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The notion of promissory estoppel is used in relation to promises/undertakings that are not supported by consideration (and therefore not normally enforceable as contractual promises). Promissory Estoppel replaces consideration completely.
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Traditionally, there is the Pre-Existing Duty Rule in the background.
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Through promissory estoppel, the person making the undertaking is prevented (“estopped”) from reversing her position.
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To say “I meant it at the time, but it’s not supported by consideration, so now I take it back” – this is unfair! We are trying to have consistency here and it would be unjust to let them not be bound after the fact.
Lord COKE defined it as follows:
"Estoppel cometh of the French word estoupe, from whence the English word stopped; and it is called an estoppel or conclusion because a man's own act or acceptance stoppeth or closeth up his mouth to allege or plead the truth."
Yes ENFORCEABLE
No
Yes ENFORCEABLE
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Promise Given for Consideration
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No SHIELD: ENFORCEABLE
Yes
SWORD (compare Sec. 90 – reasonable foreseeability)
No
UNENFORCEABLE
High Trees is the leading case for promissory estoppel
In High Trees, Lord Denning decided that the undertaking not to claim the full rent during the war was binding, i.e. that the landlord was “estopped” from going back on his promise.
Lord Denning referred to “promises which were intended to create legal relations and which, in the knowledge of the person making the promise, were going to be acted on by the party to whom the promise was made, and have in face been so acted on.”
Compare Section 90 of the Restatement
CML – Central London Property Trust v. High Trees House, [1947] K.B. 130: CB 236 |
Jurisdiction
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USA
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Facts
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In 1937, CLP (landlords) leased a block of apartments to HTH (tenants) for £2500 per year. In 1939 when the war broke out, most of the flats had not been rented, the tenants could not pay, so the landlords agreed to reduce the rent to £1250. There was no duration specified for the rent reduction. By 1945, all of the apartments were rented, and the landlords wrote to ask that the full rent be paid and also claiming arrears (back rent) of £7916. The original lease had been a lease under seal.
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Issues
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Was the promise to accept lower rent legally binding? If yes, what is the scope of that promise?
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Holding
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Partial judgment for the landlords – rent increase effective 1945, no arrears.
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Reasoning
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Denning:
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Rule of equity: courts may give effect to a variation in writing to a lease under seal – in this case, to the rent reduction
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No consideration in the promise to give a rent reduction
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Promissory estoppel: in agreeing in writing to accept a lower rent, the landlord (1) intended to be legally bound; (2) knew the tenants would act on the grounds of the promise by paying a lower rent. In fact, (3) the promise was acted upon by the tenants. Therefore, the landlord is not entitled to arrears notwithstanding the absence of consideration for the promise.
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Scope of the promise to accept lower rent: applied only in wartime when the flats were not fully let – these conditions are no longer present, so the promise is no longer valid. The tenants must pay the original rent from the second half of 1945 onward.
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Ratio
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Promissory estoppel – a promise made with the intention to be legally bound, and acted upon, cannot be gone back on after the fact, even if the promise was not supported by consideration. “The promise, intended to be binding, intended to be acted on and in fact acted on, is binding so far as its terms properly apply.”
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Comments
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Distinguishable from Gilbert in a few ways:
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Here, performance was completed to a certain extent because lowered rent was accepted for a significant period of time, whereas in Gilbert performance (payment) was never completed (“extent of reliance”?)
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Agreement here to accept less money (vs. Gilbert, where it was an agreement to pay more) – use of estoppel as a shield (protection of reliance) rather than as a sword (to get more money out of someone “because they said”)
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MOST OF THE JUDGMENT IS OBITER! (i.e. the discussion about arrears, because in this particular action they are only looking for the payments for the last two quarters of 1945)
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Leading case (Lord Denning) that creates a sub-category of estoppel (estoppel with a time limit), protecting reliance
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IN ENGLAND AND IN CANADA: Estoppel cannot be used as a sword. Australia and USA are different…
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There was no consideration, so no promise under CML – but 1870s merger of CML and Equity brings different rules to bear
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Denning gives himself authority – says that this is a natural principle (because he says so), and that the time has come (because he has decided)
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“The time has come for the validity of such a promise to be recognized,” but Denning doesn’t mean that it can be sued upon by either party later clarified in Combe v. Combe that he only meant promissory estoppel as a defence
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Denning might have found consideration instead (HTH not going bankrupt and continuing to lease the building, etc.) – but didn’t, maybe because there were no terms in K2, or maybe because he felt that the law needed to develop in this way
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This is a “test action”: a sense that this is the first of several similar cases – but whereas CLPT was testing the two quarters in 1945 in preparation for maybe suing for more, Denning restricts the holding to a narrow victory for CLPT
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Distinction between accepting less for something and paying more for something under a K – so CLP’s accepting less rent and then suing is different in two respects than CUP paying more in Gilbert Steel and then being sued: if you take the distinction seriously, then the holding might have been different if CUP had instead accepted less steel for the same price
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Promissory Estoppel in Different Jurisdictions
The ruling in High Trees was given a narrow scope in subsequent Anglo-Canadian decisions: promissory estoppel can only be invoked defensively/ as a shield (doesn’t work in Gilbert because it is used as a sword in that case).
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“A promise to accept a small sum in discharge of a larger sum, if acted on, is binding, notwithstanding the absence of consideration...”
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The courts have refused to allow the party making such a promise to act inconsistently with it. Promissory estoppel, it has been said, is a “defensive equity”.
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In Canada and in Great Britain, it is thus said that promissory estoppel can only be used as a “shield”: “to preclude departure from a representation by a person in a pre-existing contractual relationship that he will not enforce his contractual rights.”
In the Absence of Consideration
SHIELD: one-sided variation of contract in the form of a concession (giving up claims, accepting partial payment, etc.)
Situation: The party that has made the concession tries to enforce the agreement as it initially was before the concession was made. Eg. High Trees
SWORD: one-sided variation of contract in the form of additional advantages
Situation: The party that benefits from the additional advantages tries to enforce the promise of additional advantages. Eg. Gilbert Steel
SWORD: New relationship: promise or representation without exchange, but followed by reliance
Eg. Kirksey, Walton Stores
Synthesis and analysis
Consideration
PLAINTIFF WAS PROMISEE
Benefit to promisor:
Wood v. LLDG
Williams (pay more)
Detriment to promisee:
Hamer
Stott
Failure to find consideration:
White v. Bluett, Gilbert Steel
Reliance
PLAINTIFF WAS PROMISOR
(another group of cases in which consideration may or may not be considered)
High Trees (accept less)
Tudale
Enforceable legal relation
The courts here see a difference between paying more and accepting less (somewhat a function of the sword/shield distinction, but with different doctrinal history) – whether this is a good reason, it seems to be one that the courts used
If one party agrees to pay more and then wants to pay lower price, estoppel might be seen as a sword
If one party agrees to pay less and other wants them to pay more, more likely that estoppel will be a shield
Doctrinal origin: Denning saw estoppel as an extension of equitable doctrine of waiver (one party is at liberty to reduce its rights) – so accepting less (looks like waiving rights) can be seen differently from seeking more
Hamer v. Sidway doesn’t fit here, as the debt had been sold twice, so the plaintiff was the promisee but there was also a reliance interest
The reliance claim may be more compelling if you really show important actions in reliance outside the K
Gilbert (1978): Wilson J. found that a going transaction adjustment had no consideration (because only the price was changed – so how much else would have had to be changed?) some suggestion by commentators that Gilbert Bros were being slightly dishonest, that there was some duress exercised in raising the steel prices
Williams (1991): consideration was found (has CML changed?) in real terms, advantage in having Williams continue his work, so a shift from the sailor cases (but the sailor cases may have been decided for policy reasons, not for consideration reasons)
Section 90 of the Restatement of Contracts
USA: Sect. 90 also recognizes that a promise made without consideration can nevertheless be enforced when it reasonably induces reliance – to the extent that “justice requires”.
Applicable without a pre-existing relationship.
Section 90 of the Restatement
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach maybe limited as justice requires.
(2) A charitable subscription or a marriage settlement is binding under Subsection (10) without proof that the promise induced action or forbearance.
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Commentary:
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“Promissory Estoppel” – prevents a person from showing the truth contrary to a representation of fact made by him after another has relied on the representation
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Promisor is affected only by reliance which he does or should foresee
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Enforcement must be necessary if injustice is to be avoided VERY FLEXIBLE RULE
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Also depends on the reasonableness of promisee’s reliance
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Depends on the formality with which the promise is made
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Reasonable reliance by a third party (“beneficiary”) on a promise between two people is also grounds for enforcement of the promise, based on same factors
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Remedy might only consist of damages or relief measured by the extent of the promisee’s reliance rather than by the terms of the promise
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“Unless there is unjust enrichment of the promisor, damages should not put the promisee in a better position than performance of the promise would have put him.” (CP p. 278)
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Gratuitous promises to procure insurance – applied with caution – reasonableness is taken into account
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Example 1: A (bank) lends B (lender) money. A mortgage on a house is security for the loan. A demands that B insure the house as a condition of the contract, but offers to take care of the insurance. B relies on the promise and does not seek insurance elsewhere. The house is destroyed by fire, and A did not take care of the insurance as promised. Even though there is no “consideration” (the promise to procure insurance on B’s behalf was a gratuitous promise), it was reasonable for B to rely, so the promise is binding.
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Example 2: A sells B an airplane, but keeps title to secure payment. A promises to keep the airplane covered by insurance for the amount of time that B needs to procure his own insurance. B could obtain insurance in three days, but doesn’t, and the airplane is destroyed after six days. A is not liable – the promise is not binding because the “term attached” was as long as B needed to obtain insurance if he acted right away. REASONABLE PERSON STANDARD.
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Promises of gifts are only binding if reliance is foreseeable and reasonable, and involves a definite and substantial change in position which would not have occurred if the promise had not been made
Section 90 of the Restatement of Contracts also recognizes that a promise made without consideration can nevertheless be enforced when it reasonably induces reliance – to the extent that “justice requires”.
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This is not just about what you bargain for or what you have the intention to do (cf. Lord Denning in High Trees), but also for what you should reasonably be able to foresee the promisee incurring in relying on your promise.
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Broadens the application of promissory estoppel from only used in situations arising from the Pre-Existing Duty Rule to any new relationship. You can be estopped from renegging on a first promise in the States, whereas you have to be renegging on a second gratuitous promise where you already have a pre-existing duty in classical CML (ie Canada/UK)
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Although the “justice requires” part is really very subjective!
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If you apply §90 to Kirksey, a judge now would put her in the position she would be in if she had never relied on his promise (they wouldn’t enforce the performance). This compensation of having relied on this promise is a departure from classical CML detrimental reliance: the bro in law would have to pay for the things she lost.
Consideration is more than just form, it is the reason for enforcing a promise. This fundamental principle makes us assume that the relationship exists and enforce a promise after reliance/detriment has been incurred.
Australia – “Inching towards Section 90?”
Walton Stores extended the doctrine of promissory estoppel to the enforcement of positive promises.
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Where is the promise? “implied promise to complete the contract”
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“[M]ere reliance on an executory promise to do something, resulting in the promisee changing his position or suffering a detriment does not bring promissory estoppel into play. There must be something more would be required.”
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“[T]he creation or encouragement […] of an assumption that a contract will come into existence or a promise will be performed and […] the other party relied on that assumption to his detriment to the knowledge of the first party (and as intended by the first party).”
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“[A] departure from the basic assumptions underlying the transaction between the parties must be unconscionable.”
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Walton Stores imposes liability before both parties want to be bound: conflict of Private Autonomy and the requirement of Fairness/Good Faith
CML – Walton Stores (Interstate) Ltd. v. Maher., (1988) C.L.R. 387 (H.C.A): CB 241 |
Jurisdiction
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USA
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Facts
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Maher negotiated with Walton Stores to lease a commercial property he owned. A draft lease was sent to Maher’s solicitor and amendments were discussed. A few weeks later, Walton’s solicitor was told that it would be impossible for the new building to be completed on time unless the agreement was completed “in the next day or so”. Maher refused to demolish a part of the old building until the agreement was finalised.
An executed lease “by way of exchange” (no exchange taken place yet – pre-contractual state – “gentlemen’s agreement”) was forwarded to Walton, and Maher proceeded with the demolition of the building.
Walton had second thoughts and then was informed of the demolition.
A few months later, building works were started by Maher, and before it was halfway completed, Walton said it did not want to proceed.
Maher claimed Walton was estopped from going back on their earlier agreements about the lease.
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Issues
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Was Walton estopped from retreating from its promise to complete the contract?
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Holding
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Yes Maher.
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Reasoning
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First factor: it was unconscionable for Walton to adopt the course of inaction which encouraged Maher to demolish the building and build a new building. Behaviour of Walton made it seem like completion of the exchange was just a formality.
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Second Factor: urgency of the matter. The appellant was under an obligation to communicate with the respondents within a reasonable time.
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W “was under obligation to communicate with the respondents within a reasonable time after receiving the executed counterpart deed and certainly when it learnt on 10 December that demolition was proceeding. It had to choose whether to complete the contract or to warn the respondents that it had not yet decided upon the course it would take. It was not entitled simply to retain the counterpart deed executed by the respondents and do nothing […] the appellant’s inaction, in all the circumstances, constituted a clear encouragement or inducement to the respondents to continue to act on the basis of the assumption which they had made. It was unconscionable for it, knowing that the respondents were exposing themselves to detriment by acting on the basis of a false assumption, to adopt a course of inaction which encouraged them in the course they had adopted. To express the point the language of promissory estoppel the appellant is estopped in all the circumstances from retreating from its implied promise to complete the contract.” p. 243
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Ratio
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Promissory estoppel extends to representations (or promises) as to future conduct. Example of estoppel used as a sword in case where there was no pre-existing duty – detrimental reliance based on other party’s conduct is enough to support action in estoppel. BIG step away from classical doctrine.
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Comments
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Court found an implied promise, however, there was no contract in terms of doctrine, rather case hinges on behavior of the party – just be negotiating one has entered into a promise/relationship where one must not act unconscionably
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Negotiating leads to a relationship and duty to each other
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Parties to proposed contracts should be aware that their conduct before the contract is entered into may support an action in estoppel by the other party should the other party rely on their representation and the estopped party have knowledge of this reliance. This may be the case notwithstanding that contractual terms are still to be agreed. It was not crucial that there be an intention of the parties to enter contractual relations.
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Note: court is enforcing the promise to contract. Requirement of unconscionability – normally only present in civil law...
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Pre-Contractual Duties
Imposing liability before both parties want to be bound: conflict of Private Autonomy and the requirement of Fairness/Good Faith
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See the German doctrine of Culpa in Contrahendo
To be continued in next section…
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