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Brief Counsel

Court of Appeal confirms your word is your bond

01 September 2014

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​A recent Court of Appeal decision confirms that a promise may become binding, even if non-contractual.  The Court did not clearly establish the circumstances in which it will enforce such promises. Each case will turn on its facts.

But the reminder for commercial players is clear: don’t think that you’re not bound by a commitment just because you’ve not contracted to perform it.  At the least, you could find yourself liable for the other person’s expenses incurred in relying on your word.  Worse, you may have to follow through – even though you may no longer want to. 

The context

The case (Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd) concerned sale and buy-back arrangements for a downtown Auckland property which Wilson Parking leased and which the owner, a company controlled by a Mr Haghi, planned to expand to include retail, residential and office space. 

To solve a temporary cash flow problem, the company sold the property to ASAP Finance Ltd on the condition that ASAP would sell it back to Fanshawe 136 Ltd (another company associated with Mr Haghi) the following year for $11.3 million – this was sufficient to provide a return on investment for ASAP but was below the property’s market value of $15.5 million.

The parties to this deal later changed – but not the terms nor the underlying ownership interests – with ASAP being replaced by Fanshawe Capital Ltd and Fanshawe 136 Ltd by 136 Fanshawe Ltd, an entity whose sole director and shareholder was Mr Haghi’s sister.

Both sale and buy-back agreements were subject to Wilson Parking, as the tenant, waiving its rights of first refusal.  By letter dated 20 September 2012, Wilson confirmed “that if Mr Haghi or a related party were to repurchase the property …, Wilson Parking would waive [its] Right of First Refusal …”  In reliance on this, Mr Haghi spent time and money on the development project. 

However, months out from the buy-back date, and just as Mr Haghi had obtained finance for the buy-back at a fee of $500,000, Wilson wrote to Fanshawe Capital expressing interest in purchasing the property at the discounted price. 

This blindsided Mr Haghi who tried to resolve the issue with Wilson but the discussions failed to clear the air, and Wilson sought to proceed with the purchase.

Mr Haghi sought redress in the High Court, obtaining an order for specific performance of the buy-back agreement and a declaration that Wilson could not deny that it had waived its right of first refusal.  Wilson appealed to the Court of Appeal.

Court of Appeal

The main issue for the Court was whether a reliance-based (i.e. the Mr Haghi’s expenses incurred in reliance on Wilson’s promise) or an expectation-based (i.e. the performance of the promise) remedy was appropriate. 

Wilson argued that its broken promise could be adequately remedied by paying Mr Haghi’s expenses and that the Court shouldn’t require Wilson to make good on its promise to waive its Right of First Refusal.  If successful in this argument, it could complete its purchase of the property.

The Court acknowledged the “elusive” nature of any attempt at a definitive and exhaustive statement of principle of when expectation-based relief is appropriate.  It opted for a “fact-dependent” approach instead, and held that there were three elements to be considered:

  • the clarity and nature of the assurance or promise
  • the degree and consequences of the promisee’s reliance on it, and
  • the remedy required to achieve a “just and proportionate” outcome.  For example, expectation-based relief may be inappropriate where the claimant’s expectation is disproportionate to the detriment suffered.

Applying those principles, the Court considered that Wilson’s promise to waive its right of first refusal was unequivocal and assured Mr Haghi that he could safely invest in the property’s development (which he did). 

Wilson’s attempt to gazump Mr Haghi’s buy-back was “opportunistic” and not in good faith.

Against reliance-based relief was, among other things, that Mr Haghi’s losses were substantial, that the value of his expectation was not readily quantifiable, that Wilson would achieve a windfall gain (the difference between the property’s value above purchase price and Mr Haghi’s costs) and that Mr Haghi’s purpose throughout had been to buy back the property.

For those reasons, the Court dismissed the appeal and upheld the High Court’s order for specific performance of Fanshawe Capital’s sale to Mr Haghi and the declarations sought.

Comment

The Court’s decision underlines the risk that commercial players will be held to their promises even if they lack a contractual foundation.  The outcome in this case may seem a fair response to Wilson’s identified ‘opportunism’.  But it may also unduly raise expectations of the courts’ willingness to force parties to live up to non-contractual statements.

Arguably, the Court didn’t need to approach the relief in the way it did.  If the Court had held that Wilson had effectively waived its right of first refusal, Mr Haghi’s buy back was unconditional.  On that view, the question of what damages were payable by Wilson does not arise.  Instead the outcome from the court is that a commercial party is forced to perform a non-contractual promise worth around $3 million. 

Our thanks to Jeremy Upson for writing this Brief Counsel.

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