Topic 5- Estoppel - Lecture notes 5 PDF

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Lecture notes for Law of Contract I ...

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Topic 5- Estoppel Estoppel is a legal doctrine which has developed completely separately from contract law. However, it increasingly impinges on some areas of contract law because it can be a basis for the legal enforcement of promises. The promises that the contract is concerned with are promises made as part of a bargain. The promises that estoppel is concerned with are promises that are relied on by the promisee, to his or her detriment. 'The word estoppel comes from the old French word ‘estoupail’, meaning a plug or stopper. Common law is an older form of estoppel, and its operation is more consistent with the origin of the word. The estoppel stops up the mouth of the representor, preventing him or her from pleading the truth.'

Fundamentally, estoppel is about preventing a party from inconsistent conduct which harms another person. For example, where A engages in conduct, usually a statement or representation, and they induce B to adopt an assumption based on that statement or representation, if B relies on the assumption and suffers detriment, then A might be held to the statement if they later try to change their mind. Cheshire and Fifoot, identify three elements; 1. A party makes a statement, representation, promise of fosters an assumption 2. The other party relies to his or her detriment on the statement, representation, promise or assumption 3. The first party wishes to act contrary to the statement, representation, promise or assumption, and this would be unconscionable in the circumstances Central London Property Trust v High Trees The parties had a contract for the lease of a premises. During WWII, the tenant was unable to pay the full amount of rent. The landlord (plaintiff)

agreed to reduce the rent for the duration of the war. In 1945, the landlord decided that it was entitled to the full rental again, and brought proceeding. Denning's famous judgement re-establishing and extending estoppel is actually obiter, since he was speculating on the legal consequences if the landlord had sought to recover the full rental for the period during the war. He argued that the plaintiff would be 'estopped' from making such a claim. In the example; 1. The landlord made a promise not to insist on being paid the full amount of rent for the duration of the war 2. The tenant relied on that promise. They could have moved into cheaper premises, or closed down altogether. They arranged their financial affairs on the assumption that the landlord would not enforce his legal right to the full amount of rent 3. In the case, the landlord didn’t try to resile from his promise, but if he had tried to do so, then estoppel would have arisen Another example would be; 1. A promises to give certain land to B. B relies on the promise by building a house on the land. 2. A then refuses to transfer the land. There is no contract between A and B. A has induced B to assume that the land will be transferred to him or her. B has relied on that. 3. He or she has expended time and money building a house on someone else's land. He or she will suffer a detriment if A is allowed to behave inconsistently with his or her promise 4. That may be the basis for an estoppel Different Kinds of Estoppel The most important distinction is between common law estoppel and equitable estoppel. The distinction developed out of the history of estoppel. This makes the criteria for different estoppel slightly different. Common Law Estoppel

Common Law Estoppel Also known as estoppel by representation. This form of estoppel arises when; • • • •

Party A leads party B To adopt an assumption of fact Party B relies on the assumption The reliance means that B will suffer detriment if A subsequently denies the truth of the assumption • Party A tries to deny the truth of the assumption • Party A is estopped The limitation is that this estoppel only applies where the representation is about an existing fact. Since 1854, and Jordan v Money it became the authority to rule that estoppel was limited to the representation of fact, not to representation of future conduct. Equitable Estoppel Prior to Waltons v Maher there were two main types of equitable estoppel. They were developed after Jordan v Money and were limited and narrow exceptions to the rule in that case. Proprietary Estoppel 1. 2. 3. 4.

Party A leads Party B To adopt an assumption that A will transfer interest in land to B Party B relies on the assumption The reliance means that B will suffer detriment if A subsequently denies the truth of the assumption 5. Party A tries to deny the truth of the assumption 6. Party A is estopped It can apply to representations of future conduct, however it was limited in scope to the assumption about interests in land. Promissory Estoppel It

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It concerned exclusively with promises not to enforce legal rights. Parties must be in a pre-existing legal relationship. It is used to describe any equitable estoppel that doesn’t involve an interest in land. High Trees It re-invented promissory estoppel, with slightly broader terms. It was decided that estoppel could only be used as a shield and not as a sword. Meaning that it could only be used to defend against legal claims, not to enforce legal rights. Je Maintiendrai v Quaglia Was first case in Australia to adopt the 'High Trees' formulation of promissory estoppel. Main question was the issue of detriment, and whether the parties had proven detriment to the extent required so as to raise an equity in their favour. Waltons v Maher Waltons had been negotiating for the lease of property from Maher. The terms of the agreement to be required Maher to do extensive construction work according. To Walton's specifications. Waltons slowed on the signing and approving of contracts as they were having second thoughts, while Maher engaged in a lot of the early demolition and construction work to keep up with the timetable. Waltons eventually refused to sign the contract, as there was no contract that Maher could enforce, they sued on the basis of promissory estoppel. 1. Maher's believed that Waltons had signed the lease and therefore there was a binding contract between them (Common Law Estoppel) This interpretation was adopted by Deane and Gaudron, as an assumption of the fact, meaning that it fell within the existing parameters of common law estoppel.

2. Maher's believed that Waltons had not signed the lease, but were legally bound anyway (Promissory Estoppel) This prevented Walton from denying the assumption, meaning they could not deny that they had signed the lease. 3. Maher's believed that Waltons would sign the lease and complete the transaction (Promissory Estoppel) Interpretation adopted by Mason CJ, Brennan and Wilson JJ. An assumption concerning future conduct and according to the orthodox doctrines, could only be used to support equitable estoppel. However, circumstances did not sit as easily within the parameters of equitable estoppel. In this case the parties did not have a pre-existing legal relationship as they were only involved in pre-contractual negotiations. 1. Mason CJ and Wilson J said that promissory estoppel could arise in the absence of a pre-existing legal relationship. 2. Secondly, the Maher's were using estoppel as a sword, rather than a shield, meaning that they were seeking to enforce a non-contractual promise rather than defending the claim made by Waltons. This was taken from Brennan J who said that estoppel could be used as a sword. 3. Thirdly, Waltons did not expressly represent that they would sign the contract. The representation must have been through their silence. The Justices found that silence was, in the circumstances, a form of representation which induced the Maher's assumptions. The Waltons v Maher case leaves some issues a little hazy, but overall it has paved the way for a significant expansion of estoppel, particularly promissory estoppel. Elements of Estoppel Brennan J sets out a list of the rules of estoppel post Waltons v Maher 1. The plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant, or expected that (one) would

2. 3. 4. 5. 6.

exist between them The defendant induced the plaintiff to adopt that assumption or expectation The plaintiff acts of abstains from acting in reliance on the assumption The defendant knew or intended that reliance The plaintiff's action will occasion detriment if the assumption is not fulfilled The defendant has failed to act to avoid that detriment

Later cases have thrown some of these criteria into doubt. An example is Brennan J's 4th criteria, which is controversial as it doesn’t seem to be required by Mason and Wilson in the same case. Brennan J also doesn’t include unconscionability, which seems like an important omission given the emphasis that the judgements put on that element. Paterson, Robertson and Duke suggest the following criteria, but do note that the last three have not been required in every case. 1. An assumption adopted by the relying party (Assumption) 2. The assumption is induced by the representor's conduct (Inducement) 3. The relying party relies on the assumption and will suffer detriment if the assumption is not fulfilled (Reliance and Detriment) 4. The relying party has been reasonable in adopting and acting on the assumption (Reasonableness) 5. It would be unconscionable for the representor to depart from the assumption (Unconscionability) 6. The representor threatens to depart or does depart from the assumption (Departure) 1. Assumption If assumption is about an existing fact, then that gives rise to common law estoppel, whereas an assumption about future conduct can only support equitable estoppel. Though this distinction has been eroded, it has not been abandoned yet. There is still a dichotomy between common law and equitable estoppel. Another limitation which is now in doubt is whether the assumption must

Another limitation which is now in doubt is whether the assumption must relate to the existence of a legal relationship between the parties. The has been abandoned in the case of proprietary estoppel (equitable estoppel concerning interest in land) but it is not clear whether it still applies to promissory estoppel. The case of W v G suggests that it doesn’t. The case concerned a promise made by a defendant who had been in a lesbian relationship. She promised her partner that she would share responsibility for any children born during the relationship. The plaintiff has two children. When the relationship ended, the plaintiff sought financial assistance by claiming an equitable estoppel. The court found that there was an equitable estoppel, even though the assumption did not relate to any legal relationship between the parties. (At the time of the case it was decided that a relationship between lesbian women has no legal status in the Australian jurisdictions). 2. Inducement In Waltons v Maher, the defendants had induced the assumption by remaining silent when they should have spoken. Cleary an express promise or representation is not needed to support a finding of inducement. However, it is more usual that an assumption is induced by express language or conduct. Furthermore, the conduct or statement should be clear and unambiguous (Legione v Hately). 3. Detrimental Reliance This requirement is absolutely central to estoppel. It is important to understand that the detriment that is needed is a loss suffered as a result of the party relying on the assumption. The loss is that which would occur of the other party is allowed to depart from the assumption at the time of the threatened or actual departure. In contract, the focus is on expectation loss. That means the loss of a benefit expected to accrue if the promise is kept. Reliance loss, by contrast, is the loss that would be incurred because of the reliance on the promise. F

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For example if A promises to transfer land to B, and B builds a house on the land in reliance on the promise, then B's expectation loss is the value of the land and house. B's reliance loss is the expenditure incurred because of his or her reliance on A's promise. On the other hand, if A promises to transfer land to B and B does nothing, then no estoppel will arise because there is no detrimental reliance. Waltons v Maher Maher's expectation loss would be the profit from the lease to Waltons over the whole term of the lease. The Maher's reliance loss would be the time and money spent in demolishing the old building and constructing the new one. Je Maintiendrai v Quaglia The majority found that there was reliance loss and therefore detriment on which an estoppel could be founded. The seriousness of the detriment necessary is difficult to determine. The necessary level of detriment required more than that the promisee had acted on the promise, some injustice had to be suffered. It was enough that the lessee would be forced to pay back rent as a lump sum rather than on a week-by-week basis. Other examples of detrimental reliance include performing domestic or building work, failing to exercise an option, failing to commence litigation within a statutory limitations period, consenting to adjournment of litigation, entering a witness protection program and thereby severing lawful means of obtaining income, and even increase in mental stress and anguish. In W v G the detrimental reliance was in conceiving and rearing two children. 4. Reasonableness This requirement is said to involve two separate questions; 1. Did the party act reasonably in adopting the assumption? 2. Did the party act reasonable in taking the detrimental action in reliance on the assumption? Murphy v Overton

The plaintiffs were given an estimate of expenses for which they would be liable if they became tenants in a retirement village. The court held that it would not be reasonable to adopt an assumption that the estimate took into account all likely expenditure, since it was based on 'present budget figures' and it is reasonable to assume that new and different types of expenditure might arise in the future. 5. Unconscionability Deane offered a definition of unconscionability in the context of estoppel in the case of; Grundt v Great Boulder Gold Mine The use of or insistence upon legal entitlement to take advantage of another’s special vulnerability or misadventure in a way that is unreasonable and oppressive to an extent that affronts ordinary minimum standards. As always, the issue is whether the conduct is sufficiently unconscionable to justify equitable intervention. This is an inherently subjective and value-laden assessment. 6. Departure This requirement arises because, until a departure from the assumption is threatened or made by the representor, then there has been nothing unconscionable in their conduct. Also, it seems likely that no detriment will be suffered, since that is analysed as at the time of the departure. Further, up until that time, the representor might take steps to prevent the other party from suffering harm or detriment. Remedies Prior to the unification of promissory estoppel and proprietary estoppel in Waltons v Maher, the remedies available to a party who has proven the elements of estoppel differed depending on the type of estoppel. Equitable estoppel could only give rise to an equity based on detriment that

the promisee had suffered. This is very different from the consequences of enforcing contractual promises, which was generally the basis of relief for common law estoppel. Relief in equitable estoppel is based on the promisee's reliance, and the loss which is suffered as a consequence of that, whereas contractual relief is based on the expectation of the promisee if the promise had been fulfilled. However, despite this fundamental difference, the practical impact is sometimes the same, that the promisee is prevented from resoling his or her promise. Other times the relief is to monetarily compensate the promisee for their detriment. In offering relief, the court can choose between two possible paths; 1. Is to allow the promisor to resile from the promise, and require them to compensate the promisee for actual detriment suffered, by way of paying money 2. Is to require the promisor to hold to the assumption they have induced rather than allow them to depart from it. This is equivalent to enforcing the promise, and might involve an order similar to an order for specific performance Expectation v Reliance Expectation Damages Are the normal damages awarded in contract law. The purpose is to put the promisee in the same position as if the promise had been performed. In the context of estoppel, that means that, where an assumption is induced by the other party, then the default way to assess damages is to require the other party to actually make good the assumption. Like enforcing a non-contractual promise. Waltons v Maher There was no existing contract between the parties. However, Waltons induced Maher to adopt an assumption that a contract would be entered into. If the court adopts an 'expectation damages' approach, then the proper remedy will be to enforce the contract That would mean that Waltons would

remedy will be to enforce the contract. That would mean that Waltons would have to pay the rent on the lease for the entire term. In other words, the court would in effect be enforcing a promise despite the lack of contract. The relief ordered was that Waltons had to pay the full amount of rent under the unsigned lease. In other words, the result was that the Maher's were granted expectation damages. Expectation damages are more closely associated with common law estoppel. This has created a lot of controversy regarding whether this approach should be taken. It is argued that this approach will undermine the sanctity of contract and the special place given to contractual promises. Reliance Damages Is the amount or order that will undo the detriment which was incurred because of the reliance of the innocent party on the assumption. The focus is on the amount of detriment incurred when the party relied on the assumption induced by the other party. Waltons v Maher It would be to repay the amount of money spent on demolishing the existing building and re-building according to the contract specifications. Commonwealth v Verwayen Concerned a claim by Mr Verwayen that the Federal Government had promised not to plead two defences to his claim for damages arising out of a collision between two ships. Mr Verwayen was a sailor with the Royal Australian Navy and was serving on the HMAS Voyager when it collided with the HMAS Melbourne in 1964. Mr Verwayen was injured, but had never sued the Commonwealth for negligence because at the time it was believed that the Commonwealth owed no duty of care to members of the armed forces and would therefore not be liable. However, in a later case (Groves) it was indicated that liability could arise in the circumstances, so Mr Verwayen commenced proceedings. However, another problem was that he did so after

the action was barred under the Statute of Limitations (which provides time limits for commencing civil proceedings). At one stage during the legal proceedings, the solicitor for the Commonwealth has indicated that the policy of the government was not to plead these two defences (i.e. the Groves defence and the Statute of Limitations bar). Then, in 1986, a change of government precipitated a change of policy, and the Commonwealth sought leave to amend its defence so as to plead both defences. That was the point at which Mr Verwayen claimed that the Commonwealth was estopped from amending its defence. To explain in terms of the principles of estoppel; 1. An assumption adopted by the relying party (assumption). Here the assumption was that the Commonwealth would not plead the defences 2. The assumption is induced by the representor's conduct (inducement). The Commonwealth had induced that by stating its policy and by not ...