In many family enterprises parents transfer ownership of the family business based on “sweat equity” (work performed in the business for less than market conditions) on the basis that the business will be gifted (with no consideration paid) and or transferred for less than market value payments at time of transfer on or before their retirement or death. In many instances there is a lack of legal formality in such decisions, which could have unintended consequences.
In Nolan v Nolan and Others [2014] QSC 218 an ex-wife gained a substantial interest in her ex-husband’s family enterprise belonging to her ex – parents in law on the basis that she contributed to her parents in law farming enterprise. This decision reinforces the principal that despite the lack of legal formality the Law of equity can recognize future expectations or services performed not only by children but by their children’s spouses (or in this instance their son’s ex-spouse who was not working directly in the family business).
What follows is an overview of the circumstances that could give rise to a family business being in danger of inadvertently enabling an in law to benefit despite not being wanted.
Facts
The Plaintiff and her ex – husband (‘the First Defendant’) were married for 18 years. During this time, they contributed to the running of the parents (‘Second & Third Defendant’) farming enterprises and associated spraying business (‘the Fourth Defendant’). The ex-husband left the marriage in 2009.
The Plaintiff then commenced proceedings to seek recognition of her contribution to her ex-husband’s family farming enterprise by way of declaration of constructive trust in her favour, either on the basis of her future expectation that herself and the ex-husband would inherit the farming properties and associated businesses, or on the basis that she was engaged in a common endeavour with the ex-husband and his family in regards to the farming enterprise.
Decision and implications
Future Expectations and Equitable Estoppel:
In accordance with the principle outlined in Finn v Finn [1993] 3 VR 712 the Plaintiff argued that proprietary estoppel may be established even where conduct of a party is such that the expectation has not been precisely defined.
Lyons J held that while a vague expectation could satisfy the requirements of equitable estoppel. Her honour was not satisfied that there was any intention by the ex-husband and his parents of passing on all of the farming property & enterprises to the Plaintiff and her ex-husband without any recognition of the parents other children.
Lyons J further considered that the Plaintiff did not suffer a sufficient detriment to warrant a claim in equitable estoppel. Her Honour was of the view that while the plaintiff and her ex-husband lived at Kitcombe, they did not live there on reliance on the specific representation that they would one day inherit the property and farming enterprise.
Implications – Clearly document correctly your intentions to children and or their spouses should you wish in the future to benefit or not benefit a child or their spouse.
In Kramer v Stone [2024] HCA 48 a final will in which a deceased left a farm to her daughter was overruled.[1] In making a final will, Ms Dame Leonie (the deceased) had either forgotten her promise to Mr Stone or decided not to honour it (it was Mr Stone’s expectation that he would inherit a Farm).[2] Mr Stone did not learn of the terms of Ms Dame Leonie’s will until after her death.[3] It was affirmed by the majority of the High Court the circumstances gave rise to a valid equitable estoppel claim, whereby the Court ordered title to the farm to be held on trust for Mr Stone.[4] The matter is an exemplar of the importance of Estate Planning beyond the formalisation of executing a will and understanding the circumstances which can result in a verbal promise becoming binding.
Facts
Ms Kramer promised a share farmer, Mr Stone (who shared some of the costs and income derived from the farm), that he would inherit the farm on her death.[5] In reliance on that promise, Mr Stone lived and worked on the farm for an additional 23 years.[6] In the absence of such promise, the Court considered that Mr Stone would have terminated the share farming agreement and pursued employment that returned a higher level of income and a lifestyle free from the hardships endured on the farm.[7] On her passing Ms Leonie did not leave Mr Stone the farm in her will and the dispute with the executors arose from his claim to a proprietary interest.[8]
Equitable Estoppel
When the focus is only upon an equitable estoppel which arises by reason of encouragement from a promise, the elements that must be satisfied are as follows:
- First, there must be a “clear and unequivocal” promise made by the party estopped (the promisor) to the party who relies upon the promise (the promisee);[9]
- Secondly, a reasonable person in the promisor’s position must have expected or intended (or the promisor actually did expect or intend) that the promisee would rely upon the promise by some action, omission or course of conduct;[10]
- Thirdly, the promisee must have relied upon the promise by acting or omitting to act in the general manner that would have been expected; and[11]
- Fourthly, the consequence of the promisee’s reliance must be that the promisee will suffer detriment if the promise is not fulfilled, in the sense that the promisee will be left in a worse position, as a consequence of reliance upon the promise, than if the promise had not been made.[12]
Ruling
The majority of the High Court ruled the circumstances satisfied the elements of equitable estoppel as:[13]
- Ms Dame Leonie made a “clear promise” that Mr Stone would inherit the farm upon her death;
- In making such promise, a reasonable person in Ms Dame Leonie’s position would have expected, which she did expect, that Mr Stone would rely upon the promise by not pursuing any other employment;
- Mr Stone continued to work on the farm for 23 years in reliance on the promise; and
- Mr Stone suffered detriment through reliance on the promise as he had not sought more remunerative employment, failed to develop new employment skills and restricted his social and domestic life.
Orders
Appeal dismissed with costs.[14]
Common Endeavour and Constructive Trust:
The Plaintiff sought to assert a constructive trust on the basis of common endeavour between the Plaintiff and the ex-husband and his parents. Lyons J noted that this equitable remedy does not depend on the common intention of the parties and is imposed by equity regardless of the actual or presumed intention of the parties. This remedy prevents the unconscionable retention of property as outlined in Willetts v. Marks [1994] QCA 515.
Where a constructive trust is sought by common endeavour, the usual practice is to make an equal division of property, particularly when parties have equally contributed over a substantial period of time. These contributions do not necessarily have to financial contributions: the court can take into consideration contributions to family welfare by way of domestic assistance, home making and parenting.
Lyons J found that the Plaintiff was engaged in a common endeavour with the Defendants because of her role as homemaker for her family, co-borrower and guarantor for farm machinery and vehicles, the use of her wage to help the Defendants in difficult financial times, and administrative and physical work relating to the farming enterprises and related spraying business.
Her Honour further held that the Plaintiff had suffered a detriment as a result of her involvement in the common endeavour and that it would also be unconscionable for the Defendants to benefit from her contributions to the common endeavour without some compensation to her.
Implications – The respective that a child or an in-law may not be working directly in a family business ensure that the unintended beneficiary whether a child or their spouse (the in-law) is adequately compensated for both indirect and direct contributions to the family business.
Orders
The Plaintiff was assigned 50% of the asset pool ($405,000.00) that was originally assigned to her and her husband, minus the deduction of $69,300.00, to acknowledge that Plaintiff had lived rent free on the Defendants’ property since the marriage ended.
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