Archive for the ‘Formalities’ Category

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.

The likelihood of an ‘open contract’ in Hong Kong

January 13, 2011

It is open to the parties to a contract for the sale and purchase of land to intend to enter into legal relations on the basis of oral agreement as to parties, property and price. The courts in modern Hong Kong will be hesitant about finding that they had an intention to contract when they have not agreed on the completion date. A document that contains significant terms in addition to those agreed on in an oral contract is not a memorandum for the purposes of CPO s.3(1).

In Kwan Sin Man Joshua v Yaacov Ozer ([1999] 1 HKLRD 216, CFA) the plaintiff was tenant of the defendant’s apartment. One day they met casually and agreed the price for the sale of the property by the defendant to the plaintiff. The plaintiff sought specific performance of the agreement. The CFA held that the failure to agree on a completion date was a strong indicator that they were still negotiating and had not yet formed an intention to enter into a contractual relationship on the terms discussed. In modern Hong Kong the completion date was a matter of importance and parties rarely failed to reach agreement on it if they truly intended to enter into a contract.

The plaintiff sought to rely on correspondence between solicitors to provide the memorandum for the purposes of  CPO s.3(1). The relevant correspondence, however, referred to additional (fresh) terms beyond those covered by the alleged oral contract. It could not, therefore, be a memorandum.

Two documents referring to the same contract can be read together

January 12, 2011

Two documents referring to the same contract can be read together to form a memorandum to satisfy CPO s.3(1).

In Chu Kim-Leung v Wong Suk-Yee ([1973] HKLR 102, SC) there was an oral agreement for the sale and purchase of an apartment. The question was whether a receipt for the deposit and a document giving the seller’s instructions concerning the sale could be read together to form a memorandum. Together they contained all of the necessary details and they were both signed by an authorised agent. Cons J held that two documents can be read together to form a memorandum when each refers to the same contract.

When parol evidence can be used to link two documents to form a CPO s.3 memorandum

January 11, 2011

A document signed by or on behalf of the party to be charged can be linked to another document to form a memorandum satisfying CPO s.3(1) where the signed document contains an express or implicit reference to some other document or transaction. When this condition is satisfied, parol evidence can be introduced to identify the other document or explain the other transaction.

In Elias v George Sahely & Co (Barbados) Ltd ([1983] 1 AC 646, PC) the plaintiff and the defendant had completed an oral agreement for the sale and purchase of property. The purchaser’s attorney wrote to the seller’s attorney confirming the oral agreement and setting out its terms. Enclosed with the letter was a cheque for the 10% deposit. The purchaser’s attorney asked for a receipt. The seller’s attorney wrote back with a receipt for the cheque. This confirmed that the money was a deposit for the property ‘agreed to be sold’. The seller then refused to complete the transaction and pleaded the lack of a written memorandum. The Privy Council allowed parol evidence to be adduced that linked the signed receipt with the letter containing the terms of the agreement. It ordered specific performance.

Lord Scarman held that the modern law on linking two documents together in this way had been correctly stated by Jenkins LJ in Timmins v Moreland Street Property Co Ltd. A document signed by or on behalf of the party to be charged can be linked to another document to form a memorandum satisfying CPO s.3(1) where the signed document contains an express or implicit reference to some other document or transaction. When this condition is satisfied, parol evidence can be introduced to identify the other document or explain the other transaction.

Defendant’s letter to own bankers as CPO s.3 memorandum

January 10, 2011

A letter to a third party by the defendant in an action for breach of contract could be a sufficient memorandum for CPO s.3(1). Damages for breach of an agreement for lease are the difference between the agreed rental and that obtainable on the open market. Where part performance is relied on, the court can grant specific performance but not damages (unless in lieu of specific performance).

In Chan Yat v Fung Keong Rubber Manufactory Ltd ([1967] HKLR 364) the plaintiff and defendant had orally agreed that the plaintiff would grant the defendant a lease of a factory. They had agreed the property, the rental, the term and the commencement date. The defendant then sought to back out of the transaction. A letter by the defendant to its own bankers setting out the agreed terms was a sufficient memorandum. Damages were awarded to cover the difference between the agreed rental and that obtainable on the open market. Obiter Pickering J stated that had the plaintiff succeeded on the basis of part performance (also a real possibility on the facts) then the plaintiff would only be entitled to specific performance or (at the court’s discretion) damages in lieu thereof. The plaintiff relying on part performance does not have an election between specific performance or damages. The judgment also contains interesting observations on the question of whether a solicitor’s letter referring to a draft lease that accompanies it could amount to a memorandum. Pickering J thought that, on the right facts. it could do so.

Certainty of assurance and of property in proprietary estoppel

October 12, 2010

In Thorner v Major ([2009]UK HL 18) David Thorner worked without pay on the farm owned by his father’s cousin Peter Thorner. Peter was a man of few words but it was found as a fact that he had given assurances to David that he would inherit the farm. These assurances were in very vague terms but it was found as a fact that in the context of the personalities and relationship involved they were clear enough and had been understood and relied on. Peter died without leaving a will. David claimed the farm on the basis of proprietary estoppel. The House of Lords focused on two issues. First, was there a clear assurance. Second, was there sufficient certainty as to the identity of the property?

The Court of Appeal had decided against David on the basis that the assurance lacked clarity. The House of Lords rejected this.  Lord Hoffman said:

‘It was enough that the meaning he conveyed would reasonably have been understood as intended to be taken seriously as an assurance which could be relied upon.’

The assurance must be ‘clear enough’. It did not have to be clear, precise and unambiguous (per Lord Roger of Earlsferry). Especially when the assurance is oral or to be implied from behaviour then the question as to whether it was clear is a question of fact and is highly context-specific. The first instance judge had found as a fact that Peter had indicated that David would have the farm and also that it was reasonable for David to have understood and relied on Peter’s assurances.

The second question concerned certainty of property. Over the years, the precise identity of the farm had changed from time to time; some land had been sold and other land had been bought. This did not defeat David’s claim:

‘In this case, the extent of the farm might change but .. there is, as I see it, no doubt as to what was the subject matter of the assurance, namely the farm as it existed from time to time .. As in the case of a very different equitable concept, namely the floating charge, the property the subject of the equity could be conceptually identified from the moment the equity came into existence, but its precise extent fell to be determined when the equity crystallised, namely on Peter’s death.’ (per Lord Neuberger of Abbotsbury).

This is not like a case of a commercial agreement where more precision might be expected.

When should proprietary estoppel give rise to a proprietary interest in land?

October 11, 2010

This question is considered by Susan Bright and Ben McFarlane (‘Proprietary estoppel and property rights’ , (2005) 64 Cambridge Law Journal 449). They argue that a successful proprietary estoppel claim should only give rise to a proprietary right (rather than some kind of personal remedy) where this is necessary to protect the claimant’s reasonable reliance. Otherwise, a personal remedy is called for. The need for certainty concerning property rights and for a proportionate response to a successful proprietary estoppel claim are important considerations.

Bright and MacFarlane discuss the principles that they suggest should govern the answer to the question as to whether or not a proprietary award is satisfied:

1. Would this exceed the claimant’s expectation?

2. Where the claim arises out of a bargain between the parties and they had agreed that the claimant would get a proprietary interest then this should be awarded.

3. Where there is an agreement in principle that the claimant is to have a proprietary interest (but no concluded contract) then a proprietary interest should be awarded (can this survive the House of Lords decision in Yaxley v Gotts?)

The claimant might need a proprietary interest because there is a need to bind third parties, because of an attachment to some particular piece of land (because you have lived or carried on business there for a long time) or where the claimant has given up some other proprietary interest in reliance on the relevant assurance.

The effect of a sale ‘subject to’ an existing contract

October 9, 2010

In Lyus v Prowsa Developments ([1982] 1 WLR 1044) Mr and Mrs Lyus agreed to buy a plot on a housing estate that was being developed. The contract with the landowner / developer provided that the plot would be transferred to the purchasers when the developer had completed the building of a house on the plot. The developer ran into financial difficulties and its bank exercised its rights as mortgagee to sell the housing estate (including the plot). The sale to Prowsa Developments included a clause that provided that the sale was ‘subject to and with the benefit of’ the contract with Mr and Mrs Lyus. The question was whether Prowsa Developments held the plot on constructive trust for Mr and Mrs Lyus. It was held that there was a constructive trust; the mutual intention underlying the clause was to create something like an express declaration of trust. The court granted Mr and Mrs Lyus a decree of specific performance. This is obviously a decision that depends on the specific facts of the case. In other cases, the courts have declined to impose a constructive trust on what appear to be similar facts.

A disciplined approach to proprietary estoppel

October 9, 2010

Cobbe v Yeoman’s Row Management Ltd

Introduction

The House of Lords decision in Cobbe v Yeoman’s Row Management Ltd ([2008] 1 W.L.R. 1752) looks again at the conditions to be met if a proprietary estoppel claim is to be successful. In particular, it emphasises the need for the claimant to be ascertaining a clearly ascertainable proprietary right; this will not be the case where reliance is being placed on statements made in the course of negotiations that did not result in a concluded contract. As Lord Walker of Gestingthorpe said:

‘[E]quitable estoppel is a flexible doctrine … But it is not a sort of joker or wild card to be used whenever the court disapproves of the conduct of a litigant who seems to have the law on his side.’ (at 1775)

Facts

Mr Cobbe (a property developer) had agreed with Yeoman’s Row Management Ltd (YRML) that he would get planning permission for the development of a property owned by YRML. When that had been achieved the property would be transferred to him. He would carry out the development works and the profits from the sale of the property above an agreed sale price would be shared between them according to a profit-sharing formula (an overage arrangement). No written contract existed but the parties had agreed on many of the essential terms (though some important terms of the deal remained to be agreed).  Mr Cobbe believed that he and YRML were bound ‘in honour’ though as an experienced developer he knew that there was no legal commitment until contracts had been exchanged.

Mr Cobbe spent time and money on the effort to obtain the planning permission and was successful. YRML then refused to conclude a formal agreement on the basis of the earlier negotiations. YRML proposed a new deal that was more advantageous to it. Mr Cobbe refused and brought proceedings based on proprietary estoppel and constructive trust, arguing that YRML was estopped from entering into a contract on the terms that had been agreed. He had succeeded in the Court of Appeal but failed in the House of Lords.

Proprietary remedies: proprietary estoppel

The House of Lords rejected the award of a proprietary remedy (whether by way of proprietary estoppel or constructive trust) since this would amount to enforcement of the contract. The House of Lords was not prepared to do this since there were important terms of the contract still to be agreed and since the parties clearly envisaged that there would be a formal written contract.

The proprietary estoppel claim was rejected by the House of Lords.  The seminal authorities all show that the claimant must have an expectation of a ‘certain interest in land.’ Mr Cobbe did not satisfy this since he was fully aware that there was no binding contract nor any other basis on which he could have claimed such an interest.

Lord Scott of Foscote provided this important explanation of the nature of an estoppel:

‘I want first to consider as a matter of principle the nature of a proprietary estoppel. An “estoppel” bars the object of it from asserting some fact or facts, or, sometimes, something that is a mixture of fact and law that stands in the way of some right claimed by the person entitled to the benefit of the estoppel. The estoppel becomes a “proprietary” estoppel – a sub-species of a “promissory” estoppel – if the right claimed is a proprietary right, usually a right to or over land but, in principle, equally applicable in relation to chattels or choses in action.” (at 1761)

Here the claimant had failed to show both (1) the fact or matter of fact and law that the defendant was estopped from asserting; and (2) the claim to a proprietary right that the fact or matter of fact and law would defeat. The claimant was not asserting that there was a contract. Even if there had been a concluded oral agreement, there was no reason why YRML should be estopped from arguing that it was not enforceable because not in writing (as required by section 2 of the Law of Property (Miscellaneous Provisions) Act 1989).

‘The present case is one in which an unformulated estoppel is being asserted in order to protect Mr Cobbe’s interest under an oral agreement for the purchase of land that lacked both the requisite statutory formalities .. and was, in a contractual sense, incomplete.’ (at 1763)

This reasoning explains why documents marked ‘subject to contract’ cannot form the basis of a proprietary estoppel claim:

‘The reason why, in a “subject to contract” case, a proprietary estoppel cannot ordinarily arise is that the would-be purchaser’s expectation of acquiring an interest in the property is subject to a contingency that is entirely under the control of the other party to the negotiations … The expectation is therefore speculative.’ (at 1767)

‘Proprietary estoppel requires, in my opinion, clarity as to what is that the object of the estoppel is to be estopped from denying, or asserting, and clarity as to the interest in the property in question that the denial, or assertion, would otherwise defeat. If these requirements are not recognised, proprietary estoppel will lose contact with its roots and risk becoming unprincipled and therefore unpredictable’. (at 1768 – 1769)

Lord Walker of Gestingthorpe reached the same conclusion. If this was to be a proprietary estoppel case, it would be one where the estoppel is based on the common expectations of the parties (rather than one where one party knows of the other’s mistake and does nothing to correct it). But in these cases, mere hope of an interest is not enough. There must be a confident expectation that one has an interest in the land. But both parties here knew that the argument was not binding.

Constructive trust: the Pallant v Morgan equity

Mr Cobbe’s constructive trust claim also failed. This was not a Pallant v Morgan  type of case. Lord Scott explained the basis of the Pallant v Morgan equity thus:

‘where a joint venture involves the acquisition by one of the joint venturers of the property intended for the purposes of the joint venture and the pursuit of the joint venture then becomes impracticable or impossible, the acquirer is not entitled to retain the benefit of the property for his own benefit but must be taken to hold the property on trust for himself and the other joint venturers jointly.’ (at 1766)

But the property in this case was never ‘joint venture property.’ (at 1772).

So the proprietary claims failed, unconscionability alone is not enough:

‘In these circumstances, the imposition of the constructive trust on the property and the pro tanto divesting of the defendant company’s ownership of it seems to me more in the nature of an indignant reaction to Mrs Lisle-Mainwaring’s unconscionable behaviour than a principled answer to Mr Cobbe’s claim for relief.’ (at 1772)

However, unconscionability plays ‘a very important part in equitable estoppel in unifying and confirming, as it were, the other elements.’ (at 1788 per Lord Walker of Gestingthorpe).

In essence, the proprietary claims had to fail since: (i) there was no concluded agreement but both parties expected that there would be; and (ii) YRML owned the property before the negotiations started (at 1772).

In personam remedies

Although the proprietary claims failed, the House of Lords ordered YRML to make a reasonable payment for his professional work and expenses in obtaining the planning permission provided he allowed YRML to use the drawings produced for the purposes of getting planning permission. The remedy is essentially restitutionary with the focus being on YRML’s enrichment at Mr Cobbe’s expense or the value of Mr Cobbe’s services.

Lord Scott pointed to a variety of possible bases which would lead to Mr Cobbe obtaining an in personam remedy:

  1. unjust enrichment.
  2. Quantum meruit
  3. The contract was the second part of a two-stage transaction and the first part had been completed (total failure of consideration).
  4. Damages for the tort of deceit.

Lord Scott thought that the claimant could rely on unjust enrichment. It would apply where YRML has been enriched by the claimant’s work in obtaining planning permission. YRML’s repudiation of the agreement in principle had frustrated the basis upon which Mr. Cobbe had been relying. The award on this basis would be the value of the services provided by Mr. Cobbe.

Quantum meruit was available too. Mr Cobbe had supplied valuable services which were not intended to be provided gratuitously. No fee had been agreed because the agreement in principle had been intended to provide the consideration. Mr Cobbe was entitled to a quantum meruit remedy which would reimburse his outgoings and give him a fee for his services at a rate appropriate for an experienced developer (while avoiding any double-counting).

Third, obtaining planning permission was the first part of a two-stage process. There had been a total failure of consideration (at 1774) and this would entitle Mr Cobbe to an award calculated in the same way as the quantum meruit.

The House of Lords did not, however, believe that the tort of deceit provided a remedy for Mr Cobbe.

Proprietary estoppel and statute

Obiter dicta of  Lord Scott of Foscote indicate that proprietary estoppel cannot be used in England (against the background of England’s own legislation) to make enforceable contracts that fail to comply with the formality of writing:

‘The proposition that an owner of land can be estopped from asserting that an agreement is void for want of compliance with the requirements of section 2 is, in my opinion, unacceptable. The assertion is no more than the statute provides. Equity can surely not contradict the statute.’ (at 1769).

The role of equity in commercial transactions

Lord Walker of Gestingthorpe argued that:

‘The court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as fiduciary obligations and and equitable estoppel.’ (at 1785)

Michael Lower

World Food Fair in the Court of Appeal: Part Performance

October 7, 2010

In the Court of Appeal decision in World Food Fair Ltd v Hong Kong Island Development Ltd ([2005] HKLRD 665) the parties were negotiating for the grant of a lease of premises in a shopping mall. They had agreed many of the principal terms of the lease. The tenants then paid a deposit of $200,000. They were allowed to enter the premises and to carry out alteration works. The court had to decide whether there was a concluded agreement. If there was the court had to decide whether it was enforceable notwithstanding the failure to comply with s.3(1) of the Conveyancing and Property Ordinance. The Court of Appeal found that there was a concluded agreement and that the payment of the deposit and going into possession were sufficient acts of part performance. The decision was overturned by the Court of Final Appeal on the basis that there was in fact no concluded contract. That being so, the question of part performance did not need to be considered in the Court of Final Appeal ([2007] 1 HKLRD 498).