Australia: Loose lips sink ships (and service level agreements): the impact of your communications in managing your contract

Last Updated: 16 September 2016
Article by Alexandra Wedutenko and Natasha Smith

Most Read Contributor in Australia, August 2016

Do not depart from the contract terms, or encourage the other party to do so, unless you're serious about altering the contract.

You've signed the contract with the hope that this sets your arrangements in stone, right? In an ideal world, that would be right, but this is not an ideal world. Your words and actions in negotiating and managing those contracts may actually impact on the agreement you reach and document and may alter your ability to exercise your contractual rights.

In this article we'll see from real-life example the importance of:

  • ensuring that the terms of your agreements meet you requirements and reflect the agreed positions of the parties in the pre-contractual phases; and
  • managing the agreement, and the relationships between the parties, in accordance with the terms of the agreement.

Estoppel and contract management

The two important forms of estoppel that have a direct impact upon contract management are:

Promissory estoppel: this arises from representations about present or future rights between parties. The party protected must have altered its position in reliance on an assumption induced by the representations or promises so that it would suffer detriment if there were a departure from the assumption. the majority view supports the notion that a promissory estoppel may be found where a representation by one party is capable of creating an assumption or expectation in another (reasonable) person that was then acted upon by that other person, to their detriment; and

Proprietary estoppel: this binds the owner of property (A) who induces another person (B) to assume or expect that an interest in that property will be obtained by or conferred on B, where B relies on that assumption or expectation and alters its position to its detriment.

At least, this is the distinction we're taught at law school. There is some uncertainty about some of the more curly questions of estoppel, including whether proprietary and promissory estoppel remain two distinct doctrines with distinct requirements. The last time the High Court offered an opinion, it said that promissory and proprietary estoppel are likely distinct doctrines, and that there could be a difference in what is needed to be proved to obtain relief under each doctrine (Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26).

While the court did not express a majority view on the type of conduct which might give rise to a proprietary estoppel it was suggested by Justice Keane that for proprietary estoppel to be found, "the assurance or representation on which the party claiming the benefit of the estoppel relies must be sufficiently clear that the expectation which that party asserts was both actually, and reasonably, engendered by the assurance or representation".

The following case studies show the blurring of the boundaries between the two doctrines and, more importantly, how an estoppel can arise and bind you to something you did not anticipate.

Case study: promissory estoppel

Caringbah Investments Pty Ltd (CI) owned a property leased by Caringbah Business and Sports Club Ltd (CBSC). CBSC fell behind in paying rent and outgoings. CI issued a notice of breach of the lease covenant to pay outgoings, and further issued a notice of termination of lease for non-payment of rent and non-compliance with the notice of breach.

CBSC responded by arguing (among other things) that CI had made representations to it prior to lease execution that rent for the first three years would be $20,000 lower than the amounts specified in the lease. Both parties accepted an equitable estoppel could arise out of pre-contractual negotiations.

The parties had included an entire agreement clause, which means that the entire agreement is within the four corners of the contract. This, however, does not necessarily prevent an estoppel arising.

The primary judge found (with the Court of Appeal agreeing) that the elements of promissory estoppel were made out by CBSC. CBSC had relied, to its detriment, on the representations by CI about the amount of rent for the first three years of the lease. Not only had CBSC entered into the lease in reliance of the statements about the lower rent, but CBSC had paid, and CI had accepted, this reduced amount from the commencement of the lease in December 2012 until December 2013, when a letter from CI to CBSC was sent, claiming a shortfall in the rent and outgoings.

CI was therefore estopped from asserting that the rent payable was that set out in the lease rather than as stated in the representations (Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165).

Case study: proprietary estoppel by encouragement

Mr Vosnakis' wife died in 2012. His mother-in-law, Mrs Arfaras, offered to bury his wife in a burial plot for which she held a burial licence, and to transfer the burial licence to him, so that he could be buried in the same plot as his late wife. Unfortunately Mrs Arfaras did not mean it.

Mr Vosnakis commenced proceedings and argued (among other things) that Mrs Arfaras was estopped from denying the existence of a binding and enforceable agreement regarding the transfer of the burial licence.

The NSW Court of Appeal found that the doctrine of proprietary estoppel by encouragement was applicable. It also upheld the primary judge's finding that the essential elements of estoppel had been established (Arfaras v Vosnakis [2016] NSWCA 65).

This case is interesting because traditionally, representations about present or future rights between parties (ie. rights of a contractual-type nature, such as the right to a licence) have been the ambit of claims of promissory estoppel. This judgment, however, appears to expand the scope of the principle of proprietary estoppel, such that rights of a contractual nature may be enforceable under this principle.

How to make sure estoppel doesn't affect your contract management

The courts are yet to definitively resolve the question of there is a single unified doctrine of estoppel. The courts also take different views as to what representations will be found to satisfy a claim for promissory estoppel. Further, it is also still unclear as to what type of conduct will give rise to a finding of proprietary estoppel, though the scope of this class of estoppel appears to be expanding.

While a binding contract may not exist with respect to such representations, you may still be liable for those representations or be estopped from resiling from your obligations. The above cases highlight that what you say may impact on your rights.

Another observation by the courts was the lack of documentary evidence retained by the parties about issues discussed at meetings, representations made and oral agreements reached.

The key lessons from all of this are:

  • Keep accurate records, particularly contemporaneous records of all interactions between parties, which should be made and stored appropriately.
  • Do not depart from the contract terms unless you intend to vary those terms through a formal contract amendment or waiver.
  • Do not encourage, or ignore, behaviour by another party which is not in accordance with the terms of the agreement as you may be estopped from denying such behaviour.

RELATED KNOWLEDGE

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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