Collateral contracts and contractual promises: Clarification from the High Court

Collateral contracts and contractual promises: Clarification from the High Court

On 20 July 2016, the High Court provided further clarification into collateral contracts in Crown Melbourne Limited v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26.

Crown Melbourne Limited (Crown) leased two premises to Cosmopolitan Hotel (Vic) Pty Ltd (Cosmopolitan).  Cosmopolitan held these leases over two areas in Crown’s Casino and Entertainment Complex.

The new leases were for a term of five years and did not contain an option for renewal.  It was a condition of the lease that Cosmopolitan undertook major refurbishment of the premises.

Concerned about the cost of refurbishment and the extent of this obligation under the lease, Cosmopolitan’s representative, Mr Zampelis, sought to obtain a commitment from Crown so as to enable them to continue to trade for a further five years.

In October 2008, Crown invited tenders for new leases of the premises and Cosmopolitan submitted tenders in March 2009.  In December 2009, Crown gave notice to Cosmopolitan requiring them to vacate the premises on the expiration of the 2005 lease, 31 August 2010.

Proceedings in the Victorian Civil and Administrative Tribunal (VCAT)

In July 2010, Cosmopolitan brought proceedings in the VCAT in which they alleged that a series of representations had been made to Mr Zampelis to the effect that Cosmopolitan would be given an extra term of five years following the expiration of the 2005 lease (Representation).

Cosmopolitan’s argument was that:

  • • they had been induced by the Representation to execute the 2005 leases and carry out the refurbishment;
  • • the Representation gave rise to a collateral contract which Crown was obliged to offer the tenants further five year leases;
  • • an estoppel had arisen and Crown was prevented from denying that obligation.

The Tribunal upheld Cosmopolitan’s claim based on the collateral contract and ordered that Crown pay damages of $1.6 million plus interest to Cosmopolitan.

However the Tribunal found that Crown had not expressly stated that it would renew the 2005 leases.  The Tribunal made a specific finding that a representative of Crown, Mr Boesly had informed Mr Zampelis (and therefore the tenants) that they would be “looked after at renewal time” (Statement).  In the tribunal’s view, Crown’s promise did not require Crown to offer any particular terms to the tenants other than the five year term.

Appeal to the Supreme Court of Victoria and Court of Appeal

On Appeal to the Supreme Court, Hargrave J considered that a reasonable person in the parties’ situation could not have understood the statement that the tenants “would be looked after at renewal time” would amount to a binding contractual promise to renew the 2005 leases for a further 5 years.  The Supreme Court also found that the obligation which arose from the Statement was illusory and unenforceable.[1]

This was also upheld on appeal to the Victorian Court of Appeal where the Court held that the Statement was too vague to be enforceable.

Application to the High Court

Cosmopolitan applied to the High Court for special leave to cross-appeal on the ground that no question of law was involved in the question of whether there was a collateral contract (or an estoppel) and therefore no right of appeal to the Supreme Court.

The two issues before the High Court were:

  1. whether an assurance given by Crown that Cosmopolitan would be “looked after at renewal time” could lead to a further lease by way of estoppel.”; and
  2. whether an enforceable collateral contract came into force between Crown and the tenants whereby Crown was obliged, on the expiration of the leases to grant Cosmopolitan a new lease on terms having a reasonable correspondence with the terms of the original leases.

No estoppel

The High Court found that the Statement, which Cosmopolitan asserted was a representation, did not give rise to an estoppel as the representation was not one which was able to create a reasonable assumption or expectation in question.  The court found that the evidence suggested that Crown had not agreed to renew the lease on terms acceptable to the tenant. 

The Court also found that Cosmopolitan’s representative, Mr Zampelis did not act upon an expectation that the tenants would be granted renewed leases on terms acceptable to them and that “no one in his position could reasonably have expected a renewal of the lease for five years on the same terms and conditions as had been agreed in the leases or on the terms reasonably corresponding to those terms.”[2]

The High Court held that the question of whether the communications which took place between the parties to an alleged contract are vague or incomplete is a question of law.[3]

The High Court was of the view that the statement that Cosmopolitan would be “looked after at renewal time” was not capable of conveying to a reasonable person that the tenants would be offered a further lease.

In this case, the Court was of the view that Crown’s promise to “take care of the tenant” was no more and no less than a promise to make an offer to Cosmopolitan.[4]

Lavan Legal comment

Where a promise is no more and no less than a promise to make an offer, the promisor cannot be said to be left with a choice as to whether or not to perform the promise merely because the terms of the offer to be made are left to the promisor.

The case highlights that is important to be clear about a promise or representation that is made in the course of lease negotiations as one often find themselves negotiating several issues on behalf of a client.

Where a representation is made which allows a party to act in its discretion, as it was in this case, it is unlikely that the Courts will find that a contact was formed

From a practical perspective, where representations/promises are made it is important to ascertain the content and scope of the representation in question.  It will also be prudent to document all aspects of negotiations and clarify the scope and extent of any promises that have been represented by a party in the course of negotiations as these may be relied on in proceedings.

[1] Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2013] VSC 614 at [72] –[74]

[2] [160]

[3] [131]

[4] [62]