Generator Developments Ltd v LIDL UK GmbH

In arm’s-length commercial negotiations concerning land, an arrangement expressly made subject to contract ordinarily creates no commitment in law or equity. Each party remains free to withdraw until a formal contract is made. Such negotiations therefore cannot ordinarily supply the pre-acquisition arrangement, common intention, reliance or unconscionability required for a Pallant v Morgan constructive trust.

The relevant understanding must also have been assented to by someone capable of binding the acquiring party, or possessing ostensible authority. Equity will not impose property rights which contradict the parties’ express reservation of contractual freedom.

Generator Developments Ltd and Lidl UK GmbH explored a joint commercial development of an industrial estate. Generator materially assisted a successful bid, after which Lidl became sole purchaser. The parties exchanged several drafts for a proposed sale-and-leaseback development, each expressly marked subject to contract. Important terms remained unresolved, Lidl’s board had not approved the venture, and Generator understood that its expenditure might be abortive.

A Deputy High Court Judge dismissed Generator’s claim to an equitable interest under the Pallant v Morgan doctrine: [2016] EWHC 814 (Ch). Generator appealed, arguing that the judge had misapplied the accepted legal principles. The central issue was whether the parties had a sufficient pre-acquisition understanding that Lidl would acquire the property for their joint benefit, making Lidl’s retention of it unconscionable.

1. Appeal dismissed. The correct central question was whether there was a sufficient understanding that the property would be acquired for the parties’ joint benefit, coupled with circumstances making it unconscionable for Lidl to retain it. Although the trial judge framed the question too narrowly and placed excessive weight on the absence of an agreed default position, his conclusion was correct.

2. The parties were legally advised commercial organisations negotiating at arm’s length. They had not agreed important terms and possessed no common intention concerning the proposed enterprise. The principles of proprietary estoppel and common-intention constructive trust operate differently in this commercial setting from their operation in domestic cases.

3. The repeated subject to contract qualification meant that neither party intended to be bound in law or equity before execution of a formal contract. Each reserved the right to withdraw and accepted the corresponding commercial risk. It was impermissible to separate an alleged agreement in principle from the acquisition arrangements and the detailed joint-venture terms. In this context there was no pre-acquisition arrangement capable of supporting a Pallant v Morgan equity, and no fiduciary duty arose.

4. Generator knew that Lidl might use another developer. Its own draft lock-out agreement stated that neither party was committed, while Generator’s board understood that its expenditure might be abortive. These matters contradicted both a common intention to confer an interest and reliance upon any assurance. Generator expected protection through a future binding contract.

5. An arrangement capable of supporting the equity must be assented to by a person able to bind the acquiring party, or at least possessing ostensible authority. Generator knew that Lidl’s negotiating employees were not the decision-makers and Lidl’s board had not approved the venture.

6. No agency or pre-existing fiduciary duty was pleaded or established. Lidl bore the whole acquisition risk, Generator had no obligation to contribute to or indemnify Lidl for the purchase price, and Generator expressly retained a right not to proceed. It was not unconscionable for Lidl to exercise a freedom which both parties had expressly reserved.

• Court of Appeal (Civil Division): The appeal was dismissed unanimously: [2018] EWCA Civ 396.
• High Court, Chancery Division: Mr Nicholas Lavender QC, sitting as a Deputy High Court Judge, held that Generator had not acquired an equitable interest and rejected its Pallant v Morgan claim: [2016] EWHC 814 (Ch).