Generator Developments Ltd v Lidl UK GmbH (2018)


The Court of Appeal summarised the law applicable to equitable claims based on Pallant v Morgan [1953] Ch. 43. A property development company, which had been negotiating a joint venture with a supermarket for the purchase of land, did not have an interest in the land under Pallant v Morgan principles when the supermarket had purchased it before the joint venture was finalised.


A property development company appealed against a decision that it was not entitled to an equitable interest in land acquired for development by the respondent supermarket (Lidl).

The parties had entered into negotiations with a view to acquiring the property as joint venture partners. The vendor had accepted the appellant's offer to buy the property and the parties had agreed that Lidl would be named as the sole purchaser in the heads of terms. A lock-out agreement was then entered into between the vendor, the appellant and Lidl. A joint venture heads of terms was drafted but never agreed or signed. Each draft was specified as "subject to contract". Without agreeing the heads of terms, Lidl exchanged contracts and completed the purchase of the property shortly after the expiry of the lock-out agreement. After that, discussions between the appellant and Lidl continued for a short time, before terminating.

The appellant asserted that it had agreed that Lidl would acquire the property for their joint benefit, in furtherance of the joint venture between them, and that an equitable interest therefore arose under the principles in Pallant v Morgan [1953] Ch. 43.


Applicable law - The court summarised the applicable principles as follows: (a) Pallant had been decided on the basis of breach of an existing fiduciary duty, applying ordinary principles of agency, Crossco No.4 Unltd v Jolan Ltd [2011] EWCA Civ 1619 followed, Pallant considered; (b) a Pallant equity did not arise where both parties were negotiating on an express "subject to contract" basis, London & Regional Investments Ltd v TBI Plc [2002] EWCA Civ 355 followed, Banner Homes Holdings Ltd (formerly Banner Homes Group Plc) v Luff Developments Ltd [2000] Ch. 372 not followed; (c) it was open to question whether the Pallant equity could arise where the agreement was not intended to have contractual effect; (d) equity would not intervene in a case in which parties were consciously relying on honour alone, Cobbe v Yeoman's Row Management Ltd [2008] UKHL 55 followed; (e) it was correctly stated in Herbert v Doyle [2010] EWCA Civ 1095 that "if the parties intend to make a formal agreement setting out the terms on which one or more of the parties is to acquire an interest in property, or, if further terms for that acquisition remain to be agreed between them so that the interest in property is not clearly identified, or if the parties did not expect their agreement to be immediately binding, neither party can rely on constructive trust as a means of enforcing their original agreement", Herbert followed (see paras 46, 63, 67-71 of judgment).

Conclusion - The appellant's claim failed because: (a) the case involved commercial parties, advised by lawyers, working at arms' length towards the conclusion of an agreement for a commercial enterprise, the terms of which were never agreed. The Pallant principles, when resting on the doctrine of common intention constructive trust, operated quite differently in a commercial context compared to a domestic context. There was no common intention because the parties were still in disagreement about the terms of the proposed enterprise. In addition, the Pallant principles were considered to be the same as those underpinning proprietary estoppel, but such an estoppel could not arise in a commercial case where each party knew that they were not legally bound. It followed that a claim based on Pallant could not succeed; (b) the proposed joint venture was expressly made "subject to contract". That meant that neither party intended to be bound in law or in equity unless and until a formal contract was made and; each party reserved the right to withdraw until such time as a binding contract was made. Equity could therefore not intervene, Cobbe followed. It also meant that fiduciary duties did not arise. The mere fact that the parties had agreed to engage in good faith negotiations for the making of a joint venture was insufficient to support a constructive trust, Kilcarne Holdings Ltd v Targetfollow (Birmingham) Ltd [2005] EWCA Civ 1355 followed; (c) the lock-out agreement was designed to protect the appellant and stated that neither party was committed to the transaction. It also showed that the appellant was relying on the prospect of a legally binding contract to protect it, rather than some ill-defined honourable conduct on the part of Lidl; (d) in order to invoke the Pallant equity, the agreement in question must have been made by a person capable of binding the party in question, or who at least had ostensible authority. The appellant knew that Lidl's board had not approved the joint venture; (e) Lidl did not owe any pre-existing fiduciary duties to the appellant and had not acted as the appellant's agent in buying the property; (f) it could not be unconscionable to exercise a right which had been expressly reserved to both parties by means of the "subject to contract" formula. Nor could it be unconscionable for one party to follow a course which the other party had insisted was open to itself (paras 78-86).

Appeal dismissed