The Doctrine of Estoppel in Australia - Literature review Example

? Promissory Estoppel May Contents Introduction ……………………………………………………….…………………3 2 Requirements of Promissory Estoppel……………………………...………………3 2.1 pre-existing relationship …………………………………………………..…….4 2.2 Clear and unambiguous promise………………………………………….…….5 2.3 Promisee relies on the promise to his detriment…………...…………………..6 2.4 Promissory estoppel can be used both as a sword and a shield………………7 3 Application of the doctrine of estoppel…………………………………………….8 3.1 Central London Property Trust v High Trees House [1947] KB 130………...8 3.2 Scenario…………………………………………………………………………9 1. Introduction Promissory estoppel is an equitable doctrine that applies to contract law to enforce a promise that is unsupported by consideration. It involves a promise given by one of the parties to a contract, during its performance, not to insist to the terms of the original contract (Feinman, 1984). This doctrine mitigates the harshness of the common law which insists that any promise which is unsupported by a consideration cannot be enforced. In the law of contract, parties must furnish consideration to make the contract binding. Therefore the words ‘estopped’ means ‘prevented’ or precluded. It prevents a party to a contract from denying the truth of a promissory representation (Feinman, 1984). Lord Denning in Combe v Combe[1951] 2 KB 215 at 220defined the doctrine by stating that “ the principle, as I understand it, is that, where one party has, by his words or conduct, made to the other a promise or assurance which was intended to affect the legal relations between them and to be acted on accordingly, then, once the other party has taken him at his word and acted on it, the one who gave the promise or assurance cannot afterwards be allowed to revert to the previous legal relations as if no such promise or assurance had been made by him, but he must accept their legal relations subject to the qualification which he himself has introduced, even though it is not supported in points of law by any consideration but only by his words…” 2. Requirements of Promissory Estoppel This English position was first adopted in Australia by the High Court’s decision in Legione v Hateley(1983) 152 CLR 406. It sets some key ingredients for the application of the doctrine. First, there must be a pre-existing contract between the parties, which they seek to modify. Secondly, there must be a clear and unambiguous promise, which one party relies on as result of which they change their position and lastly, it must be inequitable to allow the promisor to go back on their promise. 2.1. Pre-existing Relationship There must be a legal relationship that existed between the parties. The parties ought to be in a continuing legal relationship, in the course of which, one of the parties agrees to the variation, and/or termination of the current one. Promissory estoppel cannot exist in a vacuum, and that it would only arise where there is an existing relationship between the parties.In most instances the existence of a relationship suffices from the existence of a contract (Boyer, 1952). In essence, the underlying contract must have been enforceable, and consideration for the subsequent agreement that is not required (Boyer, 1952). The requirement for the existence of a contract for the application of the doctrine of estoppel was held not necessary in the Australian case of Waltons Stores (Interstate) Ltd v Maher[1988] HCA 7. The brief facts of the case were that Walton and Maher entered into a negotiation with regards to a lease of a property that was owned by Maher. They agreed that Maher would demolish a building that was in existence and build a new one which Walton would then occupy. The parties entered principally into an agreement pertaining to major terms, with Walton’s solicitors sending a draft lease to Maher’s solicitors and the necessary changes being discussed. Later that year, Maher informed Walton that demolition had commenced and it was necessary to conclude the lease without further delay. With over 40% of the work in the new building done, Walton informed Maher that he did not wish to proceed with the lease, and Maher brought an action to seek the performance of the agreement through the doctrine of estoppel. The contract had not been complete to establish the relationship required to find for the promissory estoppel. The court held that despite the fact that formal contracts had not been exchanged, Maher was entitled to assume the exchange was just a formality and could thus rely on promissory estoppel even if Maher did not believe that contracts had been entered into by the time he embarked on the demolition. In essence, the court held that a mere belief that a contract exists will suffice to establish the relationship necessary to find for promissory estoppel. Brennan J. stated that “toestablish an equitable estoppel, it is necessary for a plaintiff to prove that the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exists between them and in the latter case, the defendant would not be free to withdraw from the expected legal relationship”(Waltons Stores (Interstate) Ltd v Maher, 1988). 2.2. Clear and unambiguous promise There must exist a clear and definite promise. The representation relied upon by the person claiming the benefit must have been a clear one, but it can be implied or expressed (Boyer, 1950). The promise must be indicative that some other contract will be entered in the future, or one of the parties will refrain from insisting fully to his rights under the contract, or will do a positive act in the course of the performance of the contract. It is sufficient for the plaintiff to intend for the defendant to rely on the promise (J.G.M (1933). In Legione v Hateley, the court held that the requirement that the promise must be clear is not tantamount to that the promise ought to be express, and that it can be implied from the conduct. In this case, a buyer of a property requested for an extension of time from the sellers, but the sellers refused them. While trying to set up a loan, the buyer spoke to the seller’s solicitors and offered to settle the amount on a date that was 7 days past the contracted time. The solicitor’s secretary stated that “I think that would be alright, but I will have to get further instructions.” However, the vendor’s solicitors informed him a few days later that the contract had been rescinded. The court held that the secretary’s words did not amount to a clear promise. 2.3. Promisee relies on the promise to his detriment. Promissory estoppel is a reliance based doctrine that suffices to protect detrimental reliance in whose favour an undertaking is made (Gordon, 1965). Brennan J in the Waltons case stated that it is sufficient for the defendant to have induced the plaintiff into the assumption that they will do or refrain from doing something and the plaintiff subsequently does so, and the plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled. According to Gordon (1965), estoppel cannot operate unless the promisee had changed their position on the reliance of that promise. Further, it was held that the detriment must not be conjectural or speculative but substantive. In Walton’s stores case, the court held that the plaintiff had relied on the promise by starting to execute the work with the knowledge of the defendant and that it would be unconscionable to allow him to go back on the promise. Pham (1994) argues that detrimental reliance is composed of two things: reliance and injury. He argues that a promissory estoppel claim can fail either because the promisee did not rely on the promise at all, or even if he did rely, no injury resulted from such reliance. 2.4. Promissory estoppel can be used both as a sword and a shield In Combe V Combe, the House of Lords stated that promissory estoppel can only be used as a shield but not a sword. In essence, promissory estoppel can only be used as a defence but not to find a course of action, to enforce the promise by the promisor. The court in holding so, maintained the importance of consideration in establishing a binding agreement. Promissory estoppel should only operate as an evidentially rule, to bar the defendant from denying the truth of a representation he made to the plaintiff(Sharma, 1994). However, in Australia, this position was changed in Walton Stores case. In this case, the High Court held that promissory estoppel could suffice to establish a course of action, and therefore could be used both as a shield and as a sword. The court stated that “[p]romissory estoppel, it has been said, is a defensive equity and the traditional notion has been that estoppel could only be relied upon defensively as a shield and not as a sword. High tree case was an instance of the defensive use of promissory estoppel but this does not mean that the plaintiff cannot rely on estoppel…” Therefore, the court relied on promissory estoppel to enforce the claim by the plaintiff, the landlord, against the tenant, Maher, finding that the tenant was “estopped in all the circumstances from retreating from its implied promise to complete the agreement.” 3. Application of the doctrine of estoppel 3.1. Central London Property Trust v High Trees House [1947] KB 130 The defendants in this case leased a block of flats from the plaintiff for a rent of ? 2,500, commencing in 1937. At that time, it was a new block of flats and the defendants had a difficulty in getting tenants to occupy all the houses because of the heavy bombing in London. In 1940, to counter the situation, the parties made a written agreement to reduce the rent payable by half. Nevertheless, the period in which this reduced rent would apply was not included in the agreement. In 1945 following the end of the war, there was a full occupation of the flats. The plaintiff sued for the payment of full rent from June 1945. Consequently, the court was asked to address the question whether the agreement of 1940 constituted an agreement that the rent of ? 1250 would apply to the whole lease. The court stated that if a promisor gives a promise to the promisee, intending it to be binding and to be acted upon and is in fact acted upon, it is binding to the extent that the terms apply.The court in this case therefore found that the tenant had already relied on the landlord’s promise, and therefore was bound by the promise. This case served as an exception to the consideration requirement. Though the promise by the landlord was not supported by any consideration from the tenant, it should have been unenforceable following the strict application of the contract law. 3.2. Scenario Suppose that A ltd, a hotel operator entered into a contract with B, a contractual farmer. The terms of the contract indicated that B was to grow two types of vegetables, X and Y, and which would be supplied to A, in fixed amounts per day for a fixed amount of days and money. To add, it was agreed that B would use a certain chemical C1 to kill weeds, and that B would not use any other chemical apart from C1. Subsequently, because of the demand of C1, its price shot up significantly, such that B found he would not breakeven. Hence, B wrote to D, Altd’s manager in charge of procurement informing him the same, and D orally agreed with B’s request to use C2, a chemical that is a perfect substitute of C1. Subsequently in this scenario, A gives his promise not to fully insist on strict performance of the contract between the two as far as C1 is concerned. Therefore, if B, conscious of the fact that the demand of C2 would also rise leading to the sky rocketing of its price, bought a huge stock in advance, it would amount to reliance of A’s promise. Consequently, if A, who has found an alternative and cheaper supply of the vegetables, were to insist on strict compliance of the original contract, with the intention of making B to breach the agreement, he would be estopped from doing so. Promissory estoppel shall prevent him from relying on the absence of consideration from B for the latter agreement to make it binding. However, supposing after B wrote to A requesting that he be allowed to use C2 instead of C1, D replied that “I don’t think that is a problem, however, let me get authorization from the board of directors.” If no further communication was made, then following the decision in Legione v Hateley, such D’s reply cannot amount to a clear and unambiguous promise, and therefore estoppel cannot suffice. Supposing that B, after receiving consent from A to use C2 instead of C1continued using C1 after he managed to import a cheaper supply. Thereafter, the government, desirous of protecting local industries, banned the import of more chemicals. Before, B could rely on A’s consent, A had a change of mind. A cannot be estopped from claiming strict compliance with the original contract since B did not rely on the contract to his detriment, or purely, he did not rely on the promise. Supposing that A after realizing that C2 produced better quality vegetables than C1 decided to make the oral agreement binding. He therefore sent a draft agreement to B containing the terms, to which B said he would sign and send a copy back to him. A went ahead and indicated to its customers that it uses C2 to produce its vegetables which increased the demand for its vegetables. Before he would sign the agreement, the price of C1 reduced tremendously due to reduced demand. B therefore refused to formalize the agreement. Consequently, A can sue to enforce the contract. This is because in Walton Stores case, it was held that Estoppel can be used both as a shield and a sword. 4. Conclusion In conclusion therefore, the doctrine of estoppel in Australia has changed significantly since Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7. The plaintiff can use the doctrine of estoppel to commence a case, given that estoppel can be used both as shield and a sword. It is not necessary for the plaintiff and the defendant to have been in a prior relationship as held in Central London Property Trust v High Trees House [1947] KB 130. In essence, the doctrines of estoppel applies to stop a party, for example the tenant in Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7, from withdrawing from a promise which they had made and which had been relied on by the other party, to their detriment. In Waltons’ case, the landlord in reliance of the tenant’s promise had demolished a house, and commenced constructing another in the hope that the two would exchange contracts. References Cases Law Combe v Combe[1951] 2 KB 215 Waltons Stores (Interstate) Ltd v Maher [1988] HCA 7 Legione v Hateley(1983) 152 CLR 406 Central London Property Trust v High Trees House [1947] KB 130 Journals Boyer, B.F. (1950).Promissory Estoppel: Requirements and Limitations of the Doctrine. University of Pennslyvania Law Review, Vol. 98:4, pp.459-498. Boyer, B.F. (1952). Promissory Estoppel: Principle from Precedents: I. Michigan Law Review, Vol. 50:6, pp.873-898. Feinman, J. (1984). Promissory Estoppel and Judicial Method.Harvard Law Review, Vol. 97:3, pp.678-718. Gordon, D.M. (1965). Contract.High Trees Case.Promissory Estoppel.The Cambridge Law Journal, Vol. 23:1, pp. 15-17. J.G.M. (1933).Contracts.Promissory Estoppel.Virginia Law Review, Vol. 20:2, pp. 678-718. Retrieved from http://www.jstor.org/stable/1067013 Pham, P. (1994). The waning of promissory estoppel.Cornell Law Review, Vol. 79:1263. Sharma L.K. (1994). Doctrine of Promissory Estoppel.Deep & Deep Publications. Read More