The Doctrine of Promissory Estoppel in Contract Law - Case Study Example

The Doctrine of Promissory Estoppel has developed to such an extent that it is now a realistic alternative to consideration for the enforceability ofalteration promises. With references to decided cases and academic commentary, critically discuss. The doctrine of consideration is a fundamental core principle of contract law1 and the leading case of Currie v Misa2 underlined the role of consideration to determining enforceability of contract by asserting ““valuable consideration in the sense of the law, may consist either in some right, interest, profit or benefit accruing to one party or some forebearance, detriment, loss or responsibility, given, suffered or undertaken by the other3”. However, in the case of Central London Property Trust Limited v High Trees House Limited4 Denning J effectively redefined the doctrine of consideration by importing the doctrine of promissory estoppel into contract. Moreover, the landmark decision in the case of Williams v Roffey Brothers5 clearly added another perspective upon the role of the classic definition of consideration and even went as far as to question its relevance in the modern law of contract. Interestingly, the Williams’ decision suggested that in some instances performance of existing contractual obligations could constitute sufficient consideration in a new agreement, which undermined the traditional view and appears to support the assertion that promissory estoppel effectively operates as an alternative to consideration. Indeed, it was further held that benefit and detriment were not the only aspects of consideration and there are other principles which make up the doctrine of consideration such as the fact that consideration “must be sufficient but need not be adequate” as indicated in the case of Chappell & Co Limited v Nestle Co Limited6[. Moreover, in the case of White v Jones7 Lord Goff went as far as stating that “our law of contract is widely seen as deficient in the sense that it is perceived to be hampered by the presence of unnecessary doctrine of consideration”8. Closely tied to this is the doctrine of promissory estoppel, which disregards the requirement of any benefit or detriment, and focuses on a reliance based theory, which creates an inherent paradox with the notion of consideration and contractual promise9. The applicability of estoppel in contract was articulated by Lord Denning in the case of Central London Property Trust Limited v High Trees House Limited10as “a promise intended to be binding, intended to be acted upon, and in fact acted upon, is binding so far as its terms properly apply”11. The central issue of controversy regarding estoppel is whether it undermines the consideration in disregarding the traditional requirements of benefit and detriment12 However, whilst at first glance the development of promissory estoppel has arguably been necessary to address the changing nature of commerce and contractual relationships, uncertainty remains as to the exact parameters and applicability of the estoppel doctrine as an alternative to consideration. The current ad hoc judicial approach to contractual disputes has reshaped the doctrine of consideration without any clear boundaries13. The focus of this analysis is to critically evaluate the assertion that promissory estoppel operates as an alternative to consideration or whether it is simply part of contract law as extrapolated by Lord Denning in the High Trees decision. If we use the decision in the High Trees case as a starting point, according to the doctrine of precedent, Denning J argued that the decision was not overturning previous law and that the doctrine of promissory estoppel was in fact being utilised as part of contract law to enforce consideration. In the case of High Trees itself, the tenants were promised by the landlord to have the rate of their leases at £2,500 a year to be cut by 50% owing to the bombing in the Second World War. When the bombing ceased, the flats were full and the landlord attempted to recover the original £2,500 a year for the period of the bombing. It was determined by Lord Denning that the landlord could not claim the back rent of reduced payments during the bombing but that the tenants were obliged to pay the original rent-charge after the period of bombing. This decision seems to contradict consideration and result in a variation of contract as the promise to reduce the rent was given without consideration, however was legally enforceable against the landlord. Lord Denning utilised a rationale analogous to proprietary estoppel and asserted that once a promise had been made with an intention to be legally binding and was acted upon and a cause of action in damages was made for breach of contract it would give rise to promissory estoppel. Whilst the result was clearly meritorious on the facts of the case, it was clearly motivated by policy considerations, which undermined unequivocal principles of consideration in contract law. Denning acknowledged the inherent problem of enforcing this equitable remedy within defined contractual law principles and when the Law Revision Committee published its report on consideration in 193714, Denning utilised the opportunity to introduce promissory estoppel into English law. Denning recommended replacement of the recommendation in the High Trees case to define the doctrine of promissory estoppel as being enforceable when “a promise which the promisor knows, or reasonably knows will be relied upon by the promisee, shall be enforceable if the promisee has altered his position to his detriment in reliance on the promise”15. Denning also reiterated the justification for the operation of promissory estoppel in English law based on the case of Hughes v Metropolitan Railway Company16, which had also been used as a justification for the decision in High Trees. In the Hughes case, the House of Lords held that the tenant was entitled to be relieved from forfeiture of the lease set by the landlord as the six month deadline promised by the landlord was suspended during times of negotiation to purchase the lease. This type of promise that was being relied on in absence of consideration was extended in the case of High Trees. However in the Hughes case the landlords’ strict rights were merely suspended, whereas the controversy created by the High Trees decision was that the promisor was prevented from claiming his strict rights indefinitely, which has led commentators to argue that estoppel has effectively become an alternative to consideration when addressing alteration promises17. Alternatively, some commentators have argued that Denning’s decision in the High Trees case remedied some of the problems highlighted in earlier cases such as Foakes v Beer18, which is an example of the controversial application of the pre-existing duty rule. In the Foakes’ decision the House of Lords ruled that payment of a debt for the lesser sum was not adequate consideration for an enforceable contract. The greater sum could not then be discharged as it remained a debt to be owed thereby cementing the rule that prevents contractual parties from discharging obligations by part performance. The precedent set out in Foakes v Beer was argued as being inappropriate in the contemporary contractual context as highlighted in the case of Williams v Roffey Brothers19, which considered the Foakes’ decision outdated. In the Williams case the consideration doctrine was effectively extended to hold that a promise for extra payment was enforceable being supported by valuable consideration and is discussed further below. However it can be argued that the case of Foakes is still applicable as in the case of Re SelectMove Limited20 it was held that the precedent in Foakes was applicable in dealing with the issue of whether there had been consideration satisfied of debt by payment of a cheque. The precedent therefore set out in High Trees is not absolute and ultimately ambiguity remains as to when the doctrine will apply. In Re SelectMove Limited for example, the defendant was under the impression that their contract was enforceable by a promise made by the Inland Revenue. However, it was determined that the defendants could not claim that the crown was estopped from allowing them to pay the debt in instalments as the officer for the claimant had no authority to make such a promise, which flies in the face of the rationale in High Trees regarding detrimental reliance. The underlying rationale of promissory estoppel appears to indicate that the need for legal benefit or detriment are no longer justifiable and that courts appear to enforce a promise when there is good reason to21. On the one hand, this clearly leads to alteration of contractually agreed promise thereby supporting the assertion that promissory estoppel effectively operates as an alternative to consideration. Conversely, the judicial development of estoppel in contract law highlights the need to be flexible and address different types of contractual situations in different ways22. For example, in the case of Williams v Roffey23 the judicial rationale shifted from the strict requirement of legal benefit of detriment and created a link between cases of a two party nature and third party considerations. Moreover Noble argues that “in the past the courts have been quick to find consideration and so uphold contracts even when, one might argue there was none to be found24”. Lord Denning on the contrary argues that any act done at the request of the promisor is good consideration provided it does not contravene the public policy. If we further consider the Williams v Roffey Brothers decision25, the factual scenario involved B who engaged another party A as sub-contractor to do some carpentry work on a block of flats for the purpose of performing a contract between B and third party C. The amount for the carpentry was to be paid by B to A and was agreed at £20,000 however this amount proved to be too low for A to complete the work to a satisfactory standard and at a profit. As a result, B promised to make further payments to A, who in turn undertook no extra obligation. B made this promise due to a comment by his own surveyor that the amount of £20,000 was too low for A to complete the works to a satisfactory standard and due to the fear that A would not complete the work on time. This caused B to be penalised under its contract with a third party C. It was held that B’s promise of extra payments did provide sufficient consideration by the way of practical benefits. The fact that B would benefit from A completing the work on time was seen as sufficient grounds to impose the promise. However, whilst the Williams decision clearly criticised the limitations of the traditional doctrine of consideration; the argument that the practical benefit constituted further consideration obfuscates the distinctions between consideration and promissory estoppel. On this basis, estoppel appears to operate as an artificial means of finding consideration as opposed to an alternative. Moreover, it seems that with instead of producing a clear direction for similar cases to follow, ambiguity clearly remains as there was no overruling of decision in Stilk v Myrick26, which provided a contrary result. Indeed in the case of High Trees itself, Purchas L. J stated that the Stilk case was a “pillar stone of the law of contract” however may be decided differently today. Glidewell L. J. stated that the decision did not contravene the decision in Stilk but rather “refined and limited” the principle. Russell J argued that the Stilk case demonstrated a rigid approach to the doctrine of consideration which was no longer necessary or desirable. However, the failure to overrule the decision in Stilk or expressly acknowledge the applicability of promissory estoppel as an alternative to consideration compounds the continued uncertainty regarding the parameters of its application. Furthermore, the general principle remains that a contract cannot be varied without consideration and therefore in order to permanently waive one’s legal rights, a party have to receive consideration from the other party, as removal of those rights from the contract amounts to a variation of contract27. However, promissory estoppel was developed as “equity’s answer to the strictures of the law of consideration in the particular context of a waiver”28. However, the ad hoc and policy motivated considerations of judicial determinations in this area perpetuates uncertainty as to the parameters of promissory estoppel and whether it is restricted to the law of waiver rather than being as wide-ranging basis for the enforcement of promises as the general law of contract. In English law, this was determined in the case of Combe v Combe29, where the Court of Appeal commented that the doctrine of promissory estoppel could only operate as a shield and was not to be utilised as a separate cause of action per se. However, it can be used to reduce the obligations owed by the promise to the promisor, but not to increase the obligations owed by the promisor to the promise or create new ones. This would therefore suggest that estoppel only operates as a potential alternative to consideration in cases where the promise reduces obligations under contract. Indeed, Lord Denning highlighted in the High Trees decision that “consideration remained a cardinal necessity of the formation of a contract, but not of its modification or discharge”30. This suggests that promissory estoppel is merely an exception to the general doctrine of consideration and does not therefore result in alteration of consideration doctrine. This is further highlighted by statements in the case of Combe v Combe31 where it was highlighted that “promissory estoppel is limited to the modification of existing legal relationships rather than to the establishment of new obligations”32. However, this is somewhat contradicted by the decision in Evenden v Guildford City FC 33 where Lord Denning asserted that promissory estoppel was applicable even when parties were not already contractually bound: “it applies whenever a representation is made, whether of fact or law, present or future, which is intended to be binding, intended to induce a person to act on it and he does act on it34”. This clearly goes beyond the assertion that estoppel is used as an alternative to consideration in applying alteration promises and effectively creates a binding contract solely on grounds of promissory estoppel. Moreover, Kramer argues that “aspect of promissory estoppel that has caused the most indecision is whether the promissory estoppel is merely suspensory in its effect or whether it has the capability to extinguish a responsibility”35. As stated above, in the case of Hughes v Metropolitan Railway, the promissory estoppel was arguably suspensory, however in the High Trees decision the right of the owner to receive full rent for the war years was extinguished completely as a result of the promissory estoppel. The effect of the promise was understood to be solely applicable during the war years however the rent automatically resumed to the pre-war stated upon the war being over. On this basis, Kramer asserts that it is arguable that estoppel effectively operates as a contractual modification supported by consideration, which preserves fundamental contractual principles. However, the issue of contention remains as to whether the promissory estoppel permanently waives the rights or whether it is suspensory, with the weight of opinion appearing to support the latter viewpoint. Kramer propounds that the distinction is that detrimental reliance is required for promissory estoppel to arise, which is distinguished from a binding contractual variation as the detriment will be sufficient in estoppel when relied on. Conversely, this will only constitute valid consideration if the detrimental reliance is at the request of the promisor36. To this end, arguably the law of estoppel brings the law of consideration into relief particularly in context of contractual variation. Traditionally, consideration is still legally required for a valid variation of contract however, under promissory estoppel, if the requirement of consideration is removed it can enforce promises on a temporary basis, which would suggest that estoppel solely operates as an alternative to consideration on a “suspensory” basis. Kramer further argues that the development of estoppel is further distinguished between promises that decrease and increase obligations37. In the former type of situation, it is submitted that the strict requirements of consideration of Stilk v Myrrick are effectively removed by the decision in the case of Williams v Roffey brothers. However, promissory estoppel does not appear to apply to variations resulting in increase of obligations, as indicated in Re SelectMove Limited38. Therefore on this basis, Kramer suggests that where a waiver by estoppel is not a variation of law and only a variation in effect, promissory estoppel operates in a non-contractual way of effecting the same result outside of consideration principles. For example in the case in the case of D & C Builders v Rees39 Lord Denning expressly observed that the doctrine of consideration as embodied in Foakes was still applicable as good law, and that equitable estoppel only operated where it would be inequitable to allow the promisor to enforce his strict legal rights. Whilst Kramer’s distinctions are a welcome attempt to decipher this messy development of principles, the failure of the courts to expressly clarify the parameters of promissory estoppel lends itself to legal uncertainty and discrepancy in decisions in similar factual scenarios. Conversely, in Australia and the USA there is a general doctrine of promissory estoppel whereby detrimental reliance upon a promise causes the promise to be enforceable even between those with no existing contract. The award is the minimum to do justice40. In Australia, the courts focus on equitable notions of conscionability and in both Australia and the USA, promissory estoppel is a distinctly separate cause of action for enforcing promises operating alongside the law of contract and can create new rights amongst those even with no pre-existing contract and does not operate as a waiver.41 English law in contrast does not yet recognise a wide estoppel doctrine in which promises are remedied by an award of damages measuring the detrimental reliance. Whilst there has been clear obfuscation with the principles of consideration, it is difficult to conclude with certainty that promissory estoppel operates as an alternative to consideration as regards alteration promises. It would appear that the applicability of estoppel in contract effectively depends on the individual case with policy considerations often motivating judicial decisions in practice. As such, the law in this area is a patchwork quilt of ad hoc decisions, and no overall interpretation can explain all decisions, rendering promissory estoppel harder and harder to apply42. Bibliography Chitty on Contracts (2007). 29th Edition Sweet & Maxwell. Cooke, E. (1997). Estoppel and protection of expectation. 17 Legal studies 258 M. P. Furmston (2007). Cheshire, Fifoot and Furmston’s Law of Contract. 15th Edition Oxford University Press. A Kramer (2002). The many doctrines of promissory estoppel. 37 Student Law Review 17-19. E. McKendrick (2008). Contract Law: Text, Cases and Materials. 3rd Edition Oxford University Press. Margaret Noble (1991). For Your Consideration. Volume 141, New Law Journal p.1529. Smith, S.A. (2004). Contract Theory. Oxford University Press. G. H. Treitel., (2007). The Law of Contract. 12th Revised Edition Sweet & Maxwell. The Law Revision Committee’s Sixth Interim Report Cmd. 5449. Read More