Let’s dispense with the formalities: proprietary estoppel and land contracts

by Professor Michael Lower, CUHK LAW


Introduction

This blog post takes as its starting point the statement of Hon L Chan J. in Ng Yuk Pui Kelly v Dung Wai Man ([2019] HKCFI 210) that proprietary estoppel can be used to give effect to informal dealings in land ‘where constructive trust and proprietary estoppel overlap’ ([471]). Where does this idea come from and what does it mean?


I begin by reminding the reader of the formalities rules for contracts concerning land and for dispositions of equitable interests in land and of the ways in which equity can intervene to give effect to contracts and dispositions even when these rules are not complied with.


The relevant equitable doctrines are part performance, proprietary estoppel and the common intention constructive trust. They are separate doctrines with strong similarities to each other. They can be invoked separately, so why did Hon L. Chan J. stress the importance of the intersection of the common intention constructive trust and proprietary estoppel?


The answer is suggested by four cases cited in Ng Yuk Pui Kelly which together point to: (a) the significance of a saving provision for specific equitable doctrines in the formalities rules; and (b) the need (where there is no saving provision?) for some additional representation that, for example, the formalities rule will not be pleaded. How this need for an additional representation might be satisfied is unclear. Whether (b) should be necessary if (a) is present, and if so why this is the case, is also unclear.


Formalities for dealings in land in Hong Kong

Section 3(1) of the Conveyancing and Property Ordinance makes land contracts unenforceable unless either they are in writing or there is a written record (‘memorandum’) of their terms. The section also requires the written contract or memorandum to be signed by the ‘party to be charged’ (the person against whom it is sought to enforce the contract) or that person’s agent. Section 3(1) does not preclude reliance on the doctrine of part performance, as section 3(2) makes clear.


Section 5(1)(a) of the Conveyancing and Property Ordinance requires dispositions of equitable interests in land to be in writing; the written disposition must be signed by the person making it or that person’s agent. Section 5(1)(b) requires declarations of trust of land to be ‘manifested and proved’ in writing and signed by the person making the declaration. Section 5(2) provides that section 5(1) does not apply to ‘resulting, implied or constructive trusts’.


Section 3, then, contains a saving provision for part performance and section 5 for constructive trusts but neither provision explicitly refers to proprietary estoppel.


These formalities rules, first found in the Statute of Frauds 1677, are intended to frustrate the making of fraudulent claims supported by purely oral testimony as Lord Simon of Glaisdale explained in Steadman v Steadman ([1976] AC 536 at 558).


As Lord Simon went on to explain, however, equity quickly developed a doctrine of part performance to enforce informal contracts where it would be unconscionable to allow a claim to be defeated for want of formality. Proprietary estoppel and the common intention constructive trust are other tools at equity’s disposal to enforce claims arising out of informal land contracts or dispositions.


Ng Yuk Pui Kelly v Dung Wai Man

The recent Hong Kong case of Ng Yuk Pui Kelly v Dung Wai Man ([2019] HKCFI 210) illustrates the applicability of all three equitable doctrines to informal land contracts and dispositions.


The case concerned an oral agreement for the disposition of a beneficial interest in two offices where there was no writing to satisfy section 5(1)(a) of the Conveyancing and Property Ordinance. K orally agreed to transfer his beneficial interest in the property to his brother for HK$1 million.


Hon L Chan J. decided that the oral agreement was enforceable through the application of either the common intention constructive trust or proprietary estoppel. The agreement provided the common intention / assurance and payment of the HK$1 million was the detrimental reliance. Proprietary estoppel could be used to enforce informal arrangements concerning land ‘where constructive trust and proprietary estoppel overlap’ ([471]).


Overlap of common intention constructive trust and proprietary estoppel

The overlap between the common intention constructive trust and proprietary estoppel ‘in the area of a joint enterprise for the acquisition of land’ was pointed out by Robert Walker LJ in Yaxley v Gotts ([2000] Ch. 162).


In Kinane v Mackie-Conteh ([2005] EWCA Civ 45), Neuberger LJ said that a proprietary estoppel claim overlapped with the common intention constructive trust where there was:


‘the element of agreement, or at least expression of common understanding, exchanged between the parties, as to the existence, or intended existence, of a proprietary interest’ ([51]).


This category of proprietary estoppel case is to be distinguished from cases of passive assurances where a landowner stands by and allows a third party to improve the land because of a mistaken belief that the third party has, or will acquire, an interest in the land (Yaxley v Gotts [2000] Ch. 162 at 176 – 177, Robert Walker LJ).


Why the overlap matters

Following the enactment of the Law of Property (Miscellaneous Provisions) Act 1989, land contracts in England were invalid unless there was a signed written document complying with section 2(1) of the Act.


In Yaxley, the Court of Appeal had to consider whether the legislative intention was to prevent recourse to proprietary estoppel where the claim arose out of an informal land contract. Section 2(5) states that ‘nothing in this section affects the creation or operation of resulting, implied or constructive trusts’.


The Court of Appeal felt safe in concluding that section 2(5) ‘effectively excludes from the operation of the section cases in which an interest in land might equally well be claimed by relying on constructive trust or proprietary estoppel’. This seems to be the source of the idea that proprietary estoppel can be relied on where proprietary estoppel and the common intention constructive trust overlap.


In Cobbe v Yeoman’s Row Management Ltd ([2008] UKHL 55), Lord Scott gave it as his opinion that section 2(5) meant that the common intention constructive trust, but not proprietary estoppel, was available to enforce informal contracts concerning land ([29]).


An equitable doctrine can, then, be invoked to enforce an informal land contract where this use of the doctrine is expressly sanctioned by the legislation containing the formalities rule.


This explains why Hon L Chan J said in Ng Yuk Pui Kelly, that proprietary estoppel could be used to enforce informal arrangements concerning land ‘where constructive trust and proprietary estoppel overlap’ ([471]). The oral disposition in Ng Yuk Pui Kelly had to comply with section 5(1) of the Conveyancing and Property Ordinance and this is subject to the saving for constructive trusts in section 5(2).


Presumably, the same logic would apply in the case of attempts to invoke proprietary estoppel to enforce land contracts that should satisfy section 3(1) of the Conveyancing and Property Ordinance. If the same logic applies, proprietary estoppel can be invoked where the elements of part performance are present since section 3(2) contains a saving provision for part performance.


The need for an additional representation or ‘something more’

Might proprietary estoppel have a role to play even when there is no saving provision like section 3(2) or 5(2) of the Conveyancing and Property Ordinance or section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989?


In Actionstrength Ltd v International Glass Engineering SpA ([2003] UKHL 17) the House of Lords was concerned that if proprietary estoppel routinely rendered partly performed contracts enforceable, despite the lack of some legally required formality, it would effectively write the formality rule out of existence.


In Actionstrength, Lord Walker said: ‘it would wholly frustrate the continued operation of section 4 in relation to contracts of guarantee if an oral promise were to be treated, without more, as somehow carrying in itself a representation that the promise would be treated as enforceable’ ([52]). Lord Clyde put it another way: ‘In order to be estopped from invoking the Statute there must be something more, such as some additional encouragement, inducement or assurance’ ([35]).


What is this ‘something more’? Lord Bingham explains the sort of additional representation that might suffice:

  • that the agreement would be honoured despite the absence of writing (a representation that the formalities requirement would not be pleaded);

  • that the agreement did not fall within the formalities rule; or

  • that the agreement would be confirmed in writing to satisfy the formalities requirement ([9])

It is, of course, possible that some express words might be used which can plausibly be understood as an additional representation of the type envisaged by Lord Bingham. The assurance given by the seller in Law v Jones (1973] 2 W.L.R. 994) that: ‘I shall not go back on my word. My word is my bond. It is yours now: carry on and make all your arrangements’ are an example. This statement can easily be seen as an express assurance that the formalities requirements would not be pleaded.


Kinane v Mackie-Conteh: ‘Something more’ and the proprietary estoppel / common intention constructive trust overlap.

Actionstrength concerned the guarantees formality requirement in section 4 of the Statute of Frauds. There is no saving in the Statute of Frauds like those in sections 3 and 5 of the Conveyancing and Property Ordinance or section 2(5) of the Law of Property (Miscellaneous Provisions) Act 1989. This explains the need for ‘something more’.


Kinane v Mackie-Conteh ([2005] EWCA Civ 45) was about the Law of Property (Miscellaneous Provisions) Act 1989 and the judgment of Arden LJ (now Lady Arden) seems to suggest that ‘something more’, some additional representation, might be needed even when the proprietary estoppel claim overlaps with the common intention constructive trust (and so falls within the saving provision).


The judgment also suggests, however, that the ‘something more’ requirement might be satisfied even in the absence of an express assurance that the formalities rule would not be pleaded or would be complied with by some later written document.


Arden LJ (at [27] - [28]) seems to conclude that proprietary estoppel could be relied on because of the saving for constructive trusts in section 2(5) and there was an additional assurance that the informal agreement was valid and binding.


If the correct reading is that an additional representation is needed even when proprietary estoppel and common intention constructive trust overlap then this is puzzling. Why is the ability to bring the claim within the saving provision not enough?


Arden LJ’s judgment in Kinane seems to confirm that both requirements need to be satisfied:


‘There were two relevant difficulties for the appellant in the Actionstrength case, first, the absence of a saving for guarantees which did not comply with section 4 of the 1677 statute, and, second, the absence of any representation that the guarantee was valid and binding apart from the communication of the terms of the guarantee.’ ([30]).


In the same paragraph, she notes that the first difficulty did not apply to Kinane and that the second difficulty had been surmounted:


‘In this case, the second difficulty would have prevented proprietary estoppel arising if Mr Mackie-Conteh had returned the security agreement to Mr Kinane with a note saying words to this effect: “Here is the security agreement you asked for but you must take your own advice on it.” ’ ([30])


This may indicate that Arden LJ thought that the saving provision only helped the proprietary estoppel claim where the ‘something more’ / additional representation requirement was also satisfied.


If so, then proprietary estoppel can only be relied on by a party to an informal land contract where: (a) the legislation setting out the formalities rule also recognises the continued operation of an equitable exception to the need for compliance (such as the common intention constructive trust); and (b) there is some additional, secondary representation that the representation as to an interest in land (the primary representation) could be relied on despite the lack of due formality.


Arden LJ also seems to suggest that the additional representation will often be implied rather than express. She concludes that ‘[b]y his conduct, Mr Mackie-Conteh thereby encouraged Mr Kinane to believe that the security agreement was valid and binding. He must stand by that conduct even if he himself misunderstood the effect of section 2(1) on the security agreement’ ([28]).


It was enough that Mr. Kinane, ‘assumed that the security agreement was enforceable and thus he acted in the belief that he would be given a formal security’ ([31]). In the circumstances, the onus was on Mr. Mackie-Conteh to make it clear that he reserved his right to plead the failure to comply with the formalities rule by telling Mr. Kinane: “Here is the security agreement you asked for but you must take your own advice on it.” ’ ([30])


Neuberger LJ (now Lord Neuberger) gave a much briefer judgment in Kinane and it is less clear whether he thought that the Actionstrength need for something more would be relevant where the proprietary estoppel claim overlapped with the common intention constructive trust. Indeed, he suggests that this is not the case; only where there is no overlap is there a need for ‘something more’ ([45]).


Distinguishing proprietary estoppel and common intention constructive trust even when they overlap

Why continue to argue for proprietary estoppel if the common intention constructive trust claim is also available? The obvious answer is that the outcome may be different because of the remedial discretion associated with proprietary estoppel. Thus, Arden LJ concludes her analysis by asking herself what the appropriate relief was in Kinane. She decides that, ‘in this case’ it was appropriate to award an interest in land even though this was not the inevitable outcome ([33]).


Conclusion

Proprietary estoppel can be used to enforce an informal land contract where it overlaps with an equitable doctrine that falls within a saving provision. Even if it does not, proprietary estoppel (with the discretionary relief that characterises it) may still be available if there is an additional representation that the formality will not be pleaded or that it will be satisfied. The writer sets out his reasons for thinking that the judgment of Arden LJ in Kinane might require both the overlap and an additional representation. If this reading is correct, he confesses that he is puzzled as to why the additional representation is needed in cases falling within a saving provision.

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