Archive for the ‘Formalities’ Category

Contract: essential elements of a memorandum: significance of reference to a later formal agreement

October 10, 2012

In Rossiter v Miller ((1877 – 78) L.R. 3 App. Cas. 1124, HL) W had authority to conclude a contract for the sale of certain land. M made an oral offer. W, with the owners’ authority accepted the offer in writing. This reply seemed to introduce a new term that was not acceptable to M. M wrote to W acknowledging W’s letter but stating that he would not proceed if the intention was to introduce a new term. W replied and made it clear that he had not intended to introduce a new term. M then informed W that he did not wish to proceed. The House of Lords held unanimously that the three letters taken together amounted to a sufficient memorandum of the earlier oral agreement.

The terms of the concluded oral agreement envisaged a later formal written agreement. It was held, as a matter of construction, that this was not intended as a pre-condition to the conclusion of the contract. The correspondence set out the parties, the property and the price:

‘[I]f you can find the true and important ingredients of an agreement in that which has taken place between two parties in the course of a correspondence … if the parties to the agreement the thing to be sold, the price to be paid, and all those matters, be clearly and distinctly stated, although only by letter, an acceptance clearly by letter will not the less constitute an agreement in the full sense between the parties, merely because that letter may say, We will have this agreement put into due form by a solicitor.’ (Lord Hatherley, p.1143)

The correspondence did not mention the sellers by name but referred to them as ‘the proprietors’. This was a sufficiently certain description of the sellers:

‘The parties to a contract in writing must, no doubt, be specified, but it is not necessary that they should be specified by name. The whole course of decision and practice shews that it is not. If they are so indicated, by description or by reference, as to be ascertained, or certainly ascertainable, the exigency of the statute in that respect is satisfied. Here the vendors are called proprietors, and described as proprietors in possession. There could be no mistake as to their ownership of the premises to be conveyed, and their identity, for all practical purposes, was as clearly and unequivocally established as if their names and designations had been set out in the conditions of sale.’ (Lord O’Hagan, p. 1147)

Michael Lower

Memorandum: parties must be sufficiently identified

October 5, 2012

In Carr v Lynch ([1900] 1 Ch. 613) J was the tenant of a pub. The landlord, L, agreed to grant an extension of the lease and wrote a letter to him confirming the essential terms of the extension but without naming the tenant. The letter began:

‘Dear Sir, –

In consideration of you having this day paid me the sum of 50l. (fifty pounds) I hereby agree …’.

L invoked the Statute of Frauds (the same as section 3(1) of the Conveyancing and Property Ordinance) and argued that he was not bound by the agreement. He failed. Although the tenant had not been named, he was sufficiently identified as the person who had paid the fifty pounds. There was no dispute as to who had paid the money.

Was an agreement for lease binding?

September 14, 2012

In Tang Wai Man v Fotosky Investment Ltd ([2006] HKEC 2358, CFI) F owned the basement of a commercial building. It sent T a letter of agreement containing the terms of a proposed letting of the basement to T for use for the parking of motor vehicles (not headed ‘subject to contract’ but providing for a later formal tenancy agreement). When T then advertised for customers for the car park, F argued that the agreement was that the basement was to be used as a vehicle showroom and not for parking vehicles. F ran a vehicle parking business on other basement floors of the same building and T’s rates undercut its rates. F argued that T’s agent had misrepresented the use to which the property would be put, that in any event there was no binding agreement or (if there was) T’s use amounted to a repudiatory breach which F had accepted.

F succeeded. Although a preliminary agreement could be binding (even if a later formal agreement was envisaged) this was not the parties’ intention in this case ([69]). If there was an agreement then, despite the wording of the agreement, the parties’ shared intention was that the property was only to be used as a showroom ([62]). F had accepted a repudiatory breach.  of this term. The agreement did not properly identify the intended tenant ([72]). Although the agreement was not subject to contract, the phrase had been used by T’s agent at the outset and never been expunged ([76]). Alternatively, if there were an agreement, it had been induced by a misrepresentation ([81]).

SMS as a written memorandum of a contract?

May 15, 2012

In Distinct Fortune Ltd v Hyndland Investment Co Ltd ([2011] 1 HKLRD 817) P agreed to buy property in Tsim Sha Tsui from D. P signed a provisional agreement and paid earnest money. D did not sign a provisional agreement but preferred to sign a formal agreement prepared by the parties’ respective solicitors. The parties’ solicitors then corresponded with each other to negotiate the terms of the formal agreement. All correspondence was ‘subject to contract’. There were two or three telephone conversations between the parties’ solicitors and between the parties’ agents in which the terms of the formal agreement were settled.  D’s representative sent P’s representative a text message to say that P would tell his solicitors to go ahead with the deal. The SMS read ‘Kim said he’ll give instruction to pig to go ahead with the deal’. Kim was a director of D and ‘pig’ was the solicitor acting for D. The next day, D’s solicitors sent out an engrossment of the formal agreement for signature by P. The engrossment was sent out under cover of a letter marked ‘subject to contract’.  P signed the formal contract and returned it to D’s solicitors with a cheque for a further deposit. D’s solicitors returned the contract and the deposit payments since D had decided against proceeding with the transaction. P sought specific performance and D countered that there was no written contract or memorandum to satisfy section 3 of the Conveyancing and Property Ordinance. P relied on the SMS message  (read together with the engrossment of the formal agreement) as the memorandum. Alternatively it argued that returning the signed formal agreement together with a cheque for the deposit amounted to part performance. D succeeded in having the action struck out on the basis that there was neither a memorandum nor part performance.

There was no memorandum. The SMS  could not simply be read together with the formal agreement to form a memorandum since the formal agreement was accompanied by a ‘subject to contract’ letter. The reference in the SMS to the intructions to be given to D’s solicitor would include the instruction to send the agreement with a ‘subject to contract’ letter. The SMS merely referred to ‘the deal’ and so there was not enough detail to forge a link with the engrossed formal agreement. Another problem was that the formal agreement was not in existence at the time of the SMS. Further, the SMS could not be a memorandum since it did not in any sense purport to be signed by D’s representative.

Nor was there part performance; the acts of submitting the signed formal agreement with a deposit were acts preparatory to a contract and not part performance of it.

The case for saying that an oral agreement had been concluded was very weak. The solicitors had been careful to label all of their letters to each other ‘subject to contract’ and to declare that their respective clients were not to be bound by anything said in the correspondence until both parties had signed a formal agreement. Properly understood, the conversations between the parties had not crossed the boundary between negotiations and a concluded contract. The court would not have struck out the action on this basis, however, since a full consideration of the facts would be necessary.

Michael Lower

The parties can agree to withdraw or one party can waive ‘subject to contract’

April 17, 2012

In Law v Jones ([1973] 2 W.L.R. 994, CA (Eng)) the terms of an initial oral agreement to sell property for GBP 6,500 were recorded in two letters written by the defendant’s (the seller’s) solicitors to the solicitors acting for the plaintiff (the buyer). This correspondence was plainly covered by the ‘subject to contract’ label attached to the first of the two letters. Then the parties agreed to a price increase. In the meeting on March 13th at which the increase was agreed, the seller told the buyer, ‘I shall not go back on my word. My word is my bond. It is yours now: carry on and make all your arrangements.’ The seller’s solicitors wrote a letter on March 17th (not marked ‘subject to contract’ it seems) confirming the price increase and asking the buyer’s solicitors to amend the price recorded in the draft contract sent to them. The seller then purported to withdraw and the buyer sought specific performance.

The English Court of Appeal upheld the decision to grant specific performance. The majority of the Court of Appeal were of the view that the buyer had waived the ‘subject to contract’ label by his clear words on March 13th. Thus, it was possible to join the March 17th letter together with the earlier letters (now shorn of their ‘subject to contract’ status) to create a sufficient memorandum for the purposes of section 40 of the Law of Property Act 1925 (in the same terms as the current section 3(1) of Hong Kong’s Conveyancing and Property Ordinance but repealed in England and Wales).

Cohen v Nessdale had already made the point that the parties can expressly or impliedly agree to end the operation of ‘subject to contract’ so the idea that it can be waived is not surprising. Here, however, the buyer was relying on correspondence that had been labelled ‘subject to contract’ when written to provide the memorandum. The correspondence recorded the terms under discussion but, far from pointing to the existence of a contract, denied that a contract existed. Law v Jones therefore seems to rest on the proposition that a memorandum need only record the relevant terms and need not point to the existence of a contract. An alternative viewpoint is that the final letter, which was not subject to contract’ referred to the earlier correspondence for convenience (to avoid repetition) but pronounced them anew in a contractually binding way.

It may have been better if the court had been invited to look at the case as being one of estoppel by representation (akin to Walton’s Stores (Interstate) Ltd v Maher). The words used on March 13th seem to be a much stronger representation than that made in Walton’s Stores. Since the case was not looked at in this light the question of detrimental reliance was not discussed.

Russell L.J. (dissenting) was very anxious to preserve the use of  ‘subject to contract’ as a way of creating a safe haven in which negotiations can be conducted without fear of inadvertently creating a binding contract (at 120 – 121). In this sense, Law v Jones should be read in the light of Tiverton Estates Ltd v Wearwell Ltd).

It is unlikely that a Hong Kong court would have found that the oral discussions gave rise to a contract since it would be an ‘open’ contract (ie with no express completion date). In Kwan Sin Man Joshua v Yaacov Ozer it was held that failure to agree on a completion date in Hong Kong was a strong indicator that there was no intention to create legal relations.

Estoppel and the Statute of Frauds

November 14, 2011

An oral guarantee that results in the extension of credit or some other action or forebearance does not give rise to an estoppel in the absence of some further assurance and some further detriment than are inherent in the guarantee contract itself.

In Actionstrength Ltd v International Glass Engineering In.GL.en SpA ([2003] UKHL 17, HL) C was D1’s sub-contractor. D1 was the main contractor under a contract to build a factory for D2. D1 was in arrears with the payments due to D2 under the sub-contract. C alleged that there was a meeting at which D2 assured C that payments due to D1 would be withheld from D1 and used to pay C. This was disputed but for the purposes of D2’s claim to have the action struck out it was assumed that C’s account of the facts was accurate. D2 argued that the promise would amount to a guarantee and would be unenforceable because of the failure to comply with section 4 of the Statute of Frauds. C argued that, in reliance on D2’s assurance, it had continued to perform its obligations under the sub-contract for a further month. C argued that this gave rise to an estoppel; it would be unconscionable for D2 to resile from its assurance. C failed. This was a simple case of an unenforceable guarantee; there was no additional assurance / detriment to give rise to an estoppel. There was no independent equity subsisting alongside the contract. C had refused to rely on part performance.

Lord Bingham hinted that the outcome might have been different if D2 had made any payment to C pursuant to the alleged assurance (para 9).  Lord Hoffman made the point that equity can intervene where there have been subsequent acts of part performance (paras. 22 – 24). But part performance relies on the distinction to be drawn between the contract, on the one hand, and performance. It cannot intervene to make enforceable  a fully executory contract that does not comply with statutory formalities. It is the later performance that gives rise to the equity.  Giving credit is central to the guarantee arrangement. Treating it as giving rise to an estoppel would mean that estoppel could be invoked in the case of any guarantee (para. 26). Lord Clyde thought that where there was need for some ‘additional encouragement, inducement or assurance’ (para. 35).

Proprietary estoppel: Dillwyn v Llewellyn

May 3, 2011

A donor can be bound by an assurance that land has been given when the donee, with the donor’s knowledge, spends a substantial sum of money on the land.

In Dillwyn v Llewellwyn ((1864) 4 De G.F. & J. 517, 45 E.R. 1285, HL) a father gave his son possession of the land and a memorandum that he had made the gift so as to provide a dwelling-house for him. The son spent a large sum to build a house on the land. The father died. Was the gift of the land effective notwithstanding the failure to abide by the proper formalities to transfer title in the land to the son? Was this a case of an imperfect (failed) gift so that the land belonged to the father’s estate?

Lord Westbury held that the freehold in the land had been transferred to the son:

‘So if A puts B. in possession of a piece of land and tells him, “I give it to you that  you may build a house upon it” and B. on the strength of that promise, with the knowledge of A., expends a large sum of money in building a house accordingly, I cannot doubt that the donee acquires a right from the subsequent transaction to call on the donor to perform that contract and complete an imperfect donation which was made.’ (at 522)

The analogy with part performance is alluded to and there is an attempt to look at this in orthodox contractual terms but this was a gift.

Elements of proprietary estoppel

January 17, 2011

The elements of proprietary estoppel are that A must have encouraged or allowed B to entertain a belief to B’s detriment so that it would be unconscionable for A to be allowed to deny the truth of that belief. It does not matter that in so acting A was mistaken as to his own rights in the matter (though this may affect the question of unconscionability). B must be acting in reliance on A’s action (or inaction).

Taylors Fashions Ltd v Liverpool Victoria Trustees Co Ltd ([1982] QB 133) concerned two leases of neighbouring retail  premises. Each lease contained an option to renew that had not been registered under the Land Charges Act 1925 (because at the time of the grant the prevailing understanding was that registration was not necessary). Each tenant carried out substantial works at their respective property. Each believed that it had the benefit not only of its lease but also of the option to renew. The leases and the reversion were each assigned.

As a result of the decision in Beesly v Hallwood Estates Ltd ([1961] Ch 105) it became clear that options did need to be registered. The assignees of the reversion argued that, as a result, the options were void as against them for non-registration. The tenants argued that the assignees were estopped from denying the validity of the options because they had known of the improvement works that the tenants were carrying out. The landlord argued that an essential element of proprietary estoppel is that the person against whom the claim is made should have known of his own rights at the time he encouraged or allowed the other party to act on the latter’s mistaken belief. Here both the landlord and the tenant had had the same mistaken belief as to the state of the law.

Oliver J held that the elements of proprietary estoppel are that A must have encouraged or allowed B to entertain a belief to B’s detriment so that it would be unconscionable for A to be allowed to deny the truth of that belief. It does not matter that in so acting A was mistaken as to his own rights in the matter (though this may affect the question of unconscionability).  So here it did not matter that the landlord had mistakenly believed that the option was binding on it at the relevant time.

B has to show that he is acting in reliance on the encouragement or acquiescence of A. One of the tenants was able to show this. The other tenant failed because it was held that it was acting on its own mistaken belief rather than as a result of anything that the landlord did or allowed.

Receipt of purchase price and delivery of possession are the clearest possible acts of part performance

January 15, 2011

Delivery up of possession and receipt of the purchase price are the clearest possible acts of part performance. The equitable interest created by a contract is not defeated by a successor in title of the seller who inherits the seller’s estate. Chinese customary law does not trump the system of registration contained in the Land Registration Ordinance.

In Wu Koon Tai v Wu Yau Loi ([1996] 2 HKLR 477, PC) a lease of land in the New Territories was granted to Wu Cheong U. He died and, in 1934, his son sold the land. In accordance with Chinese customary law the sale was effected through a document signed by neither party but by a middleman. The purchaser paid the price and went into possession. He and his successors remained in possession. The successor-in-title of the grandson of the seller claimed to be entitled to the land. Among other grounds relied on were the fact that there was no contract for sale satisfying CPO s.3(1) (the document had not been signed by the parties or their authorised repesentative). Lord Browne-Wilkinson held (at 483) that payment of the purchase pice and giving possession were the clearest acts of part performance. Thus there was a specifically enforceable contract. The equitable interest so created was binding on the successor-in-title of the seller’s grandson since he was a volunteer. The successor-in-title’s claim to possession failed. The 1934 sale was effective. In the course of argument the argument had been raised that failure to register the sale in 1934 did not matter since s.13 of the version of the New Territories Ordinance then in force allowed the court to recognise Chinese customary law and this did not require registration. This argument failed. Chinese customary law did not ‘trump’ the system of Land Registration in Hong Kong.

When ‘subject to contract’ is meaningless

January 14, 2011

The words ‘subject to contract’ are not lightly to be disregarded. The court can ignore them when they are meaningless or where the parties’ subsequent words or conduct show an intention to be bound by the relevant agreement.

Hong Kong Housing Authority v Hung Pui ([1987] 3 HKC 495) concerned the operation of the rent review clause in the lease of a restaurant. The tenant offered to pay a revised monthly rent of HK$120,000. The landlord’s solicitors wrote back accepting the offer. The letter was headed ‘subject to contract’. These words normally indicate that the parties are still negotiating but here they appeared at a time when negotiations had concluded and no formalities were required or contemplated. The tenants later paid rent at the agreed revised level. Godfrey J held that the words ‘subject to contract’ in the landlord’s acceptance could be ignored since (a) they had no meaning in this context and (b) the tenant’s subsequent words and conduct showed an intention to be bound by the agreement.