The common intention constructive trust is not limited to the ‘domestic consumer’ context

In Chan Sang v Chan Kwok ([2015] HKEC 822, CFI) title to shop premises was in the joint names of the plaintiff and the defendant (who were brothers). The legal title was held by them as tenants in common in equal shares. The plaintiff successfully claimed to be the sole beneficial owner. The court made a declaration to this effect and ordered the defendant to convey his half share to the plaintiff. The defendant’s name was on the title deeds because of an agreement between the parties and their father. The father made a loan to the plaintiff to allow him to purchase the shop and the defendant’s name was on the title deeds as a form of security. The agreement was that the defendant would give up his share once the loan had been fully repaid. The plaintiff had fully repaid the loan and had also made all the payments due to a bank under the mortgage that had been entered into at the time of acquisition. The defendant made no payments that were referable to the property. The plaintiff had established that he was sole beneficial owner under either a common intention constructive trust or a resulting trust ([76]).

The defendant, basing himself on Laskar v Laskar, argued that the common intention constructive trust had no application here and applied only in the ‘domestic consumer’ context.  Anderson Chow J. rejected this.  Laskar was, rather, authority for the proposition that the Stack v Dowden presumption of equality in joint name cases only applied to the ‘domestic consumer’ context.  In fact, the case goes to show that it is difficult to draw a dividing line between the domestic and consumer contexts.

Michael Lower

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When can an informal agreement give rise to a constructive trust?

An agreement will not give rise to a constructive trust where: (1) a formal agreement is contemplated but not concluded; (2) some of the terms to be agreed have not been agreed so that the interest in property is not identified; or (3) the parties did not expect their agreement to be immediately binding.

In Herbert v Doyle ([2010] EWCA Civ 1095, CA (Eng)) H and D were neighbours who had negotiated an agreement for the exchange of interests in land. They reached agreement on the terms at a meeting in February 2003. In April 2003 they had a further meeting at which they agreed to proceed on the basis of the February agreement. Both sides intended to be bound as a result of the April meeting. In essence, the question was whether this agreement gave rise to a constructive trust and was enforceable. The judge at first instance held that the agreement did give rise to a constructive trust.

On appeal, H argued that the first instance decision was incompatible with the House of Lords decision in Cobbe v Yeoman’s Row. Arden LJ found that the agreement did give rise to an enforceable constructive trust. In an important passage she said that an agreement will not give rise to a constructive trust (or to a claim in proprietary estoppel) where: (1) a formal agreement is contemplated but not concluded; (2) some of the terms to be agreed have not been agreed so that the interest in property is not identified; or (3) the parties did not expect their agreement to be immediately binding (para. 57). There was some doubt as to whether the property that was the subject of the agreement had been identified with sufficient certainty. In the end this doubt was resolved in D’s favour. The court felt able to fill in the gaps in the agreement in this regard; this was not a case of an incomplete agreeement. Thus, none of the three factors were present here and the judge at first instance had been right to find that there was a constructive trust.

Michael Lower

A disciplined approach to proprietary estoppel

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

Yaxley v Gotts

In Yaxley v Gotts  ([2000] Ch. 162, CA (Eng) Mr Yaxley was a builder. He entered into a ‘gentleman’s agreement’ with Brownie Gotts  that he would convert a house into flats in return for the ownership of the ground floor flats. The property was actually (unknown to Mr Yaxley) bought by Mr Gotts’ son (Alan). Mr Yaxley carried out the building works and managed the property once it was completed and let. For a while, he received the net rents from the ground floor flats. Later, however, Alan sought to resile from the agreement even though he knew of it and had allowed Mr Yaxley to go ahead and carry out the substantial work needed at the property.

At first instance, Mr. Yaxley succeeded on the basis of proprietary estoppel. The English Court of Appeal, however, decided that the arrangement was a contract for the sale or other disposition of an interest in land and so engaged section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989. They reached this conclusion even though the agreement was with Brownie Gotts and there was a finding that Alan Gotts was not a party to any contract between Mr Yaxley and Brownie Gotts. To allow proprietary estoppel to operate in these circumstances would be to subvert the public policy underlying section 2(1).

There is, however, a saving for resulting, implied and constructive trusts in section 2(5). If the arrangement could be said to give rise to a common intention constructive trust then effect could be given to it. The Court of Appeal found that the arrangement did indeed give rise to a constructive trust.

Michael Lower