Protecting What Strict Laws Cannot: Supreme Court Uses Equitable Doctrine to Enforce a Promise Made Before the Promisor Obtained an Interest in the Property

19 December 2017

By Morgan Westgate

In what appears to be the last judgment written by Chief Justice McLachlin before her retirement this past weekend, the Supreme Court of Canada considered the scope of the doctrine of proprietary estoppel. The Cowper-Smith v. Morgan decision considers proprietary estoppel in the context of an acrimonious estate dispute, and may have significant implications in respect of equitable proprietary claims.

The Factual Context: As early as 1992 a couple, (Elizabeth and Arthur) made it clear that after their deaths their property would be divided equally among their three children (Max, Nathan and Gloria). After Arthur’s death, however, there was breakdown in relations among the children, and Elizabeth’s estate planning changed drastically. She transferred title to her home and all investments into joint ownership with Gloria, and executed a Declaration of Trust (the “Trust”) that Gloria would be entitled “absolutely” to those assets upon her death.

Nathan and Max did not know about the Trust, but eventually learned that Gloria’s name was on title to the home. Gloria told her brothers that the arrangement was solely to simplify Elizabeth’s estate administration, and that both Max and Nathan would still receive their one third share. Following their mother’s death, however, Gloria sought to rely on the Trust to put the house up for sale despite the fact that her brother was living there.

The litigation that ensued considered (among other things) whether the doctrine of proprietary estoppel bound Gloria to her word. The trial judge allowed the brothers’ claim. The British Columbia Court of Appeal overturned that decision, however, holding that proprietary estoppel could not arise because Gloria had no interest in the property when her promise was made (as the home still belonged to their mother). Max appealed.

Proprietary Estoppel Requires an Equity: To establish proprietary estoppel, one must first establish an equity of the kind proprietary estoppel protects. An equity arises when: (i) a representation or assurance is made to the claimant, on the basis of which the claimant expects that he will enjoy some right or benefit over property; (ii) the claimant reasonably relies on that expectation by doing or refraining from doing something; and (iii) the claimant suffers a detriment as a result of his reasonable reliance, such that it would be unfair or unjust for the party responsible for the representation or assurance to go back on her word.

What if the Promisor Does not have Interest in the Property at the Time of Promise? The Supreme Court held in Cowper-Smith that an equity arises when the claimant reasonably relies on the representation to his detriment that he will enjoy a right or benefit over property, whether or not the promisor owns an interest in the property at the time of the claimant’s reliance. Proprietary estoppel will then operate to make the representation binding (and thereby give effect to the equity) when the representing party obtains possession of an interest in the property sufficient to fulfill the claimant’s expectations.

In other words, proprietary estoppel need not arise at the same time as the underlying equity. Proprietary estoppel may not protect the equity immediately, or even for a significant period of time, but may take effect after the representation is made. Likewise, if the representing party never acquires an interest in the property, proprietary estoppel may not arise at all.

In this case, an equity arose in Max’s favour when he reasonably relied to his detriment on his sister’s assurance that he would receive his share in the home. That equity could not have been protected by proprietary estoppel at the time it arose (because Gloria did not then own an interest in the property), but the proprietary estoppel attached to Gloria’s interest in the house as soon as she received it from her mother’s estate.

Reliance can be Reasonable Even Where the Promisor Has No Interest in the Property: In making this determination, the Supreme Court rejected Gloria’s argument that reliance on a representation could never be reasonable where the person making the representation does not, at time of representation, own an interest in the property. Adopting such a bright line rule would, according to the Court, defeat a fundamental purpose of equity: to temper the harsh effect of strict legal rules.

Rather, reasonableness is circumstantial. The Court held that it may be that the representing party has such a speculative interest in the property that the claimant’s reliance could not have been reasonable; however, whether this is so will depend on the context.

The Remedy: Where a claimant has established proprietary estoppel, a court has “considerable discretion in crafting a remedy that suits the circumstances.” However, a claimant is entitled only to the “minimum relief necessary” to satisfy the equity, and the remedy must be proportional to the detriment actually suffered. A claimant can never obtain more than he originally expected.

Although unanimous in the proprietary estoppel decision in Cowper-Smith, the Court divided on the question of remedy. Writing for the majority, Chief Justice McLachlin ordered an in specie distribution of the estate entitling Max to purchase his sister’s interest in the house. Although a dissenting opinion expressed concern over making an award contrary to Elizabeth’s intent to vest in Gloria absolute discretion to administer the estate, the majority held that the Court was entitled to interfere with Gloria’s discretion given that her duties as executor were in conflict with her duties as beneficiary and that she had acted in bad faith (and would likely continue to do so in the future).

The Takeaway: Following the Cowper-Smith decision, it is now clear that proprietary estoppel may arise even where the promisor did not have an interest in the property at issue at the time of promise. But the decision leaves a number of questions unanswered: Can proprietary estoppel attach to an interest in property other than land? Must an equity justifying the operation of proprietary estoppel be proprietary (as opposed to personal) in nature? The majority declined to answer these questions.

Further, the Cowper-Smith decision exemplifies the tension between, on the one hand, flexible equitable relief to protect what strict application of rules cannot, and clarity of law on the other. Although the Court held that “flexibility must not come at the expense of clarity and predictability”, the Cowper-Smith decision illustrates the potential for just that: by protecting Max’s reasonable and detrimental reliance on Gloria’s assurances, the Court has cautioned that promisors may be held to their promises even where the subject-matter of such promises does not yet exist.

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