Pre-contractual representations: commercial uncertainty follows in equity’s wake

Two recent cases decided by the NSW Court of Appeal and the High Court, Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (In Liq)[1] (Caringbah) and Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd[2] (Crown case) respectively, grappled with the legal status of pre-contractual representations. In both cases, the representations were made in the context of lease negotiations conducted at arms-length between commercial parties, and appeared completely inconsistent with the terms of the written agreement. Both cases tested the boundaries of the continually developing equitable doctrine of promissory estoppel.

Caringbah

Caringbah concerned the lease of a property which hosted a licensed sports and social club. Caringbah Investments Pty Ltd (Caringbah Investments) as lessor entered into a 10-year lease with Caringbah Business and Sports Club Ltd (CBSC) in which the rent was expressed to be $170,000 for the first year, $180,000 for the second and $190,000 for the third. In the month prior to the entry into the lease, a conversation took place between certain directors of Caringbah Investments and CBSC to the effect that CBSC could only afford to pay $150,000, $160,000 and $170,000 for the first 3 years respectively. Caringbah Investments’ directors had stated during that conversation that they needed the higher figures to go into the lease, but CBSC would only be required to pay that higher amount in the event that a (at that stage proposed) merger with Cronulla Sharks Leagues Club took place. Such a merger never eventuated. After a period during which CBSC paid the lower rent, Caringbah Investments demanded the rent provided for in the lease be paid. The lease contained an “entire agreement” clause.

At first instance, there was a contest as to whether the representation was made. That was resolved in CBSC’s favour. It was that finding of fact, together with the acceptance that the representation was relied upon in entering into the lease, and that detriment was suffered by doing so, that supported the finding that Caringbah Investments was estopped from denying that the rent payable under the lease was the lesser amount the subject of the representation.

But what about the entire agreement clause? The court’s consideration of the legal effect of the entire agreement clause in relation to the operation of promissory estoppel was circumscribed. It was limited to Bathurst CJ’s (McColl and MacFarlan JJA agreeing) observation that senior counsel representing Caringbah Investments was correct not to contend that an entire agreement clause would necessarily preclude a promissory estoppel arising.[3] Two authorities were cited in support of that proposition, Franklins Pty Ltd v Metcash Trading Ltd[4] (Franklins) and Branir Pty Ltd v Owston Nominees (No 2) Pty Ltd[5] (Branir). The relevant passage from the reasons of Campbell JA (Allsop P and Giles JA agreeing) in Franklins is as follows:[6]

An “entire agreement clause” might create a factual difficulty in the way of proof of the elements of equitable estoppel, most obviously, proof of inducement or reliance, and I would not want to rule out the possibility that it might be relevant to any precise remedy granted (though I cannot at present think of an example of when that might occur). However, it does not create an insuperable obstacle of principle. Consistently with the equitable principle that it will not allow a contract to be an instrument of fraud, equity would not permit an entire agreement clause to stultify the operation of its doctrines.

The issue was not actually decided in Branir. Rather, Allsop J referred to conflicting authorities as to the relationship between contract (in the context of an “entire agreement” clause) and estoppel. Referring to McPherson JA’s finding in MacDonald v Shinko Australia Pty Ltd[7] that an entire agreement clause did not impede the equitable remedy of rectification arising from pre-contractual communications, his Honour concluded:[8]

… it is difficult to see why another remedy of equity based on unconscionability and equally arising out of pre-contractual communications should be defeated by a common law rule about the construction of documents.

However, ultimately, Allsop J found that for reasons including competing public policy and judicial considerations, where the question of whether estoppel could outflank contractual rules was not necessary to decide, it ought not to be decided.

It may be accepted that an “entire agreement” clause will not necessarily preclude an equitable estoppel arising from pre-contractual representations. However, as Campbell JA (with respect, correctly) observed in Franklins, the presence of an “entire agreement” clause must be relevant to an analysis of the elements of inducement and reliance, both of which are necessary to establish a promissory estoppel.[9] There was no such analysis in Caringbah. It is regrettable that the court did not fully articulate how these difficulties were overcome. It is not easy to conceive how, in a transaction involving two commercial parties, the elements of inducement and reliance could be easily established where both had executed a written agreement which unambiguously asserted that a complete charter of the parties’ legal rights and responsibilities was contained within the four corners of the written document.

The Crown case

The tenants in the Crown case operated restaurants in Crown Melbourne Ltd’s (Crown) Melbourne Casino and Entertainment Complex. Each held a 5-year lease from Crown expiring in August 2010. In the course of negotiating those leases, Crown had indicated that it required the tenants to undertake significant and costly refurbishments to the premises. The tenants indicated that in the circumstances, they wanted 10-year leases as 5 years was too short a period to recoup the capital expenditure incurred refurbishing the premises. Crown refused.

Instead, the tenants alleged that employees of Crown represented that if the tenants refurbished the premises, they would be “looked after at renewal time”. Each of the leases contained a clause which provided that (among other things) prior to the expiry of the leases, Crown could give the tenants notice that it required the tenants to vacate the premises. Upon the expiry of the leases, Crown did just that.

The tenants brought proceedings in the Victorian Civil and Administrative Tribunal (VCAT), which accepted their arguments that, by reason of the representations made in pre-lease negotiations, Crown was bound by a collateral contract to offer them a renewal of their respective leases and was estopped (by operation of a promissory estoppel) from refusing to offer such a renewal. Importantly, however, that estoppel bound Crown not to offer a further lease on the same terms (as was argued by the tenants) but rather on terms that Crown saw fit.

On appeal to the Supreme Court of Victoria, Crown successfully argued that the pre-contractual representations were too vague to form a collateral contract. The court found the promissory estoppel case failed because there was no evidence that the tenants would have acted as they did had they understood the representation to mean that Crown would offer a lease on terms Crown saw fit, the tenants having conducted their case solely on the basis that the representation meant that Crown would offer a further lease on the same terms. On appeal from that decision, the Victorian Court of Appeal found that while the representation was too uncertain to constitute a contractual obligation, it could estop Crown from denying an obligation to offer a new lease on the same terms as the previous lease.

By a 5:2 majority (Gageler and Gordon JJ dissenting, both finding that the representation gave rise to a collateral contract), the High Court allowed Crown’s appeal. As explained below, there was some divergence in the manner in which the majority approached their analysis of whether the representation was capable of giving rise to a promissory estoppel.

Keane J was strongly against the proposition that the representation was capable of giving rise to an estoppel. His Honour observed:[10]

It would tend to reduce the law to incoherence if a representation, too uncertain or ambiguous to give rise to a contract or a variation of contractual rights and liabilities, were held to be sufficient to found a promissory estoppel. Practical considerations such as the need of commerce for certainty, both as to the terms to which [the] parties have agreed to be bound, and as to whether the bargaining process has concluded, also provide strong support for this approach.

The plurality (French CJ, Kiefel and Bell JJ) found that for a representation to found an estoppel, it must be clear and unambiguous, such that it is able to be understood in a particular sense by the person to whom they are addressed.[11] This, their Honours explained, provides the basis for the relevant assumption or expectation. In the present case, the statement that the tenants would be “looked after at renewal time” was not capable of conveying to a reasonable person that the tenants would be offered a further lease.

Nettle J disagreed with the contention that a representation of contractual certainty was required to found an estoppel, observing that it was not even necessary for a representation to be “objectively unambiguous”.[12] However, his Honour found that any ambiguity is relevant to the assumption or expectation attributable to the representation.[13] In the result, his Honour found that as the tenants had conducted their case on a limited basis before VCAT (namely that the representation meant that Crown would offer a further lease on the same terms) and VCAT had not made any findings as to the tenants’ reliance on a representation that Crown would offer a lease on terms Crown saw fit, the tenants were not permitted to advance that case on appeal. His Honour considered that, on the basis that there ought to be finality in litigation, the matter ought not to be remitted to VCAT (as found by the Court of Appeal).

Although the Crown case was (with respect) correctly decided, the divergent views of the members of the High Court on the legal effect of the representation under consideration (of a nature frequently encountered in practice) presents challenges for practitioners advising on the legal effect of similar ambiguous representations. If one of the characteristics of a functioning legal system is predictable outcomes, the decisions in Caringbah and the Crown case demonstrate that the law relating to promissory estoppel in the context of pre-contractual repres