where the shareholder and the company are both resident abroad in places which may not give direct effect to the orders of the English court.’ ([40]).

Thus, the court has to confront the important legal question as to whether it is entitled to pierce the corporate veil and whether there is any special jurisdiction to pierce the corporate veil in matrimonial proceedings.

No special jurisdiction to pierce the corporate veil in matrimonial proceedings

The UK Supreme Court laid to rest the idea that England’s family law courts had any special power to pierce the corporate veil. The English equivalent to section 6 of the MPPO (which is in identical terms to the Hong Kong provision) was not open to this interpretation ([37] – [42] Lord Sumption).

If the courts have the power to order the transfer of the property to B it will either be because: (i) the company holds the property on trust for A so that the order can relate to A’s equitable interest; or (ii) the case is one where it is appropriate, applying general principles, to pierce the corporate veil.

Where the company is trustee for A

In Prest, there were several properties which A had either transferred to a company controlled by him for no consideration or where A had supplied the company with the funds to make the purchase and there was no evidence that this was by way of loan or in return for shares in the company. Thus, on general equitable principles, the company held the properties on trust for A. A could be, and was, ordered to exercise his control over the company to procure the transfer of the legal title to the properties to B.

In an important passage, Lord Sumption said:

‘Whether assets legally vested in a company are beneficially owned by its controller is a highly fact-specific issue. It is not possible to give general guidance going beyond the ordinary principles and presumptions of equity, especially those relating to gifts and resulting trusts. But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership’ ([52] emphasis added).

Similarly, Lady Hale said that the power in section 6 MPPO  ‘is a very specific statutory power to order one spouse to transfer property to which he is legally entitled to the other spouse. The argument is that that is a power which can, because the husband owns and controls these companies, be exercised against the companies themselves. I find it difficult to understand how that can be done unless the company is a mere nominee holding the property on trust for the husband, as we have found to be the case with the properties in issue here. I would be surprised if that were not often the case ([93] emphasis added).

Piercing the corporate veil

The Supreme Court rejected the idea that the English equivalent of section 6 of the MPPO created a right to pierce the corporate veil. The court could only pierce the corporate veil if there were some general principle that allowed it to do so. Lord Sumption thought that such a principle did exist:

‘I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality ([35]).

This principle did not come into play here. There was nothing on the facts of Prest that allowed the court to invoke this principle.

Michael Lower

 

Does the voice of the trustee in bankruptcy of one co-owner carry greater weight when considering an order for sale?

October 18, 2018

In Lo Yau Shing (a bankrupt) ([2018] HKCFI 1574) the court was asked by the trustee in bankruptcy of one co-owner of a flat to grant an order for sale. This was resisted by the other co-owner.

B (the bankrupt) and F (his father) were joint tenants of the flat in which F lived with his wife. B’s bankruptcy gave rise to a severance of the joint tenancy (Re Dennis). B’s trustee in bankruptcy applied for an order for sale under section 60 of the Bankruptcy Ordinance and section 6 of the Partition Ordinance.

In Wong Chun Kei v Poon Vai Ching it was held that the court should make an order for sale unless either: (a) the order would not be beneficial to all co-owners; or (b) the order would result in very great hardship to one co-owner. The burden of proof was on the owner resisting the sale. Hardship could be physical or practical. The voice of the trustee in bankruptcy did not carry greater weight than that of the other co-owner.

The court refused to grant the order for sale. F and his wife were both very elderly and in very poor health. If the order were made:

‘The choices faced by Lo Senior and his wife will be to rent a modest room as residence, move into a residential home for the elderly run by charities (if one can be found) or hope for a big rise in social welfare payouts from the Government, which is unlikely.’ ([93])

In these circumstances, it would be unjust to make an order for sale, balancing the interests of F against those of the creditors. Further, it would cause very great hardship to F and his wife.

If the test were whether the circumstances were exceptional (Re Bremner; Everitt v Budhram) the outcome would be the same.

Michael Lower

No presumption of advancement between siblings

September 16, 2018

In Lee Yee Yan Eva v Lee Tak Gate Richard ([2018] HKCFI 1137) a flat was bought in the joint names of a sister and brother (E and R). E provided the entire purchase price. R refused to comply with E’s request to transfer the legal title into her sole name.

Peter Ng J. saw this as a classic purchase price resulting trust. He referred to Lord Browne-Wilkinson’s statement of the law:

‘Under existing law a resulting trust arises in two sets of circumstances: (A) where A … pays (wholly or in part) for the purchase of property which is vested … in the joint names of A and B, there is a presumption that A did not intend to make a gift to B: the … property is held on trust for A (if he is the sole provider of the money) … It is important to stress that this is only a presumption, which presumption is easily rebutted either by the counter-presumption of advancement or by direct evidence of A’s intention to make an outright transfer.’ (Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669, 708A-B).

It all depended on E’s subjective intention ([38]) and, as to this, the evidence supported E’s case; there was no suggestion that she intended R to be an equitable co-owner.

Peter Ng J. also pointed out that there was no authority for the idea of a presumption of advancement between siblings ([27]).

R was ordered to convey the property to E.

Michael Lower

 

Waiver, mandatory injunctions and building schemes

August 18, 2018

Introduction

A building scheme (such as the scheme embodied in a Deed of Mutual Covenant) creates a local law for the estate it governs. The scheme may require owners of property within the scheme to obtain the consent of a common landlord (in a scheme established for leasehold properties) or of some other body (such as a Management Committee) before making alterations or additions to the property. This arrangement envisages the formal submission of plans as the start of a process leading to consent or refusal to give consent. Carrying work out without the requisite consent is a breach of covenant and can lead to an action for a declaration, damages and the grant of an injunction.

What if an owner makes alterations to property without obtaining the formal consent required but either: (a) the person or body with the capacity to give the consent knew of the work and failed to object to it; or (b) the person or body with the capacity to give consent has repeatedly failed to enforce the restriction with regard to alterations made to other properties within the scheme? Would it be inequitable either to allow the enforcement of the covenant or, if it is enforceable, to grant an injunction requiring the property to be reinstated?

These questions were considered by the Privy Council in Singh v Rainbow Court Townhouses Ltd ([2018] UKPC 19), on appeal from the Court of Appeal of the Republic of Trinidad and Tobago.

 

Singh v Rainbow Court Townhouses Ltd

Mrs. Singh owned a house in the Rainbow Court estate. She held the property under a lease for 199 years. The lease contained a recital to the effect that all of the units in Rainbow Court would be sold under a building scheme under which the covenants would be mutually enforceable. Rainbow Court Townhouses Ltd (‘the company’) was a company formed for the purpose of managing the development.

The lease contained a tenant’s covenant not to make any alteration or addition to the property without the prior written approval of the landlord and of the company. Mrs. Singh carried out works at her house without either consent. The company sought mandatory injunctions requiring Mrs. Singh to remove the alterations she had made.

 

Acquiescence or waiver

Mrs. Singh argued that the landlord and the company had acquiesced in the breach of covenant since: (a) (through its officers and employees) it knew of the work that was to be carried out for several days before it began and had not objected; and (b) the owners of ten other properties within the building scheme had carried out unauthorised alterations to their properties and neither the landlord nor the company had done anything to enforce the covenant against them.

On waiver, Lord Carnwath (with whom the other members of the Privy Council agreed) approved this statement:

‘It is in all cases a question of degree. It is in many ways analogous to the doctrine of estoppel, and I think it is a fair test to treat it in that way and ask, “Have the plaintiffs by their acts and omissions represented to the defendant that the covenants are no longer enforceable and that he is therefore entitled to use his house as a guest house.’

(Chatsworth Estates Co v Fewell [1931] 1 CH 224 at 231 per Farwell J.)

Lord Carnwath commented:

‘The issue was not whether breaches had been overlooked in individual cases but whether these omissions could be said to amount in effect to a representation that the covenants were no longer enforceable.’ ([32]).

The informal exchanges with the company’s employees and officers were not a waiver:

‘The mere failure of two officers to make immediate objection in October 2014 when notified of works due to start within in about a week, without any detailed information of their nature cannot be interpreted as a representation of any kind on behalf of the company.’ ([33])

The courts below had, however, failed to adequately investigate the allegations that the landlord and the company had not objected when other owners within the scheme had carried out unauthorised alterations:

‘On the face of the pleadings there was an arguable case that these were no different in kind to works which had been accepted without objection on other properties. Whether or not this gave rise to a case of waiver in the sense defined by Farwell J, they were at least arguably relevant to the scope of any mandatory order. It is difficult to see how fairness … would be served by an order which required the Appellant to carry out such works without any investigation of their significance, or how they compared to works accepted without objection on other properties on the estate.’ ([35])

The appeal was allowed and the case was remitted to the High Court.

Michael Lower

 

 

No oral modification clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 2)

July 14, 2018

In Rock Advertising Ltd v MWB Business Exchanges Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effectiveness of a No Oral Modification (‘NOM’) clause (see here for Part 1 of the blog post about this case setting out the facts and the decision). This post considers the underlying principles that the judgments had to confront.

The clause in question provided:

‘This Licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

The UK Supreme Court had to consider whether the parties were bound by an orally agreed modification of the licence agreement between them.

There were two aspects to this question: (1) was the clause binding according so that oral modifications were of no legal effect; and (2) if the clause did not preclude oral modifications, whether a subsequent oral agreement purporting to modify the original agreement indicated an intention to dispense with the NOM clause.

When parties who have accepted a NOM clause agree to an oral modification, they have expressed two conflicting intentions. Which is to prevail? If the courts give effect to a NOM clause are they respecting or denying freedom of contract?

The essential objection to the idea that the clause always precludes effective oral modifications is that this would contravene freedom of contract: ‘Those who make a contract may unmake it. The clause which forbids a change may be changed like any other (Beatty v Guggenheim Exploration Co (1919) 225 NY 380, 387 – 388, Cardozo J.).

Nevertheless, Lord Sumption (and the majority of the Supreme Court) thought that the NOM clause was effective and that the subsequent oral modification was of no effect: ‘Party autonomy operates up to the point when the contract is made, but thereafter only to the extent that the contract allows … The real offence against party autonomy is the suggestion that they cannot bind themselves as to the form of any variation, even if that is what they have agreed.’ ([11])

Lord Sumption saw three good commercial justifications for NOM clauses:

  1. ‘it prevents attempts to undermine written agreements by informal means’;
  2. ‘it avoids disputes not just about whether a variation was intended but also about its exact terms’; and
  3. giving effect to NOM clauses: ‘makes it easier for corporations to police internal rules restricting the authority to agree [variations]’.

Lord Sumption thought that these justifications should carry weight since ‘the law of contract does not normally attempt obstruct the legitimate intentions of businessmen except for overriding reasons of public policy’ ([12]).

If the parties were to act on an oral variation in the belief that it was effective then estoppel might come into play but:

‘the scope of estoppel cannot be so broad as to destroy the whole advantage of certainty for which the parties stipulated when they agreed upon terms including the No Oral Modification clause. At the very least, (i) there would have to be some words or conduct unequivocally representing that the variation was valid notwithstanding its informality; and (ii) something more would be required for this purpose than the informal promise itself: see Actionstrength Ltd v International Glass Engineering In Gl En SpA’ ([2003] 2 AC 51′ ([16]).

Lord Briggs took a different line on the first of the two questions. He thought that it was conceptually impossible for the parties to impose a formalities requirement on themselves, ‘not to be free, by unanimous further agreement, to vary or abandon [the contract] by any method, whether writing, spoken words or conduct, permitted by the general law’ ([26]).

On the other hand, turning to the second question, Lord Briggs was of the view that ‘an agreed departure [from the NOM clause] will not lightly be inferred, where the parties merely conduct themselves in a non-compliant manner’ ([27]). So normally, as in the present case, the approach of the majority and that of Lord Briggs would lead to the same conclusion.

Where, however, there are circumstances, such as an urgent need to agree a variation without waiting for the production of a written variation, then Lord Briggs thought that an agreement to depart from the NOM clause might be inferred ([30]).

Michael Lower

 

 

‘No oral modification’ clauses: Rock Advertising v MWB Business Exchanges Ltd (Part 1)

June 15, 2018

In Rock Advertising Ltd v MWB Business Exchange Centres Ltd ([2018] UKSC 24) the UK Supreme Court had to consider the effects of a ‘no oral modification’ (‘NOM’) clause in a contract. This blog post (part 1) sets out the facts and the essential features of the judgments. The next blog post (part 2) will set out the underlying issues identified in the judgments.

Facts

MWB Business Exchange Business Centres Ltd (‘MWB’) operated serviced offices in central London. It entered into a contractual licence with Rock Advertising Ltd (‘Rock’) containing the following NOM clause:

‘This licence sets out all the terms as agreed between MWB and Licensee. No other representations or terms shall apply or form part of this Licence. All variations to this Licence must be agreed, set out in writing and signed on behalf of both parties before they take effect.’

Rock fell into arrears with payment of the licence fee.

Rock’s sole director spoke to a credit controller at MWB to propose a revised schedule of payments. It was found at first instance that an oral agreement had been concluded to vary the licence in accordance with the revised schedule.

 

Issues and conclusion

The question was whether this oral agreement was effective. This raised two fundamental issues in the law of contract: (1) whether the oral agreement could be effective given the NOM clause; and (2) whether Rock could be said to have given consideration for the variation.

The UK Supreme Court found in favour of MWB since the oral agreement was rendered ineffective by the NOM clause. While there was unanimity as to this conclusion, Lord Briggs did not wholly agree with the reasoning of the majority (who agreed with Lord Sumption).

The Court declined to consider the consideration issue. Given the conclusion as to the effect of the NOM clause, any discussion of the question of consideration would have been obiter.

 

The NOM clause: the majority approach

Lord Sumption (and the majority) concluded that:

  1. NOM clauses are effective: ‘the law should and does give effect to a contractual provision requiring specified formalities to be observed for a variation’ ([10]);
  2. ”if the collateral agreement is capable of operating as an independent agreement, and is supported by its own consideration, then most standard forms of entire agreement clause will not prevent its enforcement’ ([14]);
  3. ‘But if the clause is relied upon as modifying what would otherwise be the effect of the agreement which contains it, the courts will apply it according to its terms and decline to give effect to the collateral agreement’ ([14]);
  4. Estoppel might come into play where the parties have acted on the oral variation ([16]).

Lord Sumption declined to deal with the question as to whether or not Rock had given consideration for the variation: ‘[t]he reality is that any decision on this point is likely to involve a re-examination of the decision in Foakes v Beer … if it is to be overruled or substantially modified, it should be before an enlarged panel of the court and in a case where the decision would be more than obiter dictum’ ([18]).

 

Lord Briggs’ analysis

Lord Briggs reached the same conclusions as the majority but for different reasons. Lord Briggs was ready to accept that a contract containing a NOM clause could be orally modified. It all depended on whether the necessary unanimous intention to agree an oral variation despite the NOM clause could be shown.

This intention would not be inferred from the fact that the parties had reached an oral agreement. This intention will not be lightly inferred where the oral agreement was made without express reference to the NOM clause ([27]).

It might be inferred where there was evidence of necessity, where it could be shown that there was some urgent reason for the parties to agree to an oral variation before the written record could be made and signed. The same facts would be equally likely to give rise to an estoppel ([30]).

Michael Lower

Receipt clauses and contractual estoppel

May 14, 2018

Introduction

In Asgain Co Ltd v Cheng Ka Yam ([2018] HKEC 889, CA) Asgain assigned land to CKM and CKY as tenants in common in equal shares. CKM was Asgain’s sole shareholder.

The consideration for the transfer was HK$1.5 million. The memorandum of agreement and the transfer each contained a clause acknowledging Asgain’s receipt of the purchase price.

In fact, however, no payment was made to Asgain at the time of the assignment. CKY subsequently made payments totalling HK$67,000 towards the purchase price.

CKY was later ordered to pay Asgain HK$683,000 (the outstanding balance of her share of the purchase price). She appealed arguing:

(i) that the receipt clauses gave rise to a contractual estoppel in favour of CKY; and

(ii) Asgain’s claim was defeated by section 18(1) of the Conveyancing and Property Ordinance.

 

Contractual estoppel

Lam V-P referred to the Court of Final Appeal decision in Ming Shiu Chung v Ming Shiu Sum ((2006) 9 HKCFAR 334), that of the Privy Council in Prime Sight Ltd v Lavarello ([2014] AC 436) and that in Grundt v Great Boulder Proprietary Gold Mines Ltd ((1937) 59 CLR 641).

Lam V-P also referred to this statement from the 4th edition of Spencer Bower, Estoppel by Representation:

‘an estoppel by convention need not involve any misleading of a representee by a representor, nor is it essential that the representee shall be shown to have believed in the assumed state of facts or law. The full facts may be known to both parties; but if, even knowing those facts to the full, they are shown to have assumed a different state of facts or law as between themselves for the purposes of a particular transaction, then a convention will be established. The claim of the party raising the estoppel is, not that he believed the assumed version of facts or law was true, but that he believed (and agreed) that it should be treated as true’ (at p.197).

Any estoppel was, however, extinguished ‘by a counter estoppel arising from the part payments by [CKY]’ (at [18]). These payments showed that her payment obligation had not been discharged by the receipt clauses. Reliance is not an element of this type of estoppel ([24]).

The contractual estoppel plea failed.

 

Section 18(1) of the Conveyancing and Property Ordinance

Section 18 reads:

‘A receipt for consideration in the body of an instrument shall be a sufficient discharge to the person paying the consideration and, in favour of any other person acting on the faith of the receipt, shall be sufficient evidence of payment.’

The effect of section 18(1) is that a receipt is conclusive at common law but in equity it only gives rise to a rebuttable presumption of payment. The vendor can sue, despite section 18, if there is evidence of non-payment.

Michael Lower

 

Does acceptance of an obligation to fence off access to an easement amount to abandonment>

April 21, 2018

In Annetts v Adeleye ([2018] EWCA Civ 555) the English Court of Appeal had to consider whether a dominant owner’s acceptance of an obligation to fence off access from the dominant tenement to the servient tenement amounted to the abandonment of a right of way.

The dominant tenement (‘the strip’) had formerly been part of a larger portion of land (‘Summerhill’) with the same right of way. The owner of Summerhill imposed the covenant on the sale of the strip to the owner of a neighbouring property.

The court also to consider whether the right of access from Summerhill over the strip to the servient tenement would revive if Summerhill and the strip were again to come into common ownership.

 

Abandonment of an easement

The relevant legal principles are to be found in Gale on Easements which was cited with approval in Dwyer v Westminster CC ([2014] 2 P & CR 7):

‘a. whether a person intends an abandonment is not a subjective question; it is always a question of fact to be ascertained from the surrounding circumstances whether the act amounts to an abandonment or was intended as such;

b. abandonment depends on the intention of the person alleged to be abandoning the right of way as perceived by the reasonable owner of the servient tenement; to establish abandonment of an easement the conduct of the dominant owner must have beensuch  as to make it clear that he had at the relevant time a firm intention that neither he nor any successor in title of his should thereafter make use of the easement;

c. abandonment is not to be lightly inferred; owners of property do not normally wish to divest themselves of it unless it is to their advantage to do so, notwithstanding that they may have no present use for it;

d. non-user is not by itself conclusive evidence that a private right is abandoned; the non-user must be considered with and may be explained by the surrounding circumstances.’ (Arden LJ at [8])

 

The fact that the owner of the dominant tenement had no need for the time being to use the right over the servient tenement would also suggest that the right of way had not been abandoned (Arden LJ at [9] citing Dyer).

The search is for the objective intention of the dominant owner as reasonably perceived by the servient owner (Arden LJ at [10]).

Given the principles mentioned above, the question is whether the hypothetical servient owner would have concluded that the right of way from the strip had been abandoned (Arden LJ at [37]). The issue has to be determined at the date of the transfer ([54]).

 
The hypothetical servient owner has some knowledge of the law; this person knows that covenants to erect a fence (being positive covenants) do not run with the land and would not bind a later owner of the strip ([48]).

 

Application to the covenant to fence off access to the servient tenement

Whether building a fence to block access to the right of way is an abandonment has to be considered on a case by case basis in the light of the above principles.

Abandonment ‘is not to be lightly inferred … Even a major obstruction does not necessarily result in abandonment of a right of way’ (Arden LJ at [49]).

It was relevant that the servient owner, who had the most to gain from an abandonment, was not a party to the covenant to build the fence (Arden LJ at [51]).

There was no abandonment.

 

If Summerhill and the strip came into common ownership would the right to cross the strip to get to the servient tenement revive?

It would (Arden LJ at [56]). The position is similar to that where the dominant and servient tenement come into common ownership (Arden LJ at [58]).

Michael Lower