Pre-contractual verbal promise gives rise to equitable relief

In brief – Purchasers succeed in avoiding contract

It may be possible to succeed in rescinding a contract on the basis of a pre-contractual promise, even though it is not included in the contract.

Development consent for townhouses on two properties

The NSW Court of Appeal case Saleh v Romanous [2010] NSWCA 274 was handed down on 28 October 2010 and concerned the sale of 163 Kissing Point Road, Dundas. The appellants, Michael and Rose Saleh, owned 163 Kissing Point Road and Michael's brother, Edmond, who lives in Adelaide owned the house next door at 165 Kissing Point Road. The Salehs obtained development consent of eight strata titled two storey townhouses on the two properties.

Sale of property on assumption that development would proceed

The Salehs entered into a contract with the respondents, Harris and Philomena Romanous, to sell 163 Kissing Point Road for an agreed sum which had been negotiated on the assumption that the property, along with the neighbouring property, would be developed into eight two storey townhouses.

Prior to the exchange, Harris and Philomena Romanous were given a statutory declaration dated 10 May 2004 which stated that Edmond had appointed Michael "as his agent for negotiating" with Harris and that "all communications and correspondence concerning the development" were to be made to Michael.

After exchange it became apparent that Edmond did not want to proceed with the plans to develop the properties. so the Romanouses instructed their solicitors to rescind the contract.

Supreme Court finding of pre-contractual promise 

In the earlier case, the Supreme Court of New South Wales found that the Salehs had made a pre-contractual promise to the Romanouses, assuring them that if the neighbour, Edmond, did not want to build, they would not have to purchase the property and would get their money back (at [47]).

The Supreme Court also noted that the Romanous’ solicitors made no attempt to have the pre-contractual promise included in the contract. Because they had attempted to have two other special conditions of lesser importance included in the contract, the Supreme Court had been asked to infer that their solicitors were not informed about the pre-contractual promise.

Court can order repayment of a deposit with or without interest

The Court of Appeal rejected the appeal, as well as the Salehs’ argument that a pre-contractual statement which cannot be enforced as a collateral contract due to inconsistency, can also not be enforced as promissory estoppel (at [62]).

Their Honours noted that promissory estoppel is a ground on which equity will protect one contracting party from inequitable conduct by the other (at [68]). The Court further noted that "promissory estoppel is a restraint on an enforcement of rights, and thus unlike proprietary estoppel, it must be negative in substance" (at [74]).

Purchasers benefit from Section 55(2A) of Conveyancing Act 

However, the court concluded that the limitations on the scope of promissory estoppel do not matter in this situation, as the Romanouses can rely on the statutory remedy conferred by s 55(2A) of the Conveyancing Act 1919 (NSW).

This means that where the court refuses to grant specific performance of a contract for the return of a deposit, the court may, if it thinks fit, order the repayment of any deposit to the purchaser, with or without interest.

The Court of Appeal held that the trial judge erred when he held that the promissory estoppel entitled the Romanouses to rescind and recover their deposit. Rather, the Court of Appeal held that promissory estoppel prevented the Salehs from enforcing the contract and entitled the Romanouses to an order under s 55(2A) to recover their deposit.

This case demonstrates that even though the pre-contractual promise was not included in the contract, the purchasers were still able to rely on it to avoid the contract.