Supreme Court rectifies, but says no to conventional estoppel based on pre-contractual dealings

Queenfield Pty Ltd v Gordon Finance Pty Ltd [2019] VSC 857

Facts

The trustee plaintiff (Queenfield) was the proprietor of a motel business in Carlton.

The defendants (the Gordon interests) had been the sole beneficiaries of the motel (they owned 100% of the units in the trust). In 2015, the Gordon interests decided to sell 50% of the motel. Between about March 2015 and June 2015 there were negotiations between the Gordon interests (as vendor) and the Paolaccis (as purchasers). Ultimately, on 1 July 2015, the parties entered into a suite of written agreements to give effect to the sale, under which the Paolaccis received 50% of the units in the trust.

One of the matters that had arisen during the negotiations was the treatment of over $6m of intercompany loans made by Queenfield to companies associated with the Gordon interests (the Gordon Debts). That matter did not, however, find expression in the suite of agreements. That omission sowed the seeds for litigation.

In 2017, the Paolaccis acquired a further 20% of the units in the trust from the Gordon interests, thus giving them a majority stake. At their instigation Queenfield then took steps to demand repayment of, and to pursue recovery of, the Gordon Debts.

Queenfield’s first step was to issue statutory demands. The Gordon interests successfully applied to have the demands set aside: Gordon Finance Pty Ltd v Queenfield Pty Ltd [2018] VSC 341. Interestingly, in evidence in that proceeding Mr Gordon produced what purported to be a minute of a meeting of Queenfield’s directors held in June 2015 (before the sale), at which they allegedly voted to cancel the Gordon Debts. Ultimately Mr Gordon admitted that the minute had been prepared in 2017, and was false. Thus at the time of the sale in July 2015, Queenfield still held the Gordon Debts on its books.

The issue

Queenfield’s next step was to sue for the Gordon Debts.

At the heart of the Gordon interests’ defences was a contention that the Gordon Debts were quarantined from the 2015 sale.

More specifically, calling in aid the principles of rectification and conventional estoppel, they contended that the parties’ common intention (or common assumption) was that the sale of units by the Gordon interests to the Paolaccis would exclude any interest in the Gordon Debts, and that such debts would instead be held by Queenfield solely on trust for the benefit of the Gordon interests.

The Gordon interests’ defences gave rise to two questions for determination. First, ‘the rectification question’: did the parties to the agreement share the aforesaid common intention and, if so, should the agreement be rectified accordingly. Secondly, ‘the conventional estoppel question’: did the parties to the agreement share the aforesaid common assumption and, if so, should Queenfield be estopped from demanding repayment of the Gordon Debts.

The judgment: Queenfield Pty Ltd v Gordon Finance Pty Ltd [2019] VSC 857 (Riordan J)

On ‘the rectification question’, the Court surveyed the relevant principles (see [80] – [82]) and assessed the competing evidence and contentions as to credibility (see [90] – [107]). Ultimately the Court found that the parties held the common intention contended for by the Gordon interests (see [108] – [112] and [125]). The Court rectified the 2015 agreement by adding the following term: “The intercompany loans […] be assigned to Gordon Nominees as trustee for the Gordon Family Trust” (see [108] – [112]). Thus it followed that Queenfield was not entitled to call on the Gordon Debts.

On ‘the conventional estoppel question’, the Court considered the question and found in favour of Queenfield (although it was not strictly necessary for the Court to do so, given its finding on the rectification question). Thus, had it had been necessary for the Court to do so, it would have concluded that Queenfield was not estopped from calling on the Gordon Debts.

Comment

The Court’s judgment in relation to the conventional estoppel question is potentially significant.

Estoppel by convention is a common law doctrine (whereas, for example, promissory estoppel is an equitable doctrine). Traditionally, estoppel by convention has been founded upon assumptions derived from the way parties to a business relationship conduct that relationship. See, for example,  the discussion by the High Court in Con-Stan Industries of Australia Pty Ltd v Norwich Winterthur Insurance (Australia) Limited (1986) 160 CLR 226 at 244-245, later cited and accepted by the Victorian Court of Appeal in Riseda Nominees Pty Ltd v St Vincent’s Hospital (Melbourne) Ltd [1998] 2 VR 70 at 76-78.

Here, however, the Gordon interests contended that Queenfield was estopped from calling on the Gordon Debts by reason of a conventional estoppel deriving solely from pre-contractual dealings (that is, dealings in March – June 2015 prior to the parties entering into their written agreement in July 2015).

The Court noted a line of cases concerning the question whether conventional estoppel arising from pre-contractual dealings was available where parties had later entered into a wholly written agreement. The parol evidence rule seemed to stand in the way of the admission of such evidence, but the law on the question was unsettled. The Court considered divergent decisions in New South Wales, the Federal Court and Queensland (see [126] – [141]), as well as overseas (see [144] – [146] regarding England and New Zealand). The Court noted that the position in Victoria was that the Court of Appeal had touched on the question, but not determined it (see [142] – [143]).

Ultimately Riordan J concluded:

  1. In my opinion, the state of the law with respect to the admissibility of pre-contractual communications in support of a common law estoppel by convention may be summarised as follows:

(a) The question has not been definitively resolved on the Australian authorities.

(b) The predominant view is that pre-contractual communications may be relied on in support of an equitable estoppel but not a common law conventional estoppel.

(c) The law in England and New Zealand does not recognise any prohibition on the admissibility of pre-contractual communications in support of an estoppel by convention.

Queenfield has sought leave to appeal from the judgment on ‘the rectification question’, and the Gordon interests have lodged a Notice of Contention in respect of ‘the conventional estoppel question’. It remains to be seen how the appeal will pan out.

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