Equitable Remedies – Mixing Business and Family

As the demographics tell us, small to medium businesses in Australia are increasingly characterised by an aging owner population.  With many SME owners reaching retirement age and not investing the necessary time to develop a clear business succession plan, scope exists for dispute.

What happens if there is a contractual-like promise between family members concerning an SME, that one party departs from to the other’s detriment?

We often advise on scenarios involving family enterprises where a lack of documentation and planning gives rise to dispute.

A classic example involves family farming ventures:  a parent says to their child, “Help me run the farm until die, then, it will be yours”.  Lo and behold, the farm is instead left in the parents will to another sibling, or perhaps a new spouse.

Another example is the 2nd or 3rd generation manufacturing business that struggles to generate the type of profit “that dad once secured” but operates on valuable industrial or development land.  Significant business goodwill can attach to the location.  A dispute can arise where the business (with low relative value) is owned by family member shareholders, but the land (which the business exclusively uses) is only owned by one family member or a separate entity with different owners and the business is kicked off the site.

The solution for the aggrieved family member may lie in equitable remedies.  The two that most neatly apply to these typical family business disputes are promissory estoppel and common intention constructive trust.

In determining whether they are appropriate remedies, there are two main considerations:

• Does the evidence satisfy all of elements of these causes of action?
• Do the facts and circumstances support an equitable remedy?  This is commonly known in legal circles as the “smell test”.

When advising disaffected family members, we find that there will generally need to be clear and almost exceptional circumstances before one of these two equitable remedies will be available.

Interestingly, these questions arose in the recent case of Penya v Penya [2025] NSWSC 805.  In this case, the daughter of the defendant brought proceedings against her father, the owner of a real estate business and property from which it operated, relying on promissory estoppel and common intention constructive trust.

In this case, the daughter claimed she relied on representations made by her father (and to some extent, her mother), to the effect that if she worked full time in that business, without pay (which she did for 22 years), she would be gifted both the business and the property from which it operated when her father retired.

Unfortunately for the daughter, her father instead sold the business to Century 21 in 2018, giving her $5,000 from that sale.

In order to succeed on the promissory estoppel claim, the daughter needed to establish the following four limbs:

• that a clear and unequivocal promise was made to her by her parents;
• that her parents intended (or a reasonable person in their position would have intended) that their daughter would have relied on that promise, by some action, omission or course of conduct;
• she did rely on that promise by acting in the manner which her parents intended; and
• that she would suffer detriment if the promise was not fulfilled.

Ultimately, the Court held that this claim failed on the first limb, as:

• her parents never made a clear and unequivocal promise, at any time, to the effect that their daughter would be given the property and the business when her father retired (as opposed to some other time, such as after he died); and
• that the statements they did make never amounted to an offer to gift their daughter the business, as opposed to providing her an opportunity to step up into the role of principal licensee of a business that she would later inherit upon her father’s death.

As the daughter’s claim failed on the first limb, the Court found it was unnecessary to consider the second to fourth limbs. However, in the event it had been necessary, the Court held that:

• the daughter grossly exaggerated the extent of her work in the business;
• that she continued to accumulate investment properties (with the help of her father’s financial assistance), as well as living rent free, and having her living expenses further subsidised; and
• she did not lead evidence establishing that she suffered detriment by working in the business and living rent free in a property, in addition to the other financial subsidies provided by her parents, as opposed to the alternate course of working elsewhere, receiving a wage, and buying her own home.

The court held that it was highly doubtful that this alternate course would have been more beneficial.

The daughter’s common intention constructive trust claim failed for the same grounds, given that this cause of action relies on similar principles to promissory estoppel (representations leading to a common intention, and acting to her detriment in reliance upon that common intention).

Prevention is the best cure.  A little planning and a document confirming intention is always recommended and SWS has a long and successful track record of assisting family businesses navigate business succession successfully.

However, we also have assisted aggrieved family members where a ‘succession plan’ has not been followed or implemented in the manner previously discussed between family members.  To determine whether an equitable remedy may be available:

• Serious consideration must be given to each and every element of a potential cause of action, well before pleadings are drafted. It is often the case that a claimant will have strong prospects on some, but not all elements of a cause of action.  In this circumstance, you’re always better off looking for another cause of action with a better “fit” or waiting for better timing (such as for damages to accrue, pending any limitation issues).  For instance, some equitable remedies are better deployed after a promisor has died, and made in conjunction with a Family Provision claim (depending on the impact the sale of the business and relevant property would have had on the size of his estate).
• The importance of the “smell test” is often forgotten about. If a claimant has received a substantial financial benefit as a result of an arrangement with a parent, and then, by way of an equitable remedy, wishes to seek more, a favourable result is less likely.  It is important to consider how an independent decision maker will view those facts.

[1] As Justice Brereton made clear in Ashton v Pratt (No 2) [2012] NSWSC 3 at [29], “Family, social and domestic arrangements do not normally give rise to binding contracts, because the parties lack the necessary intention.”
 

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.