Clean Hands Doctrine

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Clean Hands Doctrine

March 22nd, 2024

Awake Goy

Clean hands, sometimes called the clean hands doctrine, unclean hands doctrine, or dirty hands doctrine, is an equitable defence in which the defendant argues that the plaintiff is not entitled to obtain an equitable remedy because the plaintiff is acting unethically or has acted in bad faith with respect to the subject of the complaint—that is, with “unclean hands”. The defendant has the burden of proof to show the plaintiff is not acting in good faith. The doctrine is often stated as “those seeking equity must do equity” or “equity must come with clean hands”.

HE WHO COMES TO COMMON LAW MUST COME WITH CLEAN HANDS:

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Estoppel

The plaintiff submitted that the defendants were estopped from
denying the existence of an equitable lease and sought an
injunction to restrain the defendants from interfering with its
possession of the property. The plaintiff alleged that it had been
induced to rely on an assumption to its detriment that a lease
would be granted in the future, relying on the judgment in Waltons
Stores (Interstate) Limited v Maher (1988) 164 CLR 387.

In considering the plaintiff’s claim, Justice White
conducted a detailed review of the case law since Waltons Stores,
including the criteria essential for the establishment of an
equitable estoppel, and the distinction between promissory and
proprietary estoppel. His Honour refuted the defendants’
submission that “equity does not create rights but recognises
and assists with the enforcement of existing rights” as a
general proposition. Justice White noted a “controversial” previous decision by the NSW Court of
Appeal in Saleh v Romanous (2010) 79 NSWLR 453, in which the Court
held that promissory estoppel cannot act as a positive source of
new rights. He concluded, however, that the same limitation has
never been held to apply to proprietary estoppel, which is a
broader concept. In Attorney-General of Hong Kong v Humphreys
Estate [1987] AC 114, Justice Brennan described proprietary
estoppel as “the equity [that] binds the owner of property who
induces another to expect that an interest in the property will be
conferred on him.” The plaintiff’s claim was based upon
proprietary estoppel by encouragement, and not subject to any
limitation of the kind discussed in Saleh.

Unreliable evidence

Justice White conducted an in-depth analysis of the facts and
concluded that there were significant deficiencies in the evidence
before him, and the credibility of key witnesses. He found that not
only did the testimonies of all the parties differ significantly in
respect of what was agreed, the credit of each party as witnesses
was called into question. Justice White even commented that he “[did] not consider any of the witnesses to be reliable.”
Both the plaintiff and the defendants presented evidence which was
inconsistent with either prior statements they had made or other
documentary evidence. Both parties relied significantly on a
recalled conversation from several years previous.

In the absence of detailed contemporaneous evidence, it was
necessary for Justice White to rely principally on the parties’
testimonies and a sparse string of contemporaneous emails to third
parties to determine the true intentions of everyone involved. He
also looked to subsequent conduct as an interpretive aid.

Does equity always require clean hands?

It is often stated that in order to enliven a claim for
equitable relief, a party must come to equity with clean hands. In
the ordinary course, this doctrine requires that there be a
connection between the plaintiff’s unclean act and the rights
he or she wishes to enforce. The Doueihi case raises the question
of whether a party which deposes unreliable testimony merits the
protection of the courts of equity.

Despite his methodical examination of all of the evidence and
identification of that which he was satisfied with as being
truthful, Justice White did not expressly state that the
unreliability of the parties’ depositions would have any effect
on the merits of the claim in equity.

In response to the plaintiff’s claims, the defendants
submitted that any equitable relief was barred because the
plaintiff had unclean hands. This submission was not based on the
reliability of the plaintiff’s testimony. Rather, the facts
showed that the plant which the plaintiff had constructed did not
have the requisite statutory planning approval. Further, the Court
found that the plaintiff had knowledge of false information being
provided on its behalf to the Council about the output capacity of
the plant, which affected the planning permission required.
Nevertheless, Justice White held that these factors would not
preclude a successful claim in equity, illustrating that a
party’s hands need only be partially clean.

Decision

What further complicates the case is that the plaintiff, who was
originally content to lease the property on an informal basis,
later sought to procure a written legal lease. There were various
motivating factors behind the plaintiff’s actions, including
the fact that the person who owned the plaintiff company had
familial ties with several of the defendants which had altered.
When the defendants were reticent on the matter, the plaintiff
continued to pursue the idea of executing a formal lease. The Court
found that this demonstrated the plaintiff was very much aware that
it had no legal rights and, contrary to its initial submission, had
never originally expected a legal lease would be executed in the
future. In response, the defendants served a notice a quit,
alleging that they were within their rights to do so. If the
plaintiff had no long-term legal lease and was aware of this, on
what grounds does it have a claim in equity to possession of the
land?

After a lengthy discussion of the authorities, Justice White
relied on a principle enunciated by Justice Priestley in Austotel
Pty Ltd v Franklins Self-Serve Pty Ltd (1989) 16 NSWLR 582. In that
case, Justice Priestley held that a key requirement for equitable
estoppel is encouragement of the innocent party to adopt an
assumption that causes it to suffer detriment. Justice White looked
at the facts of the case holistically and ultimately determined
that the defendants had encouraged the plaintiff by allowing it to
expend money and time constructing a plant on the premises with the
expectation of a long term tenancy.

While the Doueihi decision does not significantly develop the
law of equitable estoppel, or clarify the distinction between the
various categories of equitable estoppel, it does demonstrate that
its application may be construed quite broadly. Even though the
plaintiff was aware that it had no legal rights, and in spite of
the fact that the plaintiff had seemingly acted inconsistently in
both its testimony and in its dealings with the Council, the Court
still found in its favour. It was held that the plaintiff was
entitled to an equitable remedy, and that the defendants were
required to grant it a legal lease subject to its remedying the
issue of planning permission for the plant.

What is the significance of this case?

The complex factual matrix of this case may render its
application to subsequent cases somewhat difficult.

Nevertheless, although the Doueihi decision largely restates the
rules of equity as they currently stand, and does not significantly
expand the application of the doctrine of estoppel, it is
significant in that it does appear to reflect a relaxation of the
requirement that the claimant come to the Court with “clean
hands”. The case does suggest that parties may have available
to them an estoppel argument where other claims might not succeed,
and that a certain latitude may be granted to them by the courts in
relation to their own conduct and its relationship to the rights
that they seek to enforce.

In a construction law context, disputes where the facts could
give rise to an estoppel case may also satisfy the requirements for
a statutory misrepresentation case. While a misrepresentation claim
brought under statute may have greater prospects of success
(especially given the reversal of onus effected by clause 4 of the
Australian Consumer Law), parties should keep in mind the
additional protection that the doctrine of estoppel might
provide.

While major construction projects will almost invariably have
thorough and heavily negotiated contracts with mechanisms for
changed circumstances, equity may still prove a useful aid. For
example, a party might rely on a representation that liquidated
damages might be waived, or a representation that formal
notification obligations are not required, or an agreement to grant
an extension of time in relation to a delayed project. Such
reliance might take the form of not increasing resources or working
extended shifts to overcome any project delay. In these situations
(depending on the particular facts), if the representing party
later tries to deny the waiver or the extension, and the injured
party has relied on their representations to its detriment, it
could seek to estop them from doing so.

Source:Philip Dawson

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