Australia: Negotiations to lease: BBB Constructions Pty Ltd V Aldi Foods Pty Ltd [2012] NSWCA 224

In the primary proceedings BBB claimed that Aldi engaged in conduct that was misleading or deceptive or unconscionable and breached the Trade Practices Act 1974 (Cth). Additionally, BBB claimed that Aldi was by reason of equitable estoppel, estopped from resiling from conduct or representations that Aldi would enter into a binding agreement for lease of premises. Furthermore, BBB claimed that Aldi was by reason of equitable estoppel, not able to resile from a common assumption by the parties that Aldi would enter into an agreement for lease of premises.

The primary judge, Justice McDougall found that Aldi did not engage in representations or conduct that was misleading, deceptive or unconscionable.

Justice McDougall rejected BBB's equitable and conventional estoppel claims.

On appeal BBB challenged the primary court's findings on the following grounds:

  • the primary judge took an erroneous view of the nature and effect of Aldi's representations;
  • the primary judge should have determined on the evidence that Aldi's representations and conduct were misleading, deceptive or unconscionable and breached the Trade Practices Act 1974 (Cth);
  • the primary judge should not have found that Aldi's agreement to take a lease was always subject to Aldi board approval; and
  • Aldi had induced BBB into assuming that Aldi would execute an agreement to lease and that Aldi should be estopped from withdrawing from it.

The Court of Appeal unanimously dismissed BBB's appeal and found:

  • BBB was not misled or deceived and that Aldi's conduct was not likely to mislead or deceive;
  • BBB knew and accepted at all times that the purpose of ongoing negotiations was to produce an agreement to lease acceptable to both parties;
  • BBB also knew that Aldi board approval was a pre-condition to any commitment by Aldi;
  • Both parties were commercially sophisticated businesses who employed lawyers and were able to safeguard their own interests. BBB's expenses of constructing a second basement were for its own commercial advantage. Aldi's conduct was not unconscionable;
  • The primary judge was correct in rejecting the equitable estoppel claim as Aldi did not induce BBB into believing Aldi would execute an agreement for lease. Both parties knew there would be no commitment until an agreement for lease was executed and that approval of any document was subject to Aldi board approval. As to the conventional estoppel claim, the only mutual assumption was that negotiations would continue until a final document had been produced and it would then be for each party to make a decision whether to enter into a binding commitment; and
  • The Court of Appeal noted the primary judge's comment that if Aldi had made a deliberate decision at some point not to proceed towards completion of the negotiation and then failed to communicate that decision promptly to BBB, so that BBB continued nonetheless to incur expense, Aldi may have engaged in unconscionable conduct.

This NSW Court of Appeal decision has important implications for commercial parties involved in commercial transactions particularly in regard to the following:-

  • During a negotiation between two parties, a party should always consider the impact of commencing negotiations with a third party without first informing the other party that it was originally in negotiations with. For example, if Party A and Party B are in negotiations and Party A wishes to enter into negotiations with Party C, Party A should inform Party B of its intention to enter negotiations with Party C;
  • During negotiations parties should consider when it wishes to be bound by such negotiations. In this case, Aldi stated from the outset that its offer to lease was subject to Aldi board approval;
  • If a party does not intend to be legally bound during the negotiation process then it should explicitly state that it will not be legally bound by any agreement until the exchange of an executed written legal agreement acceptable to both parties;
  • If during negotiations, a party makes a deliberate decision not to proceed towards entering into a formal written agreement and that party communicates such a decision to the other party promptly, it may not constitute unconscionable conduct; and
  • It is important for parties to ensure that they do not make decisions and incur significant expenditure on the basis of an assumption that a formal written agreement will be entered into in the future. Acting upon this assumption poses a substantial risk for parties and parties should ensure that a legally enforceable agreement is exchanged before making important decisions and incurring significant expenditure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Daniel O'Brien
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