Tuesday, June 8, 2010

Contracts - Estoppel

Estoppel

  • An old French word which means cork or stopper and it stops people from going back on their word.
  • ‘But you said…’
    • ‘Estoppel is about inconsistent behaviour where that behaviour adversely affects another’
      • Cheshire & Fifoot, p 62
  • Generally there’s nothing wrong with changing your minds, but estoppel is a different situation
    • People are going to be held to their promises where those promises adversely affect another
    • Estoppel provides us with another legal mechanism for enforcing consistency

Important in a number of situations

  • Where you can’t make out an agreement, or there is no consideration
    • Estoppel often used by courts where they are looking to enforce types of promises or agreements where they somehow or another don’t meet the requirements of a formal contract
  • Estoppel can be useful within contractual situations
    • So there is a contract but then people make further promises about how their duties are to be performed or understood etc.
    • This is linked to variation, usually not enforceable without consideration
      • Estoppel will usually provide a remedy: a party to an already existing contract might be held to their word about the variance of their contract about how the rights are going to be enforced or terms performed etc.
    • Also linked to termination: If they do or say something that indicates that want to keep the contract open, they may be estopped from terminating the contract
      • So bank accidentally pays money into your account and tells you its yours, the bank may be estopped from getting the money back.
      • The parties to a commercial deal might agree to treat cl. 2 as such and such, they may be held to it.
  • THE COMMON THREAD IS MAKING SOMEONE WORK ON THE BASIS THAT WHAT THEY SAID WAS TRUE EVEN IF IT WASN’T OR EVEN IF THEY WANT TO CHANGE THEIR MIND
  • So if I adopt a position (by statement or conduct) that clearly indicates to the other person that this is my position, and you can rely on it, and the other person does rely on it, then an estoppel is going to arise.
  • There is also the issue of unfairness. The basic idea of estoppel is that courts will enforce promises where someone has relied on what the promising party has led them to believe and it would be unfair to let the promising party go back on their word. So it targets people who act inconsistently where that inconsistent behaviour adversely affects others in an unconscionable way.
    • SO, when is it unfair? (It is about a sense of indignation)
      • Its when a change of mind inconveniences someone, when one has gone ahead and acted on something.

Overview of Lecture

  • Why bother with estoppel?
  • The varieties and development of estoppel
  • Reception of estoppel in Australian law
  • The elements of estoppel
  • What does estoppel get you?
  • The relationship between estoppel and contract law

Varieties of estoppel

  • Historically there have been a whole range of estoppels, and different labels have been attached to the same types of estoppel
    • The ones below are those types of estoppel are most likely to give effect to promises
  • Start with estoppel by conduct or representation
  • Divided into Common Law and Equitable Estoppel (Which has other names)
    • Proprietary estoppel is a subset of equitable estoppel

Common law estoppel

  • A representation of existing or past fact, not of intention or law
    • EXAMPLE: Boss overpays you $200 and insists its yours. You spend it then they try and get it back. She can be estopped on the grounds of the representation.
  • People can’t go back on their earlier representation of fact
  • LIMITS
    • The representation must be one of existing or past fact, not a representation regarding intention or law
    • Acts as a defence, not as support for a fresh claim; ‘a shield not a sword’
    • So can’t use that to demand a higher salary for the next weeks.
      • CONTRAST with mistake that the boss tells you ‘you will get a bonus in your pay next week’, you spend $200. The boss then tells you that she made a mistake
      • You have clearly relied on statement and as a result of her changing her mind, you will inflict a detriment, but CL will not help you.
        • This was not a representation of fact, but one of intention
        • The estoppel cannot be used to create a new right, it is only a defence.
  • So for centuries, the CL enforced this view of estoppel

Promissory Estoppel or Equitable Estoppel

  • Equitable doctrine
  • Its about future conduct
  • Recognised in mid 19th century but then lay dormant until again recognised in Mid 20th in High Trees v Central London Property Trust
    • Denning J revived the doctrine
    • Promissory estoppel also became known as High Trees Estoppel
    • People had entered a long-term lease of a block of London flats with the aim of further sub-letting the individual flats out
    • Then WW2 broke out and had trouble paying the lease so they negotiated with the landlord for reduced rent for the course of the war
    • WW2 ended so the landlord demanded the full rent + the back rent
    • A case was launched to see whether the landlord could demand the payment of the back rent and whether the promise to reduce the payment for the duration of the war was enforceable even though the promise had not been supported by consideration
    • So should be a variation unsupported by consideration
      • So similar to Musumeci - so could use a practical benefit argument.
    • Denning J HELD that from 1945 the full rent was payable because the reduced rate was only for duration of war or low occupancy rate.
    • Also relied on obscure 19th C cases to hold that the landlord was estopped from claiming the back-rent
    • So Landlord was held to his word, not because of fresh consideration but because landlord was estopped from going back on such an unequivocal promise that was made with the intention that the tenants would act on it.
  • NOTES from High Trees
    • Landlord was estopped from enforcing his legal rights so it seems it applies only to a negative promise (e.g. ‘I will not enforce the contract as written’): so still only a shield, not a sword
    • It was also limited as it applied only in context of suspension of existing contractual rights, it didn’t apply more generally
      • So doesn’t apply to promise of a gift or promise to keep option open.
    • Promisee must act on the promise: ‘reliance’
      • BUT in this case, the tenants had only been conferred a benefit (reduced rent). So doesn’t necessarily have to be detrimental reliance.
    • Estoppel may only be temporary (High Trees example)
      • Where contractual duty entails ongoing periodic obligations, estoppel suspends the rights of one party. SO you can go back on the promise if you give the other party time to re-adjust.
  • So the exact effect of a promissory estoppel is going to depend on the precise nature of the promise made.

Proprietary estoppel – An example of Promissory Estoppel

  • ‘One day all this will be yours…’
  • This is the one example of the exception made to estoppel that it is only a defence.
  • Only applies in situations involving land transactions and recognises that often people make quite informal arrangement s involving land.
  • Promise to pass land to another may be unenforceable because there may be no consideration, no intention to create legal relations and/or no writing.
  • But, equity says it is unfair to encourage someone to make a major commitment (such as building a house) then to deny that the people who have acted on that encouragement have any rights.
  • Proprietary estoppel can arise not just when the owner of land has encouraged another to use the land but also where the owner of the land has simply stood by and allowed someone to use the land - sometimes called ‘acquiescence’.
    • So in dealing with land, courts were happy to enforce an agreement even without a contract
    • They did this to remedy what they saw as a clear unfairness.
  • So up to High Trees, the situation was that estoppel didn’t enforce promises outside existing legal relations.
  • But Proprietary estoppel was. And High Trees Estoppel did have something to do with enforcing (negative) promises, but did allow one to go back on their word if they did the right thing.


Estoppel in Australia

  • Initially the High Trees Case was met with some resistance and it wasn’t until the 1980s that things started to happen.

Je Maintiendrai v Quaglia, 1980 (SA SC)

  • Very similar to HT, a landlord was estopped from demanding back rent having promised to reduce the rent
  • But what disadvantage? The tenant only had to pay the rent that he was liable for anyway
    • BUT King CJ held: having to pay the rent back in one go would in fact be a disadvantage to the tenants.

Legione v Hateley, 1983

  • High Court of Australia finally recognised notion of promissory estoppel but didn’t apply it because they thought an essential element was missing.
    • FACTS: Case involved a contract for the purchase and sale of land
    • Purchasers were permitted under the contract to pay a deposit and then move on to the land immediately and then pay off the balance a year later.
    • When the year was up they had to pay the balance but they found themselves in financial difficulties and if they couldn’t meet the deadline, they stood to lose both the deposit and the land now containing a house
    • Deadline was 1/7 but vendors extended it to 10/8 by giving notice
    • On 9/8 the purchaser’s solicitor rang the vendor’s solicitor’s office and spoke to a secretary. The Plaintiff Solicitor said that ‘it should be all right and we will get the finance, its just that its gonna be 7 days late. Is that acceptable?’ The Secretary replied, ‘I think that will be all right, but I’ll have to get instructions’
    • So 10/8 passed and on 14/10 the vendor terminated the contract.
    • So the purchasers argued, among other things, that that conversation with the secretary generated an estoppel, so they were estopped from insisting on the deadline.
    • HELD: This conversation was not capable of generating an estoppel
    • For an estoppel to work there has to be a clear and unequivocal statement and here the statement by the secretary was too qualified.
  • Recognised promissory estoppel, but limited as in High Trees
  • To found an estoppel, the promise or representation must be clear and unambiguous and this was the problem on the facts.
  • There must be detrimental reliance by the other party, ‘material disadvantage’ (@ 437)
  • Significance of this decision though is that for the first time the High Court of Australia recognised the existence of promissory estoppel, i.e. an estoppel concerning future intention.
    • But limited to promises concerning existing contractual obligations.


Waltons Stores v Maher, 1988

  • ‘We believe approval will be forthcoming. We shall let you know tomorrow if any amendments are not agreed to…’
  • This is the case where the High Court of Australia made the big breakthrough in relation to promissory estoppel
  • Breakthrough was twofold and now sets us apart from British Law
    • Promissory estoppel able to be used as a sword, not just a shield
    • Promissory estoppel a general principle which could operate in any legal relations, not just existing contractual relations
  • ‘A common thread’: Equity will act to relieve a plaintiff who has acted to his detriment on a basic assumption where the other party has played such a part in its adoption that it would be unfair or unjust if he were left free to ignore it . (p. 404)
    • FACTS: Waltons, a retailer wanted to build a store in Nowra
    • They found a site owned by Maher, and negotiated a deal with them whereby Maher would demolish existing buildings and build a new store to Waltons’ specs
    • Maher would then lease the property to Waltons
    • Waltons was in a hurry, they had settled the contract by late 1983 and wanted the store erected by early 1984
    • At the beginning of November, some minor amendments had been made to the contract (it had not been signed yet) and some minor adjustments were suggested by Maher. Waltons’ solicitors said they looked ok but said they will have to clear them with Waltons first.
    • They said, ‘We believe approval will be forthcoming. We shall let you know tomorrow if any amendments are not agreed to…’
    • Maher’s solicitor heard nothing further so got contract signed and then sent two contracts to Sydney to have them signed
      • The way in which contracts for land are executed is by exchange of contracts, Maher had done their bit and the appropriate thing for Waltons to do is to sign both contracts and send them back to Maher.
    • Maher started to demolish the buildings because he knew there was a sense of urgency
    • Then Waltons had a change of heart and asked their solicitors if they had a contract with Maher yet
    • Solicitors said no because they haven’t sent the contract back, so Waltons instructed its solicitors to go slow on the deal
    • Maher didn’t hear from W for 9-10 weeks and demolished the buildings on the site and had erected half of the new buildings.
    • W had a representative in Nowra who knew exactly what Maher was doing and around the 20th January, Waltons sent a letter to Maher saying they would not go ahead on the deal
    • So CONTRACTUAL SITUATION January 1984: deals of this kind are finalized by exchange of contracts and that had not happened and Maher had begun the work at his own risk
    • Law of estoppel in 1984 would also not apply as it applies to existing contractual relations when one states that the other party need not do something
    • To use estoppel would mean transforming it entirely as
      • It would be used outside an existing contract and
      • As a cause of action
    • Maher brought an action saying there was in fact an existing contract and demanded damages and won all the way to the High Court of Australia without a single dissenting judge.
    • The basis on which the majority judges proceeded in the High Court of Australia was that Maher believed that Waltons had said that the exchange of contracts would take place
    • In other words thy had promised that the contract would go ahead.
    • So the judgement tests the limits of promissory estoppel
    • Mason CJ and Wilson J, ‘Maher believed that the exchange would take place as a matter of course’ and that belief had been fostered by W through their solicitors when they said they would communicate only the –ve.
      • @ 400: They discuss the sword/shield, but look at proprietary estoppel and say it has allowed people to enforce promises without consideration and point to common thread.
    • The doctrine extends to the enforcement of voluntary promises on the footing that a departure from the basic assumption must be unconscionable
    • So this is about promises and unfairness (unconscionability) ‘ merely breaking a promise is not by itself unconscionable, but it does become unconscionable conduct when the promisee has relied on it to his or her detriment
      • Detrimental reliance is particularly important because it goes to proving unfairness
      • Mere reliance is not enough, it has to be reliance that was encouraged by the promisor.
    • This was all established on the facts of the case
      • Also looked at atmosphere of urgency generated by Waltons
      • Maher had been encouraged to believe that the exchange was a mere formality and the failure of Waltons to get back to Maher meant that the last minutes were OK and the agreement was going ahead.
      • So there was detrimental reliance that was encouraged.
    • So Waltons was estopped from retreating from its implied promise to complete the contract.
    • Silence can also support an estoppel (Brennan J) if it reinforces the assumption.


Elements of a successful Estoppel action under current Australian Law.

  • An assumption
    • An expectation of the plaintiff that the defendant will act in a certain way
  • Inducement
    • That that assumption must have been induced by the conduct of the representor (the causation requirement)
  • Detrimental reliance
    • The plaintiff must suffer some detriment as a result of his or her assumption that has been induced by the defendant.
    • This is perhaps the starting point for an estoppel action: that there has been a loss
  • Also look for elements of
    • ‘reasonableness’, and
      • The reasonableness requirement is basically asking whether the relying party is worthy of protection. Did they act reasonably in making the assumption
    • ‘unconscionability’
      • Asks whether the representor deserves blame – did they act unconscionably. This is usually a summing up of all factors.
      • NOTE: Detrimental reliance determines the issue and show unconscionability.
      • These are perhaps not separate elements but are part of the three main elements.

An assumption

  • About fact or law, present or future
    • There must be an assumption about something. There can be no reliance on anything that has not entered the mind of the representee
  • Must be clear and unambiguous, but can be in quite general terms
    • A promise may be definite in the sense that there’s a promise to do something even if that something is not precisely defined
    • So the assumption can be formed in quite general terms
    • And the type of representation or promise that is insufficiently precise to give rise to a contract may give rise to an estoppel (W v G)
    • W v G (1996)
      • Two women were living together in a same-sex relationship
      • One wanted to have children and agreed to share responsibility for them
      • The women later separated and the 1st sought compensation for the loss of promised financial support and was successful on the basis of estoppel
      • So the assumption didn’t have to relate to any existing legal relationship and a comment made in general terms may be sufficient to give rise to an estoppel
    • Crime Authority v Gray
      • Gray was involved in a crime syndicate but agreed with Crime Authority to give evidence against the syndicate in return for immunity and Witness Protection
      • So relied on a statement by a member of the Crime Authority that he and his family would not lose any income
      • Then the WPP ended, and they were sent a tax bill etc.
      • Refused to pay and said they had relied on the Crime Authority’s promise that they would suffer no disadvantage
      • Crime Authority argued that this promise was too broad
      • NSW CA HELD: that an assumption could flow form that agreement and the assumption would be that the Crime Authority would support them for a reasonable time after the program
      • SO a clear assumption is enforceable

Inducement

  • Assumption must be induced by the representor – trying to blame them for the assumption which caused the detriment.
    • So if one adopts an assumption independently of the conduct of the representor then no basis for an estoppel
  • Can be adopted expressly through words or impliedly through action or silence, but issue of clarity will arise between actions of representor and assumption formed.
  • Causal link between conduct of representor and detriment suffered by representee, must be unequivocal cause of assumption.
  • Objective criteria: was the adoption of the assumption reasonable in all the circumstances? Essentially, if a person has made an assumption where that was probably not sensible, it will make it harder to prove. SO Legione: It was not reasonable for the representee to rely on the secretary’s expression of opinion/expectation
    • Clarity of language (Legione)
    • Knowledge of representor’s authority (Legione)
      • Actual or inferred knowledge about the representor’s (lack of) authority is important
    • Context (Legione; Mobil Oil)
      • Seriousness of conversation, nature of relationship etc.
  • So focus is on inducing assumptions, not merely whether an unambiguous representation is made rather, was the assumption induced by the representor, objectively judged?
  • Can an assumption be induced by silence? (Walton)
    • Silence can give people the wrong impression, but courts will look at whether the silence/inaction has communicated anything to the other party
  • ESSENTIALLY: Did the representor causer the mistaken assumption to arise?


Detrimental Reliance

  • The fact that an assumption has been induced does not prevent a person from going back on what they’ve said. There also has to be detrimental reliance.
  • Wasted expenditure (Waltons)
  • Bearing and raising children (W v G)
  • Having to pay a lump sum rather than instalments (Je Maintiendrai)
    • This is finding detrimental reliance even in a High Trees situation. Despite the fact that the tenant only had to pay for what he had already agreed to.
    • Also: Loss of opportunity through inactivity (Je Maintiendrai)
  • Entering witness protection program (Aust Criminal Comm v Gray)
  • But when does reliance become detrimental?
    • Often what is done in reliance is not a disadvantage until the promisor goes back on what they’ve said (Je Maintiendrai)
    • Until the promisor went back on his word they suffered no material disadvantage
    • So the analysis that comes out of this case is what you do in reliance on the assumption may not be a disadvantage until the representor goes back on their word
    • SO the time for testing for detriment is the time the promisor goes back on their word.
  • Detrimental Reliance must be ‘material’ = significant in some way

Remedies I

  • If estoppel is trying to remedy detriment, then the way detriment is calculated is critical
  • ‘Expectation loss’ versus ‘reliance loss’ or ‘detriment loss’
  • Contractual obligations protect expectations. = Putting parties in the position they would have been in had the contract been performed
  • BUT: Obligations under estoppel are to undo detriment flowing from reliance. Its not gonna try and put one in a position better than they would have been in had they not relied on it.

  • But, law is rarely that simple… The distinction between expectation loss and detriment loss is cloudy. Often in property cases, they will get the land that is promised.
  • They need ‘the minimum equity to do justice’
    • They focus on the minimum.

Commonwealth v Verwayen

  • Verwayen was seeking compensation after he was injured in the Voyager disaster
  • Commonwealth government repeatedly assured Verwayen and others that they won’t plead the statute of limitations as a defence but in 1985 decided they would.
  • Verwayen argued that they were estopped from pleading that defence
    • On question of inducement, Mason J had said that normally it wouldn’t be reasonable for one to form an assumption on what a party said leading up to a case because it is always open for them to change their pleadings, but here commonwealth is no ordinary litigant. Coming from them it was like a statement of policy, so it was perfectly reasonable for Verwayen to form an assumption they would not use the defence.
    • So elements for estoppel: An assumption, induced by the Commonwealth which Verwayen then relied on to pursue an action in negligence against the Commonwealth
  • So the case which went to the High Court of Australia was on the question of ‘what flows from this estoppel’?
  • The result was a mess, but it boiled down to this detriment/remedy issue; reliance loss vs remedy loss
  • So they had a choice, the Commonwealth could be estopped from pleading statute of limitations and Verwayen would probably recover damages thus fulfilling his expectation OR the Commonwealth could be allowed to plead the defence and Verwayen wouldn’t be able to pursue his action in negligence but could recover his expenses thus far in relying on what the Commonwealth had said.
  • HELD: The Commonwealth could not plead that defence, but only Deane and Dawson based their decisions on estoppel.

Giumelli v Giumelli

  • Robert was the son of the Giumellis who worked on a farm in the Margaret River region.
  • There was a “general promise” that Robert would get part of the property to compensate him for working without wages,
  • A “second promise” that he could build marital home, and that the house and adjoining land (including the orchard) should be his.
    • He then divorced and his parents didn’t like the new wife, so he went to live on her property
  • SO a “third promise” that the property would be subdivided to create a lot including house and orchard if Robert would agree to stay on the property and not take up an offer to work for his father-in-law.
  • High Court of Australia HELD: It’s not practicable to divide up the land to give Robert his share because of all the other people that would be adversely affected so they ordered compensation for Robert’s share in the property
  • In effect they awarded monetary compensation for the value of Robert’s expectation
  • Also HELD that the prima facie entitlement is fulfillment of expectation
  • SO a reliance measure of relief is argued in the earlier cases but doesn’t seem to be implemented or enforced
    • So courts now tend to provide expectation relief which usually stops someone going back on their word.

Remedies II

  • Make good the assumption unless in the circumstances of the case it would be inequitably harsh to the defendant
  • Thus court might use estoppel to require a promise to be performed, or award sum of money equal to promised performance

Estoppel and…

  • Contract formation
    • (Waltons; Austotel v Franklins Selfserve, 1989)
    • Estoppel, in contrast to offer and acceptance and magic moment seems to make reference to a series of actions over time which matures until there is clearly a point where one can say one is estopped.
    • SO although until the magic moment, no one is bound, under estoppel if prior to the finalisation of a deal, the other party starts acting to their detriment under the terms of the deal, is the other party gonna be bound? (Waltons)
    • Cf. Austotel v Franklins Selfserve, 1989
      • Austotel were property developers and Franklins gave Austotel a letter of intent to say they wanted to open a new supermarket in the shopping centre
      • They specifically said they didn’t want to be bound yet
      • They then requested more floor area, Austotel agreed but said they had to negotiate increase in rent
      • So issues of uncertainty and incompleteness
      • The Franklins begins ordering fittings etc. but Austotel tell them they are not bound to them and want to lease it to Bi-Lo
      • So Franklins initiated action under Estoppel, saying they thought the deal was gonna go ahead
      • NSW S.C. rejected this
      • HELD: Franklins had consciously refrained from coming to a decision about the rent; two big commercial interests were playing a cat and mouse game and lost.
  • Contract variation
    • (Je Maintiendrai)
    • Nowadays you could argue like Musumeci and go a practical benefit case.
  • Contract termination
    • (Legione v Hateley)
    • One can promise not to terminate or lead the other person to assume that you won’t terminate and if you do that you may lose the right to terminate.

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