Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

No 4764 of 2007

ACCURATE FINANCIAL CONSULTANTS PTY LTD (ACN 007 294 206) and

STEVEN JOHN WEST (in his capacity as Trustee for the S & J Family Trust)

Appellants

KOKO BLACK PTY LTD (ACN 106 330 616) (in its capacity as Trustee of the Koko Black Unit Trust), SHANE ANTHONY HILLS and OLDDAY PTY LTD (ACN 098 814 594)

Respondents

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JUDGES:	ASHLEY, DODDS-STREETON JJA and FORREST AJA
WHERE HELD:	MELBOURNE
DATE OF HEARING:	14 April 2008
DATE OF JUDGMENT:	28 May 2008
MEDIUM NEUTRAL CITATION:	[2008] VSCA 86

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ESTOPPEL – Equitable estoppel – Unit holders invested on assumption or expectation to remain unit holders ‘for the long term’ – Whether representation upon which appellants relied sufficiently certain to found estoppel – Injunction restraining the trustee from acting upon redemption notices granted.

TRUSTS – Unit Trust – Provision under trust deed for redemption of units – Whether trust deed read or understood by unit holders – Whether, contrary to wishes of minority unit holders, units subject to compulsory redemption by corporate trustee controlled by majority unit holder – Whether fraud on a power or breach of trust – Principles in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 considered.

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APPEARANCES:	Counsel	Solicitors
For the Appellants	Mr M Y Bearman and Ms E Konstantinou	HDL Legal and Consulting
For the Respondents	Mr R Lancy	Wisewoulds Lawyers

ASHLEY JA:

I agree with Dodds-Streeton JA, for the reasons which her Honour gives, that the appeal should be allowed. It was not suggested, if the representations upon which the appellants relied were sufficiently certain to found estoppel, that the other elements of an estoppel were not made out. An injunction ought be granted permanently restraining Koko Black Pty Ltd from acting upon the notices for compulsory redemption of units served upon the appellants on or about 5 February 2007. It was not suggested that anything less than grant of an injunction such as I have mentioned would satisfy the minimum equity requirement.

I should add this. Dodds-Streeton JA suggests that several possible ways in which the appellants’ claim might have been - but were not - pleaded and pursued at trial were prima facie maintainable. That observation mirrors a degree of entirely understandable frustration, directed to the same issue, which is implicit in the reasons for judgment of the learned trial judge.[1] I agree that the appellants’ case was needlessly complicated. It involved an apparently determined avoidance of what might reasonably have been considered central in favour of reliance upon legal principles which for the most part were unlikely to assist the appellants in the circumstances of the case. To have pursued a different approach did not necessarily mean that the appellants, if successful, would have been saddled[2] with a kind of relief which did not suit them. I have little doubt that the approach which the appellants in fact pursued had a tendency to deflect the learned trial judge from analysis of the only basis of claim which, in the event, the appellants have now sustained.
[1]Accurate Financial Consultants Pty Ltd v Koko Black Pty Ltd [2007] VSC 40, [97].
[2]Whether by application of principle, or by the practical working out of the dispute.

DODDS-STREETON JA:

The principal issue in this appeal is whether the appellants, who are minority unit holders in a unit trust, may restrain the trustee (a corporation controlled by the

majority unit holder) from acting on notices for the compulsory redemption of their units, served approximately three and a half years after the establishment of the unit trust, in circumstances where (although the trust deed confers an unqualified power of compulsory redemption), the majority unit holder induced the appellants’ investment by representing that it would be for ‘the long term’.
Facts and Evidence

The trial judge’s finding of fact were unchallenged. The appellants are minority unit holders in the Koko Black Unit Trust (‘Unit Trust’). The first appellant, Accurate Financial Consultants Pty Ltd (‘Accurate’), a company controlled by Christopher Jackson, holds 9.5% of the units and the second appellant, Steven John West, as trustee for the S & J Family Trust, holds 14.5% of the units. Their holdings amount collectively to 25% of the issued units.

The first respondent, Koko Black Pty Ltd, is the corporate trustee (‘trustee’) of the Unit Trust. The second respondent, Shane Hills, is the sole director of the trustee in which his family trust indirectly owns the shareholding. Mr Hills owns, directly or indirectly, the majority of the units in the Unit Trust.

The assets of the Unit Trust currently comprise a successful business which operates a factory and a chain of high quality speciality chocolate shops throughout Victoria. There is also an outlet in Canberra.

The concept of the business, which involved some innovative features, was devised by Mr Hills in 2002. Mr Hills required capital in order to establish and develop the business. He discussed the concept with a number of persons, including his father-in-law Mr Carbone, Mr Tim Bourke, a solicitor, Mr Steven West and Mr Christopher Jackson. He invited them to invest funds and to participate in the development and management of the business by contributing their particular skills and expertise.

In December 2002, Mr Hills prepared the first draft of a proposal brief which he sent to Messrs Carbone, Bourke, West and Jackson. A number of updated versions of the proposal brief were prepared and circulated during 2003.

From the outset, the proposal brief indicated an intention to expand the business over time and that the investment would be long term. Capital growth, rather than the payment of dividends, was proposed. A minimum two year commitment by investors was also required.

The draft proposal brief stated that the business ‘is going to start by thinking big and acting big.’ The first store would be an ‘experiment or a pilot’ which would be ‘perfected’ as a ‘showcase for things to follow. …. The objective isn’t to franchise but to self-fund growth with a management structure.’ The draft proposal brief further stated ‘[i]nvestment in the business will suit long-term investors with a focus and strategy of growth. Issuing dividends will not be a priority.’

The draft proposal brief referred to the assembly of the board of management and included a profile of each invited participant, setting out his relevant background and likely strengths. It stated:

The Board has a great mix of talent, expertise, savvy and drive. Equally as important it is a board that can work very well together as a team.

The proposal brief referred to the benefits and undertakings associated with board membership, including:

“ ● 2% allocation of shares
·Option to increase shareholding
·$150 cash payment per meeting (Cadet $50.00)
·2 year mandatory commitment (2% allocation lost on exit)
·Opportunity to increase interest as the business grows
·Exit options after 2 years”

The proposal brief of 30 April 2003 stated, ‘Koko Black will soon be launched as a single retail outlet’. It stated that ‘the company has plans for expansion once the concept has been properly tested and refined.’ The proposal brief referred to funding and the investment sought from each participant. It repeated the statement that ‘[i]nvestment in the business suits long-term investors with a focus and strategy of growth. Issuing dividends/income will not be a priority’, which appeared in each successive draft of the proposal brief.

In cross-examination, Mr Hills agreed that the statement was included to warn the potential investors that they would not receive a return on their money for some time. He envisaged that when the business began to make profits, the cash flow would be turned back into expanding the business and there would be no return for the investors until it reached ‘a large enough size that he did not want to keep turning the investment back.’

Mr Hills testified that:

the main message I was trying to put across was that this wasn’t a quick turnaround, a quick set up and sale type business. It was a business for – that I wanted to operate for a long time.

He therefore warned the investors that they would have to stay in for ‘a long time’. Mr Hills agreed that he intended to carry on the business with the board members for ‘a significant amount of time’.

Each draft of the proposed brief indicated that in return for his contribution to the establishment of the business, each participant would receive a ‘free’ 2% share, which would be forfeited if the investor withdrew before two years had elapsed.

The Business Plan dated 15 August 2003 stated:

It should also be noted that Shane Hills will not be drawing a wage from the business during the first 12 months, instead choosing to be allocated share options at a discounted rate as the business grows. This approach is very much in line with the growth focus of the business.

The first board meeting occurred on 7 January 2003. The trial judge accepted that Mr Hills spoke words to the effect that the investors –

are to be a board of management if we decide to invest in this new business idea. I’ve handpicked you because all of you have different but complementary skills that you can bring to this new business and I feel we will together make a dynamic team. Jackson has financial and taxation skills. Bourke has legal skills. West has manufacturing and management skills, which will be useful when the business reaches a significant size. Carbone and I have business skills. I am inviting you to become part owners of the business. We will all be partners and own the business together. That’s important because if the business is to grow there may not be any return on your investment, no dividends, in the early years because if the business expands as I expect it to, all its earnings will be required to fund its development. You may need to put in further capital. It will be a long-term investment. I am inviting you on board because I want to create a large company, not one or two shops. (emphasis added.)

Mr Hills agreed in cross-examination that he consistently informed the participants that if they decided to invest, their investment would be for the long term.

The first board meeting also discussed a possible structure for the business. Mr Bourke, who was a relatively junior solicitor at the time, proposed a unit trust. The minutes of the meeting recorded that he ‘outlined that unit holder and/or shareholder agreements should be entered into, outlining numerous issues such as dividends, voting rights etc.’

Shortly thereafter, Mr Bourke circulated a standard form checklist of issues for consideration in relation to the shareholders’ agreement, including the structure to be adopted (company, trust, joint venture or partnership), whether redemption of units should be permitted, and, if so, whether only with the unanimous approval of the board or a specified number of board members.

Mr Bourke’s covering email noted that the checklist might be more appropriate to a company than to a unit trust, and urged the potential investors to read it and contribute ideas. The trial judge found that although the investors had a shared intention to establish a unit trust, they played no active part in advancing the establishment of the formal business structure.

In September 2003, Mr Hills took steps to incorporate the trustee, a company of which he was the sole director and, indirectly, the sole shareholder. The structure had not yet been finalised and the amounts to be contributed by each investor were not yet formalised. It was agreed, however, that the business would operate through a unit trust.

Between September and October 2003, Mr Jackson paid a total of $30,000, acquiring 9.5% of the units. In October 2003, Mr West paid $50,000 by instalments, acquiring 14.5%. Mr Hills received 64.5%, Mr Carbone 9.5% and Mr Bourke 2% of the units.

In accordance with the proposal brief, the total unit holding of each participant included a ‘free’ component. Mr Hills received a 27% interest for no financial investment, in recognition of his predominant contribution to devising and establishing the business. Each of the other participants received a 2% interest for no financial investment.

Each investor nominated the entity he intended to hold the units in the Unit Trust.

Mr Bourke prepared the trust deed for the Unit Trust. The trial judge found that all the investors relied heavily on Mr Bourke in relation to the preparation and execution of the trust deed.

The trial judge found that although agreement had not been reached about the contents of a unit holder’s agreement, all the participants understood that each investor would be entitled not only to units, but also to shares in the corporate trustee, in proportion to their investment.

Mr Hills conceded that he intended, and informed the other investors, that they would receive a proportionate shareholding in the trustee. Nevertheless, a unit holders’ agreement was never executed and Mr Hills therefore remained the sole director and shareholder of the corporate trustee. He consistently referred to the investors as ‘shareholders’ in notices and discussions.

The trust deed was undated, but executed in about November 2003. It relevantly provided for, inter alia, pre-emption as follows:

7.2      Redemption without the request of a Unitholder
The Trustee may at any time in its discretion redeem all or any Units held by a Unitholder without being requested to do so at the Unit price per Unit by giving one (1) month’s notice in writing to the Unitholder of its intention to redeem such Units provided that if the Unitholder waives its right to receive such notice then it shall not be necessary for the Trustee to give such notice.
7.3      Calculation of Unit price
(a)       For the purpose of fixing the Unit price [to be paid upon redemption], the Trustee shall value the Fund and the Units into which the Fund is divided, and if it thinks it necessary or advisable have the valuation made by a person competent to make such valuation at the Trustee’s expense.
….
17.6     Exercise of powers notwithstanding relationship of Unitholder
All powers and discretions conferred upon the Trustee by the Deed or by law may be exercised notwithstanding that any person being a director or shareholder of a corporate trustee, is or may have been a Unitholder or has, or may have, a direct, indirect or personal interest (whether as shareholder, director, member or partner of any company or partnership or otherwise) in the manner or result of exercising such power or discretion or may benefit directly or indirectly as a result of the exercise of any such power or discretion notwithstanding that the Trustee for the time being is the sole trustee of the Trust.
…
17.8     Unfettered power
Where in this Deed the Trustee is entitled to exercise a power or a discretion, such power or discretion shall be an absolute or unfettered power or discretion and no Unitholder or other person, except as expressly herein provided, shall be entitled to call into question the exercise of such power or discretion or the failure to exercise such power or discretion. The Trustee shall not be required to assign any reason for its exercise of such power or discretion or failure to exercise such power or discretion.
21.3     Power to act notwithstanding personal interest
The Trustee may exercise or concur in exercising all powers and discretions given under this Deed or by law notwithstanding that it or any person being a director or shareholder of the Trustee has or may have a direct or indirect interest in the mode or result of exercising such powers or discretion or may benefit directly or indirectly as a result of the exercise of any such power or discretion and notwithstanding that the Trustee for the time being is the sole trustee.
…

The trial judge found that Mr West and Mr Carbone did not read the trust deed at all. Mr Jackson did not read the trust deed, but looked at the schedule. Although Mr Hills read the trust deed, the trial judge found that he did not appreciate that it gave the trustee (which he controlled) the power compulsorily to redeem units.

The trial judge found that Mr Bourke (who was not party to the proceeding and did not give evidence) employed a standard form unit trust deed, without considering whether its pre-emptive provisions accorded with the parties’ intentions. He did not appreciate that it conferred on the trustee a power of compulsory redemption of the units.

His Honour also found that Mr Hills ‘did not contemplate the existence of a power to compulsorily acquire, or redeem any units’. Mr West and Mr Jackson were also unaware of the compulsory redemption power. They believed only that the proposed unit holders’ share agreement would create pre-emptive rights to ensure that strangers did not enter the business without the existing unit holders’ consent.

His Honour stated:

I find that, at the time the unit trust deed was signed, the parties to it had no formulated intention or belief as to the matters which would be provided for in a unit holders agreement. In particular, even though the shareholders agreement checklist circulated by Mr Bourke contained a reference to the issue of redemption of interests, there is no evidence that any of the unit holders even considered the possibility that a unit holders agreement might include a power of compulsory redemption of units. Nor was any consideration ever given by any unit holder to the possibility that there could be, and in fact was, a power of compulsory redemption of units contained in the trust deed.

Following the preparation of the trust deed, Mr Bourke did not advance the preparation of a unit holders’ agreement.

In October 2003, the trustee took an assignment of the lease of the premises of Koko Black’s first shop in the Royal Arcade, Melbourne with a term of five years from 9 November 2002, with two further options to renew of five years each. Mr Hills guaranteed the trustee’s obligations under the sub-lease.

At meetings of, or in emails between, the unit holders in October and November 2003, the question of the unit holders’ agreement was again broached, but no action was taken.

Mr Hills, by a report dated December 2003, set out the allocation of shares and the value and percentage ownership of the business as between the various board members. The total value of the investment was stated to be $400,000.

The first Koko Black shop in the Royal Arcade was opened in December 2003. It was very successful. Mr West resigned from his existing employment and worked in the business part-time for the first year of operation.

By November 2004, Mr Hills had commenced negotiations to lease a second shop in Carlton and factory premises in Coburg.

In December 2004, the trustee entered into the lease of shop premises in Carlton with an initial term of five years and two options to renew, each for five years.

In about January 2005, Mr Hills secured a lease of factory premises in Coburg for a term of three years.

In March 2005, Mr Hills advised the investors of a new business structure whereby a new corporate trustee and unit trust would be established for the Carlton shop, the Coburg factory premises and thereafter for each new outlet as it was established, although all units in the new trusts would be owned by the Unit Trust.

As additional capital was necessary, Mr Hills proposed a capital raising of $240,000 from the existing investors, which proceeded on a pro rata basis. Mr Jackson invested a further $22,800 and Mr West invested a further $34,800.

In order to raise funds for the establishment of the Carlton store, in late 2004 or early 2005, Mr Hills canvassed with the unit holders whether they wished to contribute further capital or sell some of their units. Mr Jackson offered to sell 11,000 of his units at $3.75 each. Mr Hills’ wife offered to buy them for $3.25 each. Mr Jackson rejected that offer.

In March 2005, Mr Hills established two new trusts and corporate trustees (of which he was sole director and, indirectly, the sole owner of the shares) for the Carlton shop and Coburg premises.

In about June 2005, he prepared a 2005 Annual Report for the scheduled 18 August 2005 unit holders’ meeting. The Annual Report relevantly stated:

Final Summary
Koko Black is poised for great change and increased risk. The starting point is establishing the best ownership structure to give the business the best chance for success.
Current issues with structure:
1.Shane Hills is sole director with 60% ownership yet carries 100% of personal guarantees for business loans totalling $490,000 and leases totalling $160,000 p.a for multiple years.
2.The current structure no longer provides value to the business in the area of capital raising.
3.There is no shareholder agreement.

A shareholders meeting is scheduled for 18 August which will table this critical issue.
Structure Objectives
1. Shane Hills to maintain ongoing control and direction – unchanged
2.Re-balance of shares to key business contributors (to include [key employees])
3.Explore options for new investor who has done the journey in retail

4. Start-up silent partners to sell down holding
5.8000 free share allocation to be sold back to Shane for $1 per share. This original vision of board member active involvement in the business was naïve. The intention was to keep everyone involved for a period of time (3-5 years) at which time the shares would become active.
6.Shareholders agreement to be established
7.All shareholders to share in personal guarantees or establish other arrangements

In cross-examination, Mr Hills admitted that, as at the date of preparing the 2005 Annual Report, he wanted the other investors out. It was his impression that the other investors were not actively involved in the business as originally intended and the plan for ‘a contribution over a period of time’ had not worked out. He therefore put to the investors that ‘the dynamics’ had changed and they should relinquish their units.

In cross-examination, Mr Hills did not assert that ‘the long term’ had arrived in August 2005. Rather, he conceded that he had changed his mind, ‘based on what had happened in real life’.

At the meeting on 18 August 2005, an angry exchange occurred when Mr Hills revealed his intention to purchase the minority’s shares and acquire 100 per cent ownership, which he justified by an assertion that he alone had taken the personal risks and would not be motivated to succeed with only 60 per cent equity. The minority resisted his demand to acquire their interests.

Following the 18 August 2005 meeting, the matter was temporarily dropped, but Mr Hills’ determination to eliminate the minority did not abate. In discussions with individual investors, Mr Hills proposed, unsuccessfully, to purchase their shares. He then sent the investors an intemperate letter dated 21 September 2005, which claimed that the success of the business was due solely to his efforts. The letter stated that the investors were demanding ridiculously high prices for their units. It complained that Mr Hills’ remuneration to date was low and that he alone had borne the burden of providing personal guarantees for the business’ liabilities.

A further meeting occurred on 25 September 2005. Mr Hills’ salary was increased to $100,000 and he was reimbursed for costs associated with the Carlton store. Mr West and Mr Jackson offered to share in providing personal guarantees.

At about that time, Mr Jackson learned for the first time that he and the other investors excepting Mr Hills were not, as he had assumed, shareholders of the trustee companies. Also at about that time, Mr Hills ceased to hold regular meetings and to send regular updates to Messrs West, Jackson and Bourke.

In November 2005, Mr Hills retained Deacons Consulting to investigate franchising opportunities for the Koko Black business. The Deacons Consulting report assessed the viability of an expansion strategy based on an ‘incremental methodology’ with three new company-owned stores and 22 franchised stores, which Deacons Consulting described as a ‘medium growth scenario’. Deacons Consulting concluded that the franchise proposition would be attractive equally to the franchisees and the franchisor, and that the ‘development of a franchise network will offer [Koko Black] a viable strategy to achieve its objective of growing a profitable retail network and a recognised and respected chocolate brand.’

Mr Hills continued to run the Koko Black business in consultation only with his father-in-law, Mr Carbone. He did not inform Messrs Jackson and West of its progress. He did not respond to Mr Jackson’s request to hold a meeting, failed to seek the advice of Messrs Jackson and West, and did not permit their involvement in management or decision-making.

Messrs Jackson and West were concerned about the denial of information, their exclusion from participation and the cessation of meetings.

In January 2006, Mr Jackson consulted the trust deed. On 25 January 2006, he circulated an email to Mr Hills and the other investors, which stated:

[I] am sorry that you feel this way but at the end of the day unitholders do in fact have rights and trustees do in fact have responsibilities and the trust deed determines some of the rules and regulations seeking fair value for shares (which you appear to have conveniently overlooked at our last meeting). You also appear to coneveniently [sic] have forgotten who owns the business and who initially funded it. your response is offensive as a part owner and may i suggest you should reaquaint [sic] yourself with the trust deed … in the meantime please let me know within the next week the date of our next meeting as per my request ...

On 8 February 2006, Mr Hills incorporated a new company (Koko Black Leasing Pty Ltd (‘Leasing’)) to lease the shops. Leasing took a lease of shop premises in Chadstone Shopping Centre. The lease was for a six year term with no option to renew. Mr Hills personally guaranteed the lease. He did not request the other unit holders to guarantee it.

By an email sent on 24 March 2006, Mr Hills circulated an agenda for a meeting of unit holders scheduled for 29 April 2006. The agenda noted that a Mr Bush, who was qualified in marketing and franchising, would act as an impartial chair of the meeting.

One item on the agenda was the formal valuation of the business by an independent business consultant. The papers requested the unit holders to read the trust deed, but the trial judge considered it unclear whether Mr Hills had, as at March 2006, ascertained the existence of the trustee’s power of compulsory redemption in clause 7.2.

At the meeting on 29 April 2006, the unit holders complained about the failure to issue unit certificates, and about the establishment of the individual unit trusts. Mr Hills, in turn, complained that he alone had provided personal guarantees. It was ultimately agreed that there was no present need to obtain a valuation. The trial judge found that there was no discussion of the power of compulsory acquisition at the April 2006 unit holders’ meeting.

There was, however, discussion of a proposal to franchise the Koko Black business. Mr Hills advised the meeting that he had retained Deacons Consulting to prepare a franchise business plan, at a cost of $110,000, which he described as ‘a long term investment for the business’.

At that time, Mr Hills’ plan was to franchise the business. He subsequently, when about 80% ‘through the process’ of investigation, decided not to proceed with franchising. The bona fides of that decision were not challenged.

In 2006, a deed of variation of the trust deed was executed to permit, inter alia, units to be issued to employees. It was backdated to 1 December 2004. The trial judge observed that the backdating was ‘consistent with the conduct of the parties, who typically progressed the establishment and growth of the Koko Black business and attended to formalities later’. Unit certificates were issued in or after June 2006.

In October 2006, Mr Hills leased additional premises in Camberwell for a five year term with two options to renew at five years each and incorporated another trustee of the unit trust for the Camberwell outlet. Mr Hills was the guarantor of the lease.

At about that stage, Mr Hills learned that the trust deed contained a compulsory redemption provision, hitherto unsuspected by any of the investors.

In December 2006, Mr Hills commissioned the BGV Group (‘BGV’) to undertake a formal valuation of the business, with a view to redeeming some or all of the units under the terms of the trust deed.

Mr Mordes, the principal of BGV, contacted each of the unit holders. Mr Hills informed Mr Mordes of the Deacons Consulting report, but stated that he had elected not to proceed with franchising.

Mr Mordes responded that he did not require a copy of the Deacons Consulting report, as it was not relevant to his valuation. Mr Mordes did not receive a copy of the report and did not see the projected sales figures it contained. The trial judge accepted, however, Mr Hills’ unchallenged evidence that the BGV valuation was based on growth forecasts reflecting a realistic, company-operated growth plan.

The BGV valuation gave a value per unit of between $3.05 and $3.85, with a mid point of $3.45 per unit.

The trial judge accepted Mr Hills’ evidence that he believed the BGV valuation to be generous, because it valued the business on the basis of future cash flow projections, rather than on the more restricted basis required by clause 7.2 of the trust deed.

The notice of the annual meeting scheduled for 16 December 2006, distributed on 3 December 2006, referred to the valuation report commissioned from BGV, and the proposed redemption of units. It also stated that $82,843 had been paid to Deacons Consulting for its franchise review, but that the franchise plans had been ‘shelved for the time being’.

At the meeting on 16 December 2006, Mr Eid (an accountant retained for the Unit Trust by Mr Hills), informed the unit holders that there would be a profit distribution by determining the amount of the dividend, but paying only 30%, to enable the unit holders to satisfy their tax obligations. The rest of the profit would be retained and reinvested. The unit holders (other than Messrs Hills and Carbone) were also informed that the trustee would compulsorily redeem their units for $3.45 per unit pursuant to the trust deed, which would result in payments of:

$170,430 to Accurate;
$260,130 to Mr West, as trustee of the S&J West Family Trust; and
$ 36,225 to Mr Bourke, as trustee for the Bourke Family Trust.

In or about February 2007, Leasing leased premises in Collins Street for a 15 year term.

On or about 5 February 2007, the trustee served notices of redemption under clause 7.2 of the trust deed on the appellants.

The trial judge’s analysis

The trial learned judge found that the appellants invested in the Koko Black business and became unit holders in the Unit Trust on the basis of an assumption or expectation that they would be entitled to remain as unit holders for the long term (‘the long term assumption’), induced by Mr Hills on behalf of the trustee.

He nevertheless dismissed the appellant’s claim to a permanent injunction on the operation of the compulsory redemption notices. Their claim was put on a number of alternative bases, each of which his Honour rejected.

The trial judge rejected the appellants’ contention, first, that the trustee’s exercise of the compulsory redemption power constituted fraud on a power because it was contrary to the purpose for which the power was conferred when considered in the context of the long term assumption.

His Honour considered that, in circumstances ‘where the parties gave no consideration whatsoever to the power’s existence its purpose must be gleaned from an examination of the trust deed as a whole’. In his view, the long term assumption was vague and ill-defined, and should not qualify the absolute nature of the trust power.

The trial judge rejected, secondly, the appellants’ argument that the exercise of the power was not bona fide for a proper purpose, but rather, for the impermissible purpose of aggrandising the interests of Messrs Hill and Carbone, contrary to principles of Gambotto v WCP Ltd[3] (‘Gambotto’). His Honour observed that in Gambotto, Mason CJ, Brennan, Deane and Dawson JJ (in their joint judgment) expressly recognised that a company’s constitution could, on incorporation, permit the expropriation of the minority’s shareholdings for the purpose of aggrandising the majority’s holding, although an amendment to that effect was impermissible.
[3](1995) 182 CLR 432.

The learned judge, thirdly, rejected the appellants’ argument that the trustee was estopped from redeeming the units pursuant to the compulsory redemption notices on the basis of the long term assumption.

His Honour applied Brennan J’s statement in Walton’s Stores (Interstate) Ltd v Maher[4] (‘Walton’s Stores’) of the elements of proprietary estoppel. He observed that the representation or conduct inducing the assumption or expectation relied upon, and the assumption or expectation itself, must be clear and unambiguous.
[4](1988) 164 CLR 387, 428-429.

He stated that ‘in this case the long term assumption which is relied upon to found the equitable estoppel lacks the required precision … The concept of a long term investment is not capable of clear definition.’

The trial judge, in that context, relied on a statement of Lord Denning MR in Woodhouse AC Israel Cocoa Ltd v Nigerian Produce Marketing Co Ltd[5] (‘Woodhouse’) approved by Mason and Deane JJ in Legione v Hateley.[6] In Woodhouse, Lord Denning MR stated:

In my opinion a man who receives a written representation must give to it its true meaning – or what the judge holds afterwards to be its true meaning – and not a different meaning of his own choosing. The judge must give the written representation the same meaning, no matter whether it is put forward as a variation or as an estoppel. But that is subject to this difference: If the representation is put forward as a variation, and is fairly capable of one or other of two meanings, the judge will decide between those two meanings and say which is right. But, if it is put forward as an estoppel, the judge will not decide between the two meanings. He will reject it as an estoppel because it is not precise and unambiguous. There is good sense in this difference. When a contract is varied by correspondence, it is an agreed variation. It is the duty of the court to give effect to the agreement if it possibly can: and it does so by resolving ambiguities, no matter how difficult it may be. But, when a man is estopped, he has not agreed to anything. Quite the reverse. He is stopped from telling the truth. He should not be stopped on an ambiguity. To work an estoppel, the representation must be clear and unequivocal.[7] (original emphasis)

[5][1971] 2QB 23.

[6](1983) 152 CLR 406.

[7]Woodhouse AC Israel Cocoa Ltd v Nigerian Produce Marketing Co Ltd [1971] 2QB 23, 60.

While the learned trial judge did not expressly so state, he appeared, in reliance on Lord Denning MR’s statement, to accept that a higher standard of clarity and certainty is required in a representation in estoppel, so that any significant degree of imprecision or ambiguity would invariably be fatal.

His Honour acknowledged that, in the case before him, the proposal brief stated that dividends would not be a priority, and that many of the shop leases were for a lengthy term. One lease was for 15 years, and several included options to renew for that period.

He nevertheless considered that the concept of an investment for the long term was ambiguous in the circumstances of the case. In reaching that conclusion, his Honour was influenced by the appellants’ counsel’s inability precisely to identify when the long term would be reached.

The trial judge, fourthly, rejected the appellants’ argument that the Unit Trust should be treated as a quasi-partnership between the unit holders in which there was a breakdown of mutual trust and confidence, thereby enlivening an equitable jurisdiction to restrain the trustee from acting on the compulsory redemption notices.

His Honour concluded that the principles of Ebrahimi v Westbourne Galleries Ltd[8] (‘Ebrahimi’) were directed at winding up on the just and equitable ground and the appellants’ reliance on them was misplaced, given that they did not seek the dissolution of the association.
[8][1973] AC 360.

The trial judge rejected, fifthly, the appellants’ contention that the service of the compulsory redemption notices constituted a breach of trust because the purpose was to aggrandise the interests of Messrs Hills and Carbone, and because Mr Hills failed to provide the Deacons Consulting report to Mr Mordes, the BGV valuer.

His Honour accepted Mr Hills’ evidence that Mr Mordes advised that he did not require a copy of the Deacons Consulting report. He observed that the BGV valuation took into account the company-operated expansion plans, and its bona fides were unchallenged.

As his Honour found, the investors, including Mr Hills, agreed to invest and to participate in the business, including its management and control, for the long term, aiming for capital growth rather than a short term return through dividends.

They were largely indifferent to the formal legal structure of the business, but agreed to adopt a unit trust and a corporate trustee in which each would have a proportionate shareholding reflecting his investment.

Save for Mr Hills, the investors never received the intended shareholding in the corporate trustee. They executed the trust deed unaware that it contained a provision permitting the compulsory redemption of units. That term of the trust deed, which no-one had originally read or understood, combined with Mr Hills’ total control of the corporate trustee, empowered Mr Hills unilaterally to eliminate their interests.

Some of the uncontested facts would appear, prima facie, to support relief on various grounds which were not argued, either before the learned trial judge or on appeal.

As his Honour observed, the facts may have suggested a claim to rectify the trust deed by the removal of the compulsory redemption power.

The appellants, however, did not contend that the trust deed should be rectified in that way. They thus accepted, implicitly at least, the validity of the compulsory acquisition power and merely sought to restrain its exercise at the date of the compulsory redemption notices.

Further, the facts may have suggested a partnership proper, entailing mutual fiduciary duties which would preclude the exercise of the formal ‘expulsion’ power. They may also have indicated grounds for winding up the Unit Trust.

The appellants did not, however, make a case for relief on any of the above bases.

Grounds of Appeal

On appeal, the appellants challenged the decision below on the following four grounds, also relied upon at trial:
1.        fraud on a power;
2.        breach of trust;
3.        quasi-partnership in corporate form; and
4.        estoppel .
Fraud on a power

The appellants argued that, in refusing relief based on fraud on a power, his Honour erred by ‘failing to take into account extrinsic material in ascertaining the scope of the power.’

They submitted that if the relevant extrinsic material were considered, the trustee’s apparently absolute power of compulsory redemption in clause 7.2 of the trust deed was clearly subject to the long term assumption. The true purpose of the trustee’s powers, including the compulsory redemption power, was, they contended, to provide a structure for the collective, long term investment by the unit holders in the business. The trustee’s exercise of the power was contrary to the long term assumption and therefore beyond the scope of the power. As such, it constituted a fraud on the power.

The appellants contended that no authority or learned commentary precluded the consideration of parol or extrinsic evidence in order to determine the purpose of a trust power. The statement in relevant authorities and texts that the scope and purpose of a trust power must be ascertained from the trust instrument[9] was not directed at cases such as the present, in which the trust deed did not represent the entire or real agreement of the parties. As such, it was not inconsistent with the reception of parol or extrinsic evidence where necessary to determine the purpose of the power. Such an approach accorded, it was said, with equity’s preference for substance over form.[10]
[9]See Lee v Fernie (1839) CH 1 Beav 483; Topham v Duke of Portland (1863) 1 DE GJ & Sm 517 affirmed Duke of Portland v Topham (1864) 11 ER 1242; Hutchins v Hutchins (1876) 10 IR Eq 453; G Thomas and A Hudson, The Law of Trusts, 2004, Oxford University Press relying on Kearns v Hill (1990) 21 NSWLR 107; Re Dyer [1935] VLR 273 and Re Ball’s Settlement Trusts, Ball v Ball [1968] 1 WLR 899; C J W Farwell LJ and F K Archer, Farwell on Powers (3^rd ed, 1916); D J Hayton, Underhill & Hayton Laws Relating to Trusts and Trustees, 16th ed (2003) Butterworths Lexis Nexis.
[10]As to substance over form, see Hartigan Nominees Pty Ltd v Rydge (1992) 29 NSWLR 405.

In my opinion, his Honour did not reject the argument on fraud on a power on the basis that the consideration of extraneous evidence to ascertain the purpose of the trust power was precluded. Rather, his Honour concluded that because the parties gave no consideration whatever to the existence of the power, its purpose could be gleaned only from the terms of the trust deed as a whole. Moreover, the trial judge’s reasoning indicates that he dismissed the appellants’ argument on fraud on a power principally because he considered the long term assumption too vague and ill-defined to qualify a power which was clearly conferred in absolute terms by the trust deed.

While, in my opinion, neither the authorities nor the relevant equitable principles prohibit the consideration, in an appropriate case, of parol and extraneous evidence in order to discern the purpose of a trust power, his Honour did not, on a fair reading, find the contrary.

The appellants’ argument that the service of the compulsory redemption notices in February 2007 was beyond the scope of the power and inconsistent with the limitation to which it was subject, also required them to establish that the long term had not arrived when the notices were served.

The appellants’ estoppel argument likewise depended, inter alia, on establishing the long term had not arrived at the date of the compulsory redemption notices. For the reasons set out below, I consider that the appellants are entitled to succeed on the basis of estoppel. It is therefore unnecessary to consider further the question of fraud on a power.

Quasi–Partnership in Corporate Form

The appellants contended that the trial judge erred in denying relief on the basis of the principles of Ebrahimi, on which they relied to invoke a fiduciary duty between the investors inter se, said to justify, in the present case, an injunction restraining the exercise of the power compulsorily to acquire their units.

The appellants conceded that their argument involved a novel extension of the principles of Ebrahimi.

In Ebrahimi, the petitioner, Mr Ebrahimi, and Mr Nazar, who had for some years conducted a business as partners, equally sharing its management and profits, formed a company in which each was a director holding equal shares. The son of Mr Nazar also joined the board and received a shareholding which, when combined with that of his father, amounted to 3/5 of the total issued shares. The profits of the business were distributed as director’s remuneration. No dividends were ever paid. When a dispute arose, the Nazars exercised their majority vote to remove the petitioner as a director.

The petitioner’s application to wind the company on the just and equitable ground was opposed, on the basis that his removal was based on the lawful exercise of powers conferred by the corporate constitution.

Lord Wilberforce, (with whom Viscount Dilhorne and Lords Pearson and Salmon agreed) observed that, where there were underlying, fundamental special obligations in good faith and confidence which entitled the parties to participate in the management of the business, it would not be equitable to permit one party to make use of his legal rights to the prejudice of his associate. Where a fundamental obligation was breached, the association should be dissolved.

His Lordship observed that the petitioner and Mr Nazar had ‘joined in the formation of the company’ on the basis that ‘the character of the association would, as a matter of personal relation and good faith, remain the same’.[11] Mr Nazar had, however, refused to recognise the petitioner’s continuing status as a partner by, inter alia, excluding him from remuneration; and, even were dividends to be paid in future, the petitioner would remain at the mercy of the majority.
[11]Ebrahimi, 380.

Lord Wilberforce concluded that the Nazars were:

not entitled, in justice and equity, to make use of their legal powers of expulsion and that, in accordance with the principles of such cases as Blisset v Daniel 10 Hare 493, the only just and equitable course was to dissolve the association.[12]

[12]Ebrahimi, 381.

His Lordship recognised that the principles on which the association would be dissolved were ‘those worked out by the courts in partnership cases where there has been exclusion from management … even where under the partnership agreement there is a power of expulsion.’[13]
[13]Ebrahimi, 380 (citations omitted).

Ebrahimi thus recognised that the underlying fiduciary obligations of a partnership survived despite the adoption of a corporate form, so that breach of a fundamental understanding on which the incorporation was founded would preclude the use of a legal power to expel the minority, and instead, as with a partnership, would lead to the dissolution of the association.

As Lord Cross observed, however, ‘[w]hat the minority shareholder in cases of this sort really wants is not to have the company wound up – which may prove an unsatisfactory remedy – but to be paid a proper price for his shareholding.’[14]
[14]Ebrahimi, 385.

Whether in a partnership proper or a corporate quasi-partnership, the prospect of dissolution may influence the majority, whose interests it threatens (and who may remain subject to continuing fiduciary obligations following dissolution),[15] to offer a fair price.
[15]Chan v Zacharia (1984) 154 CLR 178.

Winding up is the characteristic remedy in circumstances where a working relationship predicated on mutual co-operation, trust and confidence has broken down, whether resulting in deadlock or otherwise. Equity would not ordinarily order the continuation of such an association where it would be a futility, would require continuing supervision or would be tantamount to specific enforcement of a contract of personal services.[16] As Dr Spry has observed,

courts of equity do not ordinarily enforce, by orders of specific performance the maintenance of partnerships … The considerations underlying the rule are not merely based on difficulties of enforcing the rights of the parties, for the refusal to intervene also depends on the undesirability, as a matter of policy, that unwilling persons should, despite their opposition, be obliged to maintain confidential and intimate relationships. [17]

[16]I C F Spry LL.D, The Principles of Equitable Remedies – Specific Performance, Injunctions, Rectification and Equitable Damages (7^th ed, 2007) 122-3. As to continued superintendence by the court generally, see Spry at 103-108 and as to enforcement of contracts involving special personal relationships generally, see Spry at 119-125.

[17]I C F Spry LL.D, The Principles of Equitable Remedies – Specific Performance, Injunctions, Rectification and Equitable Damages (7^th ed, 2007) 122-3.

In the present case, if the parties were, in essence, partners who envisaged continuing personal participation in the conduct of the business, mutual fiduciary duties would apply independently of Ebrahimi principles, and indeed, the intended transfer of shares to the minority investors never occurred.

Whether within a corporate structure or not, the underlying relationship, rights and obligations of partnership or quasi-partnership would be recognised. In either case, somewhat ironically perhaps, the remedy of restraining the exercise of a legal power to expel a person is typically granted in the context of his or her application to wind up the association.

As his Honour found, the invocation of Ebrahimi (or the partnership principles which informed it) was inapposite where, as in the present case, the dissolution of the parties’ association was not sought.

In the context of their Ebrahimi argument, the appellants at trial, and in written submissions on appeal, contended that the parties were partners or quasi-partners. The respondent disputed that. Before us, the appellants ultimately did not press the contention that the parties were partners or quasi-partners. Further, counsel made clear that the appellants did not seek to continue their personal participation in the management or conduct of the business, but simply to maintain their investment.

Breach of Trust

The appellant contended that his Honour erred in failing to hold that the notices of compulsory redemption were vitiated by a breach of trust because the trustee did not provide the Deacons Consulting report to the BGV valuer. In my opinion, his Honour did not err as alleged. In circumstances where Mr Hills had informed the valuer of the Deacons Consulting report and was told that it was not required; all the investors were contacted by the valuer and had the opportunity to make submissions and to provide the report, but did not do so; Mr Hills’ evidence that he had abandoned any intention to franchise was accepted; and the bona fides of the BGV valuation and its due recognition of proposed expansion were unchallenged; there was no basis for concluding that the trustee breached either its duty of good faith or care, skill and diligence in failing to provide the Deacons Consulting report to the BGV valuer.

Estoppel

In Walton’s Stores, Brennan J stated:

In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant’s property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff’s reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.[18]

[18]Walton’s Stores, 428-9.

The trial judge appeared implicitly to accept that all elements necessary for proprietary estoppel, save for a sufficiently clear and unambiguous representation, were established.

On appeal, counsel for the appellants argued that his Honour erred in finding that the long term assumption was too vague and ill-defined to found an estoppel.

Counsel submitted that his Honour misapprehended the applicable principles and overstated the degree of certainty and clarity required by the relevant authorities.

His Honour relied only on Lord Denning MR’s statement in Woodhouse (cited by Mason and Deane JJ in Legione v Hateley), which required a higher standard of clarity for an estoppel than for a variation of contract.

Before the trial judge, the meaning of the ‘long term assumption’ said to found the estoppel arose only in relation to ascertaining the minimum equity. Argument was not directed to the degree of clarity and certainty necessary for a representation in estoppel.

His Honour asked the appellants’ counsel to specify what time span was comprehended by the long term only in that limited context. He did not have the benefit of any specific submissions on the character and quality required of a representation in estoppel. He was not directed to Flinn v Flinn,[19] Australian Crime Commission v Margaret Gray[20] and Wright v Hamilton Island Enterprises Limited.[21]
[19](1999) 3 VR 712.
[20][2003] NSWCA 318.
[21][2003] QCA 36.

It is well-established that a court, when construing a representation said to found an estoppel, need not strive to ascertain a meaning as it must when construing a contract. Further, as Woodhouse made clear, where a party to a contract makes an ambiguous representation reasonably capable of two or more constructions, it would not ordinarily estop the representor from denying the other party to the contract an indulgence if the same representation could not effect a binding variation.

Nevertheless, an analysis of the relevant authorities makes clear that Lord Denning’s statement in Woodhouse was informed by the specific context of variation of contract. In Legione v Hateley, Mason and Deane JJ, in addition to referring to Woodhouse, cited authorities which expressed the requisite standard of clarity for representations in estoppel in more liberal terms, including that of Isaacs ACJ in Western Australian Insurance Co Ltd v Dayton.[22] His Honour there, in relation to a representation sufficient to found an estoppel in pais, adopted statements in Low v Bouverie.[23] In Low v Bouverie, Kay LJ stated that ‘it is essential to shew that the statement was of such a nature that it would have misled any reasonable man, and that the Plaintiff was in fact misled by it’[24] Bowen LJ stated that the statement ‘must be such as will be reasonably understood in a particular sense by the person to whom it is addressed’.[25] Bowen LJ also stated that ambiguity did ‘not necessarily mean that the language must be such that it cannot be open to different constructions, but that it must be such as will be reasonably understood in a particular sense by the person to whom it is addressed’.[26]
[22](1924) 35 CLR 355.
[23](1891) 3 Ch 82.
[24]Low v Bouverie (1891) 3 Ch 82, 113.
[25]Low v Bouverie (1891) 3 Ch 82, 106.
[26]Ibid.

Thus, from an early stage, a representation in estoppel was to be assessed by how it would be reasonably understood by the addressee in the context of the surrounding circumstances.

Equity does not shrink from ascribing meaning to a representation and mere imprecision or loose definition will not preclude a remedy for unconscionability, at which proprietary estoppel is ultimately directed.

The relevant authorities exemplify a wide variety of apparently vague, imprecise and incomplete representations which have been construed in context and given effect.

Further, while a failure to give effect to an inherently ambiguous representation in the sense in which it was understood by the representee will rarely involve unconscionability justifying estoppel, Lord Hailsham recognised in Woodhouse that if the ambiguity is that of the representor, who induces someone to act to his detriment, the representor may be estopped.

In Woodhouse, the English buyers of Nigerian cocoa sought to vary their written contracts, which provided that the Nigerian sellers would be paid in Lagos in Nigerian pounds. At the time of entry into the contracts, the pound sterling and the Nigerian pound were of equal value. The negotiations for variation were initiated due to the buyers’ fears that the pound sterling would shortly be devalued.

A series of letters between the representatives of the buyers and sellers discussed the mode of payment, with the devaluation risk in mind. The correspondence culminated in a letter from the buyers’ representative requesting the sellers ‘to accept payment … in sterling in Lagos’, to which the sellers’ representatives replied that ‘payment can be made in sterling and in Lagos …’.[27]
[27]Woodhouse AC Israel Cocoa Ltd v Nigerian Produce Marketing Co Ltd [1971] 2QB 23, 56.

The devaluation of sterling occurred shortly thereafter and, if the sellers’ response meant that the pound sterling would become the currency of account, the sellers would bear the loss occasioned by the devaluation. If, on the other hand, the sellers’ letter meant only that the pound sterling would become the currency of payment, the contract value would still be determined in Nigerian pounds. As the Nigerian pound was more valuable than a pound sterling following the devaluation, a greater number of pounds sterling would henceforth be required to make it up. On that view, the buyers would bear the loss of the devaluation.

The Court of Appeal considered that the sellers’ representation was not sufficiently clear and unequivocal either ‘to establish that the parties had agreed to vary their bargain [or] to prevent one of them from denying that he had agreed to do so.’ [28]
[28]Ibid, 64, (Phillimore LJ).

Lord Denning MR considered it ‘extraordinary’ that although the trial judge concluded that the representation, according to its ordinary and natural meaning, could not establish a variation of contract, he nevertheless found that it was effective to estop the sellers from denying the different meaning placed on it by the buyers, who thereupon acted to their detriment.

It was in that context that Lord Denning MR made the statement which I have cited above at [84].

On appeal to the House of Lords,[29] in that case, Lord Hailsham stated:
[29]Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741.

Counsel for the appellants was asked whether he knew of any case in which an ambiguous statement had ever formed the basis of a purely promissory estoppel, as contended for here, as distinct from estoppel of a more familiar type based on factual misrepresentation. He candidly replied that he did not. I do not find this surprising, since it would really be an astonishing thing if, in the case of a genuine misunderstanding as to the meaning of an offer, the offeree could obtain by means of the doctrine of promissory estoppel something that he must fail to obtain under the conventional law of contract. I share the feeling of incredulity expressed by Lord Denning M.R. in the course of his judgment in the instant case when he said (1971) 2 QB 23, at pp 59-60:
“If the judge be right, it leads to this extraordinary consequence: A letter which is not sufficient to vary a contract is, nevertheless, sufficient to work an estoppel - which will have the same effect as a variation."

…
If, however, the two letters were insufficiently unambiguous and precise to form the basis, if accepted, for a variation in contract I do not think that their combined effect is sufficiently unambiguous or precise to firm the basis of an estoppel … against a vendor who had never consciously agreed to the proposition.[30]

[30]Ibid, 757-758.

Lord Hailsham further observed:

[i]n so far as there may be any ambiguity, and I do not myself think there is any, it originated in the letter of September 20 which came from the buyers and not in the reply originating from the sellers. I regard this as an important consideration…[31]
The short, and to my mind conclusive answer … in the present case is that ambiguity, if any in the whole correspondence originated in the letter from the alleged representee and not from the alleged representor. In such a case, I would have thought that justice, law and common sense demanded that the alleged representor should not be made to bear any financial loss arising from the ambiguity. [32]

[31]Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741, 755.

[32]Ibid, 775-776.

Lord Cross stated:

… it surely cannot be that a man who in response to a request for an indulgence which he reasonably interprets in one way makes an unenforceable promise as to his future conduct which the other party reasonably interprets in a sense different from that intended can be in a worse position that if the request for an indulgence had been an offer to contract and the granting of the indulgence an acceptance of the offer.[33]

[33]Ibid, 757-758.

In Legione v Hateley, although Mason and Deane JJ cited the statement of Lord Denning MR in Woodhouse to amplify the principle that a representation must be clear in order to found an estoppel, their main application of the principles indicated a more flexible approach, unconstrained by the particular context of comparison with variation of contract. Their Honours observed:

The requirement that a representation as to existing fact or future conduct must be clear if it is to found an estoppel in pais or a promissory estoppel does not mean that the representation must be express. Such a clear representation may properly be seen as implied by the words used or to be adduced from either failure to speak where there was a duty to speak or from conduct. Nor is it necessary that a representation be clear in its entirety. It will suffice if so much of the representation as is necessary to found the propounded estoppel satisfies the requirement. Thus, a representation that a particular right will not be asserted for at least x days is not rendered, for the purposes of promissory estoppel, unclear or equivocal merely because the words used are equivocal as to whether the relevant period is x days, x plus 1 day or x plus 2 days. If what is said or done amounts to a clear and unequivocal representation that the particular right will not be asserted for a period of at least x days, a representation to that effect can be relied on to found an estoppel.[34]

[34]Legione v Hateley (1983) 152 CLR 406, 438-439.

In Flinn v Flinn,[35] Brooking JA extensively analysed both reported and unreported cases on representations in estoppel. In a magisterial exposition of applicable principles, his Honour emphasised the characteristic liberality and flexibility with which courts of equity approached the construction of representations in order to redress unconscionability. In Flinn v Flinn, the respondents, a married couple, were invited by their elderly uncle and his wife (‘the testators’) to occupy and improve the testators’ dairy farm. The respondents lived on and improved the farm. In 1988, the uncle promised to leave them an interest in the farm. In 1990, the uncle and his wife executed ‘mirror’ wills leaving their estates to the surviving spouse. In the event that the spouse did not survive the testator, they devised one half of the farm to the respondents and the other half to the testators’ son, who had conducted unsuccessful financial ventures and had, at one stage, been adjudicated bankrupt. In 1993, the uncle made an ‘enhanced promise’ to the respondents that he and his wife would amend their wills to leave the entire farm to the respondents, if they in turn paid an amount to the son ‘sufficient to put bread and butter on the table’[36] for him. The testators again made mirror wills, devising the entire farm to the respondents on condition that they paid the son the sum of $150,000 over 10 years plus interest.
[35][1999] 3 VR 712.
[36]Flinn v Flinn (1999) 3 VR 712, 721, [29].

The uncle predeceased his wife who, in poor mental and physical health, executed a power of attorney to her son. She made a new will which made no provision for the respondents. At first instance, Gillard J held that although there was no enforceable agreement due to uncertainty about the interest in the farm, the respondents had a proprietary estoppel, based on the 1988 promise and the enhanced promise in 1993.

The Court of Appeal upheld the decision of the trial judge. It rejected the appellant’s argument that the representation was not sufficiently ‘unambiguous’, ‘clear’ or ‘unequivocal’ to found an estoppel.

Brooking JA (with whom Charles and Batt JJA agreed), referred to Lord Kingsdown’s early, authoritative recognition in Ramsden v Dyson[37] that where someone takes possession of land and expends money on it under an expectation created or encouraged by the landlord, equity will compel the landlord to give effect to the promise or expectation and even ‘if … there appears to be such uncertainty as to the particular terms of the contract as might prevent a Court of equity from giving relief if the contract had been in writing but there had been no expenditure, a Court of equity will nevertheless, …interfere in order to prevent fraud… ‘.[38]
[37](1866) LR 1 HL 129.
[38]Ramsden v Dyson (1866) LR 1 HL 129, 170-171.

Ramsden v Dyson was followed in cases such as Plimmer v The Mayor, Councillors and Citizens of the City of Wellington[39] (where the Judicial Committee observed that an equity need not fail merely because the interest to be secured had not been expressly indicated) and Unity Joint Stock Mutual Banking Association v King[40] in which (although, as Brooking JA noted, ‘the nature of the promise or expectation in this case is difficult if not impossible to determine’),[41] relief was granted.
[39](1884) 9 App. Cas. 699.
[40](1858) 25 Beav. 72.
[41]Flinn v Flinn (1999) 3 VR 712, 739 [83].

In Inwards v Baker,[42] the Court of Appeal held that a son could occupy a bungalow for as long as he wished, ‘declining to confine the principle to “an expectation of some precise legal term” ’.[43] In Crabb vArun District Council,[44] there was no agreement as to the nature or price of a propriety right, but ‘that did not matter’.[45]
[42][1965] 2 QB 29.
[43]Flinn v Flinn (1999) 3 VR 712, 740 [84]
[44][1976] Ch 179.
[45]Flinn v Flinn (1999) 3 VR 712, 741 [89] (Brooking JA).

In Jones v Watkin,[46] Slade LJ acknowledged that he was initially ‘troubled by the equivocal nature of the promises as so found which, by their nature, would not have been capable of giving rise to a legally binding contract‘. He concluded, however, that although ‘it may be surprising that a promise to confer an interest in property which is so equivocal in terms that it would be incapable of giving rise to a binding contact may be capable of conferring on the promisees a right in equity to transfer of the whole property’, it was ‘simply one instance of equity supplementing the law. The equivocal nature of the promises … is clearly one relevant factor when considering whether or not it would be unconscionable’ to permit a reliance on legal title.[47]
[46]Unreported 26 November 1987, [1987] CAT 1200.
[47]As cited by Brooking JA in Flinn v Flinn (1999) 3 VR 712, 742 [91].

In Flinn v Flinn, Brooking JA found that the representation was not too uncertain to found a proprietary estoppel.[48] The promises were to be considered in their total factual context, including the background circumstances. The uncertainty of the condition of payment, similarly, although fatal to the existence of a contract, did not prevent an equity from arising.
[48]Flinn v Flinn (1999) 3 VR 712, 743.

Brooking JA stated:

As the review of the authorities over the last 200 years shows, uncertainty preventing the creation of a contract has never been regarded as necessarily preventing the beneficial intervention of equity. Time and again an equity has been held to exist where no contract had arisen, the court often going a long way in giving effect to what the law of contract would ignore as an impossibly loose arrangement. The present case lies within the reach of the long and flexible arm of equity. [49]

[49]Flinn v Flinn (1999) 3 VR 712, 743.

He observed that assessment of the degree of certainty was not to be considered in isolation from all the circumstances, including preceding, contemporaneous and subsequent events.

In Flinn v Flinn, after making the enhanced promise in 1993, the testators had executed wills leaving the entire property to their nephew and his wife as promised, on condition that a specified sum was paid to their son by instalments. While that circumstance could not be used to ‘salvage the suggested contract’, it constituted legitimate guidance to show ‘and indeed in a formal and authoritative way - what the donors themselves, as the authors of the condition … regarded as an appropriate provision for [their son]’.[50]
[50]Ibid, 743, [95].

In Australian Crime Commission v Margaret Gray,[51] the New South Wales Court of Appeal considered claims for equitable compensation made by a husband and wife who were promised by an officer of the National Crime Authority (‘NCA’) that if they entered a witness protection program and co-operated with the NCA, they would ‘be looked after’ and ‘would not be financially disadvantaged’.[52]
[51][2003] NSWCA 318.
[52]Ibid, [70].

At first instance, the claimants had received a sum representing the income tax payable on the benefits received in the witness protection program, the costs of rehabilitation for both husband and wife and compensation for the loss suffered by the wife in selling a business interest.

The appellant argued that the promise that ‘you will not suffer any financial disadvantage from entering the program’ was too ambiguous to satisfy the requirements of promissory estoppel. It could mean either that the claimants would be provided with income to lead a reasonably comfortable life until any risk subsided, or that they would receive an income similar to their existing, legally earned income until the risk had passed. The appellant submitted that far greater precision, including the specification of amounts, dates and other terms, was necessary.

Ipp JA rejected that contention. He observed:

As Flinn v Flinn demonstrates, there have been many instances where representors have not been able to escape responsibility merely because of ambiguity or lack of clarity in the representations they have made, even where it was difficult to resolve uncertainties inherent in them.[53]

[53]Australian Crime Commission v Margaret Gray [2003] NSWCA 318, [195].

Ipp JA acknowledged[54] that although the well-settled approach to ambiguity in the construction of contracts did not apply to representations said to found promissory estoppel, it was clearly established that such representations should be construed by reference to the context in which they were made, and given the natural and ordinary meaning which would be conveyed to a normal person.
[54]Australian Crime Commission v Margaret Gray [2003] NSWCA 318, [182] – [183].

His Honour referred to Flinn v Flinn and Brooking JA’s exposition of the relevant authorities, some of which involved representations which left essential elements unspecified or unclear, but nevertheless founded an estoppel. He also referred to Walton’s Stores,[55] in which considerable judicial divergence over the meaning of the representation was no impediment to the establishment of proprietary estoppel.
[55](1998) 164 CLR 387, 428-429.

He observed that the traditional requirement for an unambiguous representation in proprietary estoppel was associated with the goal of preventing unconscionability, because ‘[u]nconscionability is usually difficult to establish when the representation is ambiguous or unclear.’[56]
[56]Australian Crime Commission v Margaret Gray [2003] NSWCA 318, [200].

Such reasoning also explained the outcome in Woodhouse and Legione v Hateley, which both involved a representation made by one contracting party to another, who sought an indulgence in relation to contractual obligations. In such circumstances, where the representation was reasonably capable of bearing an innocent meaning, it was not unconscionable for the representor to depart from it. To hold otherwise would be to place the representor in a worse position due to an unenforceable promise as to future conduct than he or she would have been if the request for an indulgence had been an offer to contract, and the granting of the indulgence was an acceptance of the offer.

Ipp JA also emphasised[57] that, in his view, ambiguity could not, in all circumstances, negate the unconscionability on which proprietary estoppel is based. He relied in that context on Lord Hailsham’s observations in Woodhouse[58] and some of the cases referred to in Flinn v Flinn. He posited a hypothetical example of a promise to deliver a ‘large quantity’ of produce on which the representee relied and acted to its detriment. The impossibility of determining the metric or imperial quantities would not, he said, exclude liability to pay equitable compensation.
[57]Ibid, [205].
[58]Ibid, 757.

His Honour concluded that the representation in the case before him was not relevantly ambiguous. It was possible to determine how it would reasonably be understood by the person to whom it was addressed, by reference to a number of factual matters at the time the representations were made, including the risk to the claimants’ lives and property; their strong incentive to enter the witness protection program; the fact that the husband’s income derived from unlawful transactions; that the claimants would be unable to earn an income while in the witness protection program and for a time thereafter; their fears of summary dismissal from the program; and the importance of their evidence and co-operation to the NCA.

Those matters informed the parties’ understanding of what the witness protection program meant. Reasonableness also constrained the promise, and conferred a finite and objective quality.

Mason P (with whom Tobias JA agreed) expressly agreed with Ipp JA’s analysis of the approach to representations in estoppel, although disagreeing with his conclusions on what constituted reasonable financial support and rehabilitation. That outcome illustrates that a representation may be sufficiently certain to found an estoppel despite judges disagreeing as to its content.

In Wright v Hamilton Island Enterprises Limited,[59] the respondents, by written agreements with the appellant’s predecessor in title, were granted licenses to conduct a restaurant and bar respectively on a Hamilton Island resort, for a five and a half year term. The written agreements did not refer to a right of renewal. The appellant’s predecessor made oral promises prior to the respondents’ entry into the written agreements, to the effect that ‘so long as the promisees had the interests of the resort at heart, provided a good restaurant (or bar), paid their accounts to [the company] on time, and complied with the requirements of their respective written licence, that licence would be renewed at the licensee’s request and be ongoing’.[60]
[59][2003] QCA 36.
[60]Ibid, [22].

The representations of future renewal induced the respondents to establish their respective businesses and to refrain from pursuing alternative activities.

Jerrard JA (with whom McMurdo P on that issue agreed) held that the appellant was estopped from denying an agreement to renew the licence for further five year periods, provided that the terms of the licences were not breached.

His Honour did not consider that the representations were insufficiently clear, precise and unambiguous to give rise to an estoppel merely because they did not specify the mechanism for exercising the election to renew, and whether the rights were assignable or subject to continuing personal residence on the island.

He stated:

the fact that the representations were limited to particular matters does not mean that they were not clear or precise. All it means is that there were no representations made about any other matters. The representations … are clear enough …[61]

[61]Ibid, [57].

McMurdo P accepted the trial judge’s finding that ‘the outer limit of the tenure of the licences was measured by a life rather than eternity’.[62] Although the representations did not cover a number of significant matters, her Honour found that ‘the fact that the representations here did not contain details of the method of renewal does not make them ambiguous’.[63] Rather, the representations were unambiguous in the sense that they ‘would not mislead any reasonable person’ and were ‘not capable of being misinterpreted or misunderstood’.[64]
[62]Ibid, [8].
[63]Ibid, [9].
[64]Ibid, [8].

An analysis of the relevant authorities, which were not cited to his Honour, demonstrates that the statement of Lord Denning MR, on which the trial judge particularly relied, arose from a relatively narrow comparative context and is, in isolation, a potentially misleading articulation of equity’s characteristically liberal approach to the construction of representations when it is necessary to prevent unconscionable conduct.

A representation which is insufficiently certain or complete to create a contract may found proprietary estoppel. Where necessary to inhibit unconscionability, equity will construe a representation robustly in context, to determine its meaning as reasonably understood by the addressee. In my opinion, the standard of certainty, clarity and completeness required of the representation cannot sensibly be determined in isolation from other elements of proprietary estoppel in the circumstances of each particular case. Moreover, ambiguity or indeterminacy generated by the representor in the context of unconscionable conduct should not confer immunity from equity’s ‘long arm’.

In the present case, the representation that the investment would be for ‘the long term’ was not made on a single occasion or in an identical form, but was made in various forms on a number of occasions, both before the first investment of funds in about October 2003 and the second investment of funds in about March 2005, as evidenced by the following matters:

(i) From the outset and consistently thereafter until August 2005, Mr Hills, in oral discussions and in a series of proposal briefs which he authored, stated that the investment was for ‘the long haul’, ‘the long term’ or ‘a long time’. The stated plan was to expand the business significantly and to reinvest its profits for that purpose, rather than to pay dividends. It was emphasised that the proposal would suit long term investors and dividends were not a priority.

(ii) Mr Hills testified that he warned investors at the outset that ‘you might not make money right away’.

(iii) Mr Jackson deposed that Mr Hills said ‘[w]e’re in this together for the long haul …’. Mr Jackson deposed that when entering into the arrangement, he understood that it ‘was to be as a long term investor in the business rather, I considered that I was providing funds by way of venture capital and expected to hold my interest in the business for many years to allow me to participate in the anticipated future growth and expansion of the business that was envisaged and contemplated in the business plan. I am informed by West and believe that this was also his understanding’.

(iv) Mr West deposed that Mr Hills told him that ‘if the business is to grow there may not be any return on your investment, no dividends in the early years because if the business expands as I expect it to, all its earnings will be required to fund its development. You may need to put in further capital. It will be a long-term investment … I want to create a large company, not one or two shops’. Mr West deposed that ‘I understood that we were all a team, in it for the long haul … ‘.

(v) There were a number of conversations in November 2004 between Messrs Hills, Jackson West and Bourke as to ‘the ongoing plans to expand the business long term and the additional capital that would be required from all of us to allow the expansion’.

The context in which the representation was made and, as recognised in Flinn v Flinn, subsequent circumstances, may provide guidance to the meaning it conveyed. The following circumstances are relevant to the construction of the representation that investment in the business would be for ‘the long term’:

(i) The minimum time commitment for the investment was a period of two years, in order to retain the free two per cent of units.

(ii) The business, although profitable, has at no stage made distributions, save for an amount to cover certain taxation liabilities. All of the profits were otherwise reinvested in expansion.

(iii) The business secured a considerable number of leases, consistently with its expansion plan, which (save for the factory lease for three years and the Chadstone lease for six years), had five year terms with two options for renewal of five years each and, in one case, was for a 15 year term.

(iv) Mr Hills acknowledged in cross-examination that the ‘long term’ for the business had not arrived as at August 2005. Rather, he conceded that he had changed his mind and sought to expel the minority prematurely because circumstances had not evolved in accordance with his expectations.

(v) In about late 2004, Mr Hills requested the investors to advance further capital amounting to a total of $240,000. In late 2004, Mr Jackson and Mr West, together with other parties, invested additional funds for further expansion, at Mr Hills’ request.

(vi) By January 2005, the business had grown to the point where it could not meet consumer demand and it was necessary to acquire its own factory premises.

(vii) In March 2005, a factory in Coburg was leased and began production. It ultimately manufactured 60 per cent of the chocolate and became the Koko Black headquarters.

(viii) The 2005 Annual Report dated 30 June 2005 stated ‘At this stage of the business’s maturity there is ample room for experimenting on site selection before more accurately forming key criteria’. It also stated that ‘Koko Black although successful by many measures in the first year is by no means an assured success … Koko Black to date is a proven concept as a very small scale over a short period of time … ‘. The Report stated that, in relation to matters such as the exclusivity of the brand and product recognition at market level, there was good progress at local level only. The factory infrastructure was noted to be ‘in place to facilitate growth’. It was stated that the opportunity to achieve the ultimate goal of being ‘the number one premium chocolate brand in Australia was achievable from our current position’. The business was about to ‘enter a new phase’ – it was to ‘continue to develop and grow the brand’ and ‘enter new territories – at least three more locations by June 2006’. The core strategy was to ‘grow as fast as possible’ and ‘franchising is the best way to achieve this strategy’. The Report concluded that ‘Koko Black is poised for great change and increased risk’.

(ix) In late 2005, a franchising feasibility study at an estimated cost of $110,000 was conducted, which Mr Hills stated ‘could be seen as a long-term investment for the business’.

(x) As at December 2006, the reinvestment policy continued to apply and only sufficient dividends to pay taxes were to be paid. Mr Hills acknowledged that the business was on the verge of future growth, a goal which he described in the 2006 Annual Report as having ‘some urgency’.

The terms of the representation, considered in context and by reference to a number of the relevant circumstances, indicate that the meaning conveyed was that investors would be entitled to retain their investment until either successful expansion on a substantial scale was achieved, substantial capital gain secured and the routine reinvestment of all profit was no longer required, or, at least, until there had been a reasonable opportunity to achieve those goals. The compulsory redemption of the investors’ interests while the reinvestment policy continued and the business was on the verge of a new phase of significant growth is inconsistent with that meaning, which clearly accords with the understanding to which Messrs Jackson and West deposed. Although ‘the long term’ suggests a stage of development, as assessed by Mr Hills, rather than a specific period of time, some guidance is provided by the terms of the leases. The first lease, acquired in 2003, had a maximum term of 15 years (from 2002) and the last lease commenced on 1 February 2007 had a term of 15 years. Only one lease was for a term of three years.

In such circumstances, I conclude that ‘the long term’ had not arrived at the date of the service of the compulsory redemption notices.

To the extent that the representation was ambiguous or indeterminate, the indeterminacy was created by Mr Hills, who wrote the proposal briefs and explained the business goals to the investors. The difficulty of ascribing a fixed period to the representation is not, in such circumstances, an obstacle to equitable relief.

In the present case, the undisputed facts reveal that the majority unit holder, in order to implement his business plans, induced the appellants to invest funds and otherwise to participate in the conduct and management of the business and to forgo any return or benefit from its successful operation and growth. The appellants’ investment of funds and other contributions were induced by, inter alia, Mr Hills’ repeated, although relatively imprecise representations that their investment would be for ‘the long term’, in order to facilitate significant expansion, and, implicitly, consequent capital growth.

The maximum term of the majority of the leases was 15 years and the policy of reinvestment of profits was still in place at the date of service of the notices. Mr Hills did not apprehend that the ‘long term’ as originally contemplated had arrived and the business was on the verge of further growth requiring an urgent response. In February 2007 (less than three and a half years after the establishment of the Unit Trust in November 2003), Mr Hills, in opportunistic reliance on a recently discovered legal power in the trust deed, caused the trustee to serve notices of compulsory redemption on the appellants.

If their units were compulsorily acquired pursuant to the notices, the appellants, having made the necessary sacrifices in the start-up phase, would be deprived of a reasonable opportunity for, if not the certainty of, the capital growth

anticipated following the expansion phase and the maturation of the business.

The premature expulsion of the appellants, to their detriment, and contrary to the expectations induced by Mr Hills, would, in my opinion be unconscionable.

In such circumstances, the trustee should be estopped from acting on the notices of compulsory redemption served on or about 7 February 2007. Although it is unnecessary for the purposes of this proceeding to determine the precise meaning of ‘the long term’, it cannot be understood independently of the practice and policy of retaining substantially the profits for the purposes of expansion rather than paying dividends. In my opinion, ‘the long term’ would appear to be coterminous with the bona fide maintenance of that policy and practice.

It might be contended that restraining the compulsory redemption of the appellants’ units effectively ‘yokes together’ quasi-partners whose mutual trust and confidence has broken down, and who are incapable of co-operative participation in the future conduct of the business. The respondents, however, deny that the parties were partners or quasi-partners. Further, counsel for the appellants made clear that they do not seek henceforth to participate personally in the management and conduct of the business, but merely to maintain their investment. While there can be no assurance that the parties will maintain a harmonious relationship, an injunction to restrain the compulsory redemption of the appellants’ units does not, in itself, mandate the continuation of the association. In particular, any beneficiary may, on proper grounds, seek relief, including the winding up of the Unit Trust at any stage.

Conclusion

In my opinion, the appeal should be allowed.

FORREST AJA:

I agree with Dodds-Streeton JA. I also join with Ashley JA in relation to the matters set out at [2] and wish to add the following. The learned trial judge’s

findings of fact were not challenged in this Court. They could hardly have been. His Honour, impeccably and concisely, assembled the facts relevant to the dispute between the parties. However, his Honour’s legal analysis was considerably hampered by the way in which the appellants’ case was presented. As Ashley JA has observed, apparently sound legal principles appear to have been avoided in preference to other contentions, a number of which were going to be difficult to sheet home.[65]

[65]See also Dodds-Streeton JA, [95] – [99].

The argument upon which the appellants were successful before us, that based on estoppel, was the subject of only passing reference by the appellants in closing submissions to the trial judge; the focus being on other arguments which had limited prospects of success. His Honour’s task, in considering the estoppel issue, was made all the more difficult by the failure of the appellant to refer his Honour to several authorities relevant to consideration of the decision of Lord Denning MR in Woodhouse.[66]
[66][1971] 2 QB 23. Four Australian decisions decided in the past ten years were referred to in the appellant’s written outline on the appeal in respect of the estoppel issue. None were provided to the trial judge – including the important decisions of Flinn v Flinn (1999) 3 VR 712, Australian Crime Commission v Margaret Gray [2003] NSWCA 318 and Wright v Hamilton Enterprises Pty Ltd [2003] QCA 36.

In a case in which a number of discrete equitable principles were argued before his Honour by the appellants, with different degrees of emphasis, it is understandable that his Honour relied heavily upon what had been said in Woodhouse. The problem, as was exposed in discussion on the appeal and comprehensively in the reasons of Dodds-Streeton JA, at [129]–[177], was that the Woodhouse principles were of limited application and necessarily had to be looked at in the context of the issues in that case, particularly when viewed in the light of both prior and subsequent English and Australian decisions.

I make these observations to emphasise that where a party wishes to propound a certain legal point at trial, it is appropriate (indeed some may say necessary) for that party to provide as much assistance as it can to the trial judge in determining that issue. That obligation extends not only to submissions but also to the provision of relevant authorities supporting the particular assertion. Simply articulating a position amongst a raft of other arguments without any considered submissions or analysis of the authorities places an impossible burden upon the trial judge.

In criminal cases[67] courts of appeal have repeatedly emphasised the positive obligation on counsel to assist the trial judge in respect of legal issues which arise in the course of a trial. There is no reason to think that such an obligation does not extend to civil proceedings. In this case his Honour was not assisted as he should have been by the appellants on the one point upon which the appellants have now succeeded.
[67]See R v Fordham (1997) 98 A Crim R 359, 361; R v Mahoney (2000) 114 A Crim R 130, 134; R v Fuge (2001) NSWCCA 208 [41]; and R v Roberts (2001) 53 NSWLR 138 [61]-[64]

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[2008] VSCA 86

28 May 2008