Promissory estoppel

Construction of a 'bespoke' commercial contract – promissory estoppel as a positive source of rights

This case relates to a contract dispute between a company and its underwriter in the context of a suspended land acquisition. The Full Court of the South Australian Supreme Court considered the proper construction of a complex commercial contract with 'potential difficulties', and set out the general principles of promissory estoppel (particularly whether it could be used as a positive source of rights).

The case is significant for its recognition that promissory estoppel can effectively operate as a positive source of legal rights.⁴

The case also highlights the importance of clear contract drafting. Although courts will consider the commercial purpose of a particular agreement in construing a contract, including what commercial parties objectively intended, where contracts may be inconsistent, complex or contain a 'potential unfairness', courts cannot redraft a commercial contract so as to meet all potential difficulties, and disregard the language actually used by the parties.⁵

Facts

The dispute concerns the construction of an underwriting agreement between Commercial & General Group (C&G Group) (C&G) and one of its underwriters Manassen Holdings Pty Ltd (Manassen).

On 30 June 2016 the C&G contracted with the South Australian Minister for Transport and Infrastructure for the sale and purchase of land around the 'State Administration Centre' in Adelaide (the sale contract). At this stage, the closing date under the sale contract (losing) was expected to be 31 October 2016.

C&G and Manassen entered into the underwriting agreement on 10 September 2016 (the agreement). The commercial purpose of the agreement was to enable C&G to access up to $40 million from Manassen for the settlement of the sale contract. The key provisions of the agreement were as follows:

• on receipt of a funding notice, Manassen could be required by C&G to provide funds to C&G at closing, provided certain conditions precedent were satisfied or waived. Funding would occur through subscription in a unit trust of which C&G was the trustee;
• the conditions precedent of the agreement included that closing would occur by no later than the relevant date, which was defined as either (i) 31 October 2016; or (ii) 30 November 2016, if certain FIRB approval requirements were needed. Manassen had termination rights where the conditions precedent were not met; and
• C&G would pay Manassen a commission consisting of (i) a base commission; and (ii) daily fees. Payment of the daily fee is the subject of this dispute:
  • under clause 1 of Schedule 5, daily fees would be paid where Manassen:
    • Subscribes or may be required to subscribe (whether or not it does actually subscribe) for any Preference Unit at any time on or after 1 November 2016. 
  • the daily fee would accrue from 1 November 2016 for a maximum of 30 days and would become due and payable by the earlier of closing or the relevant date.

On 11 October 2016 C&G issued a funding notice to Manassen for $40 million.

On 31 October 2016 closing was deferred to 15 November 2016, due to outstanding conditions precedent, including that C&G was not able to find an additional financier. Manassen subsequently wrote to C&G noting that closing had not occurred by 31 October 2016 as required under the agreement and that it reserved all of its rights to terminate the agreement.⁶

On 15 November 2016 closing again did not occur. On 21 November the Minister agreed to extend closing until 13 December 2016. During this time, C&G had made several representations to Manassen, including agreeing that the daily fees would continue to accrue until closing.

Ultimately, there was no closing, and on 14 December 2016 the sale contract was terminated. C&G issued Manassen a termination notice under the underwriting agreement on 22 January 2017, stating that Manassen's funds were no longer required, and paid Manassen the base commission amount but not the daily fees.

Manassen brought proceedings in the Supreme Court of South Australia, seeking payment of $600,000 in daily fees and further submitting that C&G was estopped from denying the payment of daily fees by its representations made to Manassen. C&G's position was that because closing had not occurred, the agreement was no longer enforceable, such that it could not be said Manassen 'may be required' to subscribe to the funding after 30 October 2016 had passed.

The primary judge found that, on the proper construction of the agreement, Manassen was entitled to the daily fee. His Honour found that the issuing of the funding notice had triggered Manassen's obligations under the agreement, such that, despite 30 October 2016 passing, if closing did occur Manassen could still be required to subscribe to the funding and could have waived the conditions precedent if called to subscribe.⁷ However, his Honour rejected Manassen's estoppel claim, on the basis that Manassen had not established the requisite detriment.

C&G appealed, on the basis that the primary judge misconstrued the agreement, and Manassen cross-appealed the finding relating to the estoppel claim.

Judgment

The issues before the court were as follows:

• whether, on the proper construction of the underwriting agreement, C&G was required to pay the daily fee; and
• whether C&G was estopped by its representations from not paying the daily fee.

The majority (Justices Livesey and Stanley agreeing in a separate judgment) allowed the appeal, favouring the construction of the agreement that 'produced the more business like outcome'.⁸ They agreed that after 31 October 2016 C&G had no enforceable rights to 'require' Manassen to provide the funding.⁹ Although a funding notice had been issued and Manassen could elect to eg waive the conditions precedent or its termination rights, such funding would occur at Manassen's own discretion. The majority held that this construction ran counter to what it considered was the commercial intention of the daily fees concept:¹⁰

It is inherently unlikely that these commercial parties intended that the daily fee should be paid where it remained entirely within the capacity of one party as to whether it would proceed and, in that setting, potentially retain both the right not to proceed and the right to receive a substantial daily fee. That seems an unbusinesslike construction.

Further, although finding that promissory estoppel was available as a positive source of rights for Manassen, the primary judge was correct in finding that Manassen had not established it had suffered detriment in relying on C&G's representations. Although the consideration of the daily fees was, for Manassen, effectively 'holding' funds out in case subscription was required, Manassen could not show it would have earned a higher rate of return or any relevant investment opportunities by which it could have earned more than it did than keeping the funds available in its bank account.¹¹ Mere non-fulfilment of C&G's representation to pay the daily fees was insufficient to constitute detriment.¹²

Construction of a commercial contract

The majority considered that the commercial purpose of the daily fee was to compensate the plaintiffs for being required to keep the funds available for the purposes of the sale contract. However, considering the actual words used by the parties, the concept of 'Relevant Date' under theagreement was distinct from closing under the sale contract. The effect of this drafting was that the daily fee would only accrue if the relevant date were 30 November 2016 (ie where FIRB approval was required), and that the relevant date could pass by even if closing were to occur later.¹³

This did occur, and after 30 October 2016, the majority held, Manassen was not 'required' to keep the funds available. Although Manassen could chose to waive its termination rights or elect to proceed with the subscription despite the failure of the conditions precedent, it cannot be said that this comes within the words 'may be required to be subscribe' in the agreement, as C&G did not have an enforceable right to require Manassen to provide the funds under the agreement.¹⁴

The majority noted, in support of this analysis, that it was unlikely the commercial parties had intended that Manassen could both receive the daily fee payment and retain the right to terminate the agreement.¹⁵ Although this may expose a potential unfairness, the majority noted that the court could not redraft a commercial contract so as to meet all potential difficulties but disregard the language actually used by the parties.¹⁶

Justice Nicholson,  in dissent, disagreed with this reasoning, on the basis that, notwithstanding the conditions precent had not been met, the agreement and the funding notice remained extant as long as closing could still occur and Manassen be called to provide funding. His Honour noted that Manassen had expressly reserved all rights, and both parties continued to conduct themselves on the basis that 'the Agreement remained on foot with the possibility that [the sale contract] would settle with the underwriting assistance of [Manassen].' His Honour held that this view was not derogated by the fact that Manassen had the choice of whether or not to proceed with the agreement, and agreed with the primary judge's construction of the agreement.

Interestingly, his Honour also noted an apparent error in the drafting of the provisions relating to payments of commissions in Schedule 5, clause 1:

by the earlier of the following dates:

(c) the date of Closing; and

(d) the Relevant Date.

His Honour noted that had the clause read 'later of the following dates', a number of construction concerns may have been resolved consistently with a sensible and businesslike operation of the agreement in favour of Manassen's contention.

Promissory estoppel

The majority also addressed several issues raised by both parties relating to promissory estoppel:¹⁷

• Promissory estoppel can, in appropriate circumstances, provide a positive source of legal rights.¹⁸ After canvassing the relevant authorities, Justice Livesey held that:

[182] In my view, whilst an estoppel does not create a legal relationship or generate any new cause of action a court of equity may, in appropriate circumstances, preclude a party from denying that a legal a relationship has arisen. In that type of case, the parties become bound to the postulated legal relationship, such as an intended contract or lease, and their obligations are then governed by reference to that postulated relationship.

[183] In particular, in my opinion, it was open in this case to find that, assuming that a sufficiently identifiable postulated legal relationship existed on the evidence, the recognition of a promissory estoppel did not involve creating legal rights in any abstract sense. Rather, the estoppel would simply preclude a party from denying that it is bound by that postulated legal relationship. It is no bar to recognition of the promissory estoppel that it might be said to have a positive, rather than merely negative, effect: at bottom, the estoppel precludes the unconscionable or unjust abandonment of the assumption which the defendant induced the plaintiffs to make. The approach taken in Austotel v Franklins, Ashton v Pratt and CPB Contractors Pty Ltd v Rizzani De Eccher Australia Pty Ltd should be followed in South Australia.

• Non-fulfillment of a representation is not alone a sufficient detriment for the purposes of a promissory estoppel claim. The correct approach is to first ascertain the plaintiff's reliance and consequential detriment, and to do so otherwise 'converts the claim to a contractual claim [for lost expectations], rather than a detrimental reliance claim'.¹⁹ To show the requisite detrimental reliance, Manassen was required to prove any valuable alternative transaction and/or prove the precise amount it had received holding the funds in a bank account.
• A representation that is insufficient to give rise to a contract will not necessarily be insufficient to found a promissory estoppel.²⁰ The primary judge had held that the representations made by C&G to Manassen on 30 November 2016, relating to daily fees continuing to accrue, were insufficient to amount to a binding agreement but did suffice to found a promissory estoppel. The majority agreed with this analysis, adopting the authorities that recognised 'a promise may be clear and defined, even if it cannot be precisely defined'²¹ – a representation can be sufficiently clear and unambiguous to found a promissory estoppel even it were difficult to construe with precision or capable of more than one reasonable meaning.