Promissory Estoppel

Nor Asiah Mohamad

Estoppel

• A product of equity;• Types of estoppel:• Equitable – promissory or proprietary

Intro

• the doctrine that prevents a party from acting in a certain way because the first party promised not to, and the second party relied on that promise and acted upon it.

• provides a means of making a promise binding, in certain circumstances, in the absence of consideration.

• * Doctrine : from Latin doctrina , means "a code of beliefs", "a body of teachings" or "instructions", taught principles or positions, as the body of teachings in a branch of knowledge or belief system

The function of the rule• It is only one form of estoppel* which has been employed to

obviate(prevent) the necessity of consideration – in this situation, the function of the rule is to make a subsequent promise made by one of the parties without consideration enforceable against the promisor- in cases where parties are already bound contractually and one of them promises to waive, modify, suspend, or hold in abeyance its strict legal rights under such contract.

• The promisor is not allowed to go back on that promise when it would be unfair/unjust to do so.

• *other types : proprietary & equitable

Scope of discussion

• When applicable? conditions for application/features of the doctrine

• Scope suspensory or extinctive?• Use of estoppel As a shiled or sword?

When Applicable : Conditions for Application

• Promissory estoppel was developed by Lord Denning in Central London Property Trust Ltd v. High Trees House Ltd [1947] K.B. 130

• Sometimes simply referred to as the High Trees case, a decision of Lord Denning that helped established the doctrine of promissory estoppel in the law of England.

• In 1937 High Trees House Ltd. leased a block of flat for a rate £2500/year from Central London Property Trust Ltd.

• Due to the war and the resultant heavy bombing of London, occupancy rates were drastically lower than normal.

• In January of 1940, to ameliorate (improve)the situation High Trees House Ltd. made an agreement with Central London Property Trust Ltd. in writing to reduce rent by half.

• However, neither party stipulated the period for which this reduced rental was to apply.

• Over the next 5 years, High Trees paid the reduced rate while the flats began to fill and by 1945 the flats were full.

• In light of this, Central London sued for payment of the full rental costs over the full period from 1940 and the future

Held:

• Lord Denning held that the full rent was payable from the time that the flats became fully occupied in early 1945, but that Central London could not go back on their promise of reduced rent for the period of the war because of High Trees reliance on the lower rate.

High Trees case can be traced to Hughes v

Metropolitan Railway (1877)2 App Cas 43 • In this case, a landlord gave his tenant six months’

notice to repair and in the event of failure to repair, the lease would be forfeited.

• Within the six months, the landlord opened negotiations with the tenant for the sale of the lease, during which time the tenant carried out no repairs.

• Shortly after, negotiations broke down and at the end of the six-months’ notice period, the landlord claimed to forfeit the lease.

Held (HOL)

• the landlord could not do so.• The landlord had, by his conduct, led the tenant to

suppose that the landlord would not enforce forfeiture at the end of the notice period and the tenant had relied on this by not carrying out repairs.

• However, the six-month period would begin to run again from the date of the breakdown of negotiations.

Q : How does the doctrine operate?

• The doctrine operates where there has been a representation by one party (the promisor) that he or she does not intend to enforce his or her strict legal rights, made with the intention that the other party (the promisee) will rely on the representation, and the other party does in fact rely upon the representation without providing consideration.

• The party making the representation will be estopped from enfrocing his or her strict legal rights, in so far as it is inequitable to do so.

Conditions for Application

• ●Inequitable to go back on promise• The promisor is not allowed to go back on his

promise when it would be unfair or unjust to do so.

• Refer to the case of Hughes v Metropolitan Railway (1877)2 App Cas 439

• ●A change in position of the promisee as a result of the promise (reliance but not necessarily to their detriment)

• A promise intended to be binding, intended to be acted on and in fact acted on, is binding, so far as its terms properly apply.

• Refer to High Trees case.

• ●Not limited only to forfeiture cases but applied to all variations of contractual rights.

• Refer to the case of Birmingham and District Land Co v London and North Western Railway Co (1888) 40 Ch D 268

Birmingham and District Land Co v London and North Western Railway Co (1888) 40 Ch D 268

• A period of time laid down in a contract was held not to apply, because there was a tacit *(unspoken but understood) understanding that the period would not run whilst building operations were held up.

• The court took the view that if persons who have contractual rights against others induce by their conduct those against whom they have such rights, to believe either that such rights will not be enforced, or will be kept in suspense or abeyance for some particular time, those persons will not be allowed to enforce the rights until such time has elapsed.

Scope of the doctrine

• Whether promissory estoppel is extinctive* or suspensory ;

• Whether the one who relied on the promise has altered his position

• Estoppel does not extinguish rights. It only serves to suspend, and not wholly to extinguish the existing obligation, the promisor may, on giving due notice, resume the right which has been waived and revert to the original terms of the contract.

• In High Trees the plaintiff company was able to restore payment of full rent (although estopped back rent was lost) from early 1945, but probably could have restored full rent at any time after the initial promise provided a suitable period of notice had been given.

• Q : What amounts to sufficient notice to terminate the suspension of the legal rights?

• Case : Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761

Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955]

• In 1938, the appellant granted to the respondent a licence to import, make, use and sell certain hard metal alloys it had patented.

• The respondent was to pay royalties, and, if the amount of material made exceeded a named quota, ‘compensation’.

• On the outbreak of war, the appellant agreed to suspend its right to compensation, the parties contemplating that a new agreement would be entered into when the war ended.

• In 1945, the appellant claimed to have revoked its suspension and to be entitled to compensation from 1 June 1945.

• This claim failed on the ground that the revocation was premature as no adequate notice had been given to the respondent.

• In 1950, the appellant brought the present action, claiming compensation from 1 January 1947, at which date the respondent was fully aware that the appellant was determined to revert to the original agreement.

Held (HOL):

• the appellant had effectively revoked its promise to suspend its legal right and that it was entitled to the compensation claimed; the equitable principle enunciated in Hughes v Metropolitan Railway Co was applicable to the situation, but the promisor might, on giving adequate notice to the promisee, resume its rights under the original agreeement.

• Note : If the promise is such as unequivocally to indicate the intention of the promisor wholly to abandon all right to payment of the money contractually due, whether periodically or as a lump sum, there is no reason why the estoppel should not be held to have permanent effect.

• It is wrong for one to contract to give the other the permission to commit a breach then turn around and sue him for that.

• The obligations are suspended until sufficient notice has been given to enable one to assume his original obligations under the contract.

Case : Sim Siok Eng v Government of Malaysia [1978] 1 MLJ 15

• Appellant was a local contractor, entered into a contract with the Government of Malaysia in respect of one tender of construction.

• After signing the contract appellant discovered that his office had made a serious error of calculation involving $1,300,000.

• Appellant found difficulty in obtaining building materials to complete the work because of the insufficient budget.

• Appellant went to see the Director of Public Works Department, Sarawak.

• As a result, the respondent orally agreed to supply the appellant with certain building materials the cost thereof to be deducted from the payment due to the appellant.

• From then on whenever the appellant wanted such building materials he would just write to the Divisional Engineer.

• After some time, no building materials were supplied after seizure of plywood by the Anti Corruption Agency.

• Consequently, appellant stopped work. • After he stopped work his contract was terminated on the

understanding that following the October meeting he was relieved from supplying the materials and the contract was varied. The important thing is that he relied on the promise or assurance given by respondent and altered his position accordingly.

• Relying on the promise or assurance given appellant had altered his position. His responsibilities to supply those materials had been suspended or kept in abeyance. For respondent to re-impose the contractual provision adequate notice should be given.

• By whatever name the promise was called - concession or temporary arrangement - it was binding on respondent but terminable by respondent giving reasonable notice.

• Where it is not possible for the promisee who has altered his position, upon reliance of the promise of the promisor, to resume his previous position, the benefit of the estoppel would continue in effect for the promisee’s benefit.

• Case : Bank Negara Indonesia v Philip Hoalim [1973] 2 MLJ 3

• Appellants/plaintiffs claimed for possession of the front room on the third floor of a building owned by them.

• This room was occupied by the respondent as a tenant.

• Appellants claimed that the tenancy was a monthly tenancy and that it had been validly determined by a notice to quit expiring on 28 February 1969.

• The respondent did not dispute the service of a notice to quit but relied upon two defences.

• First, he claimed protection under the Control of Rent Ordinance 1953;

• secondly, he set up an agreement, or understanding, made or entered into in 1958 between himself and one Lee Cheng Kiat, predecessor of the appellants, and claimed that the appellants were estopped from claiming possession of the premises against him.

• The court consider that, during the initial period after the respondent had moved to the third floor as requested by the appellants for the renovation works to the building, he enjoyed the benefit of an estoppel which would prevent the appellants from availing themselves of their legal right to remove him so long as he carried on his profession there.

• It is contended however that the respondent lost this protection by reason of events occurring in 1961.

• On 4 March 1961 as appears from a letter of that date, the appellants indicated their willingness to grant a lease to the respondent for three years at the rental of $280 per month, the lessee to have an option to terminate the lease by three months' notice in writing.

• The respondent accepted these terms and a lease was drawn up and executed which, as already stated, contained a covenant to yield up at the determination of his tenancy.

• The question is, therefore, whether the estoppel, of which the respondent theretofore had the benefit, lapsed upon the execution of this lease of $280 per month

• The court does find that the benefit of the estoppel was not removed by the events of 1961. It continued and continues in effect for the respondent's benefit.

Promissory Estoppel : “shield” or “sword” ie a cause of action or a defence?

• Estoppel is 'a shield not a sword' - it cannot be used as the basis of an action on its own.

• Rule : Promissory estoppel does not create new causes of action where none existed before. It is a defence and not a cause of action.

Case : Combe v Combe [1951] 2 K.B. 215 (CA)

• A husband, upon divorce, promised his wife ₤100 a year as a permanent allowance. In reliance upon this promise, the wife forbore to apply to the Courts for maintenance. The husband failed to make the payments, and the wife sued him on the promise.

• In other words, Mrs C. tried to argue that C legally had to pay money to her, simply because he promised to do so. She argued promissory estoppel.

Held (CoA):

• there was no consideration for the promise as the wife’s forbearance had not been requested and was not in return for the promise made to her;

• nor could the wife rely on promissory estoppel which did not give rise to a cause of action.

• Denning LJ held that promissory estoppel applied only to variations or discharges of existing contracts, not in the creation of new contracts. This is an important limitation, as otherwise consideration would cease to be relevant in our contract law theory.

• Promissory estoppel is available only where there has been an alteration to an existing contract. It cannot be used to render unnecessary consideration on the formation of a contract.

• Where a plaintiff’s cause of action is met by a defendant’s defence and counter-claim, the plaintiff may use promissory estoppel as a defence to the defendant’s counter-claim.

• Case : Cheng Hang Guan v Perumahan Farlim Sdn Bhd [1993] 3 MLJ 352

Case : Cheng Hang Guan v Perumahan Farlim Sdn Bhd [1993] 3 MLJ 352

• The plaintiffs claimed that they were and are lawful and protected tenants and were entitled in law and equity to possession of portion of land on which were situated their two dwelling houses and their vegetable farm

• The registered proprietors of the land are the trustees of Khoo Kongsi. Plaintiffs had converted what was once a swampy jungle land into a productive farm.

• The visiting trustee of Khoo Kongsi had told Plaintiff that it was not necessary to change the tenancy of the vegetable plot to her name and that she could continue planting vegetables as long as she wished provided she paid rent.

• This is an assurance given by Khoo Kongsi that as long as plaintiff continued to pay ground rent he could stay and cultivate the vegetable plot as long as he wanted.

• After the assurance given by the visiting trustee, the plaintiffs invested RM12,000 in installing a sprinkler system.

• The assurance given to Plaintiffs is consistent with the practice of Khoo Kongsi before the developers Farlim came on to the scene in the late seventies.

• For more than 50 years, neither Khoo Kongsi or anyone else had interfered with the farming activities of the plaintiffs’ family.

• Only after Khoo Kongsi had entered into a joint-venture agreement was there any interference with the plaintiffs’ possession of the plot concerned.

• The court observed that the doctrine of promissory estoppel provides a defence to an action on the original contract for a defendant relying on a voluntary variation. It does not provide a cause of action for a plaintiff relying on a gratuitous promise. Yet, its effect may be to enable a party to enforce a cause of action which, without the estoppel, would not exist.

• Here the plaintiffs and their forbears have been in possession of the plot concerned for decades and they have commenced these proceedings to protect their rights to remain in possession relying on equity or equitable estoppel.

• In the circumstances, the plaintiffs’ claim to the alleged equity does not depend on the availability of the remedy of specific performance.

• Plaintiffs’ claim was allowed by the court.

• A plaintiff may rely on an estoppel if he has an independent cause of action. Estoppel may be part of a cause of action, but not cause of action in itself.

• Case : Hong Leong Leasing Sdn Bhd v Tan Kim Cheong [1994] 1 MLJ 177

Case : Hong Leong Leasing Sdn Bhd v Tan Kim Cheong [1994] 1 MLJ 177

• Def bought some machines from a dealer who requested the plaintiff to provide hire purchase facilities to the def

• Dealer forwarded the HP agreement and delivery receipt to the def. def signed.

• Machines did not in fact exist

Claims• P claims that it was entitled for the arrears

under the HP agreement; def is estopped from denying that the machines do not exist esp by signing the delivery receipt and the payment of some installments

High Court

• Held: The mere fact that the defendant has signed the delivery receipt, with no intention on his part to make any representation to the P, and with no evidence that the plaintiff acted upon the representation, was not sufficient to raise an estoppel vs the def

Case : Teh Poh Wah v Seremban Securities Sdn Bhd [1996] 1 MLJ 701

• The appellant’s husband had a mareva injunction imposed against him.

• In order for the husband to be able to deal in stocks, the appellant proceeded to open a bank account with a cheque book, signed all the cheques in blank, and handed the whole cheque book to the husband.

• The husband then ‘entered’ into a written contract with a stock-broking firm (‘the respondent’) using the appellant’s name.

• Thenceforth, all of the husband’s share-transactions were done in the appellant’s name as it was her name which appeared on the contract.

• Eventually, the share-account with the respondent went bad, and the respondent sued the appellant for the moneys due and owing to it. The appellant delivered a defence and counterclaim.

• The court held that the appeal could be satisfactorily resolved by reference to the doctrine of estoppel. Through her actions, the appellant would have led a reasonable man to believe that she had given her husband a carte blanche to act on her behalf.

• It would, therefore, be unjust and inequitable to suffer the appellant to assert facts that would now contradict her earlier conduct. It was no answer for the appellant to say that she had not actually authorised the husband to enter into the contract using her name.

Per curiam:

• [1] The doctrine of estoppel is a flexible one by which the Courts seek to do essential justice between litigating parties. Indeed, the circumstances in which the doctrine may operate are endless. It is a doctrine of wide utility and has been resorted to in varying fact patterns to achieve justice.

• [2] It is wrong to apply the maxim that ‘estoppel may be used as a shield but not a sword’ to limit the availability of the doctrine to defendants alone. Plaintiffs, too, may have recourse to it. The true nature of the doctrine in this context is that…’Estoppel is not a cause of action. It may (if established) assist a plaintiff in enforcing a cause of action by preventing a defendant from denying the existence of some fact essential to establish the cause of action, or (to put it in another way) by preventing a defendant from asserting the existence of some fact the existence of which would destroy the cause of action.’..

• Detriment* : Is detriment an element in estoppel?

• * Damage, harm, or loss

• High Court : In order to successfully raise an estoppel, one has to prove that he has acted on the other’s representation to his detriment.

• Refer case of Hong Leong Leasing Sdn Bhd v Tan Kim Cheong [1994] 1 MLJ 177

• Federal Court : The detriment element does not form part of the doctrine of estoppel.

• Case : Boustead Trading Sdn Bhd v Arab-Malaysian Merchant Bank Bhd [1995] 3 MLJ 331

Case : Boustead Trading Sdn Bhd v Arab-Malaysian Merchant Bank Bhd [1995] 3 MLJ 331

• This was an appeal against the judgment of the trial Judge ruling that under the terms of a factoring agreement entered into between the respondent and one Chemitrade, the appellant was liable to pay the respondent RM203,072.56.

• The facts were that Chemitrade was selling goods on credit to the appellant.

• The credit terms had strained Chemitrade’s cashflow, and to alleviate the problem Chemitrade had entered into a factoring agreement with the respondent.

• By the agreement the respondent would purchase Chemitrade’s invoices in respect of the goods at a discount and then claim its full value from the appellant at the end of the credit period.

• Following the agreement, the respondent started to purchase the invoices from Chemitrade and had them forwarded to the appellant for payment. On each of these invoices the respondent had endorsed the statement “any objection to this bill or its terms must be reported within 14 days after its receipt”.

• The appellant had not complained about any of the invoices or the endorsement, and for some seven months had continued to honour the endorsed invoices. The appellant however refused to pay on about twenty of the invoices thus submitted, and subsequently sought to challenge the validity of the same.

• The appellant appealed and before the Federal Court the main issue that arose was whether, in the circumstances, estoppel would apply to bar the appellant from challenging the validity of the invoices or the endorsement in question

Held :

• ..Likewise, the requirement that the representee should have acted to his detriment is also not part of the doctrine. In this respect, all that needs to be shown is that, in the particular circumstances of a case, it would be unjust to permit the representor or encouragor to insist upon his strict legal rights.

• Indian decision : It is not necessary to prove any damage, detriment or prejudice in invoking the doctrine of promissory estoppel.

• Refer case of The Delhi Cloth & General Mills Ltd v Union of India [1987] 3 SCJ 328

• Australian decision : Detriment was not an essential attribute of waiver, and that the doctrine of estoppel did not require proof that detriment would be suffered.

• Refer case of Commonwealth of Australia v Verwayen [1990] 95 ALR 321

• It is not necessary to show detriment; indeed, the representee may have benefited from the representation, and yet it may be inequitable, at least without notice, for the representor to enforce his legal rights.

• Case : Societe Italo-Belge pour Le Commerce et l’Industrie v Palm and Vegetable Oils (Malaysia) Sdn Bhd (The Post Chaser) [1981] 2 Lloyd’s Rep 695

Case : Societe Italo-Belge pour Le Commerce et l’Industrie v Palm and Vegetable Oils (Malaysia) Sdn Bhd (The Post Chaser) [1981] 2 Lloyd’s

Rep 695 • Sellers of palm oil failed for over a month to submit a

"declaration of sailing." • When they finally did, the buyers did not initially

object and replied asking for more documents. • The buyers then sent the declaration down the line

to their own sub-purchasers. When the sub-purchasers rejected the overdue declaration, the buyers tried to reject it as well. The seller pleaded equitable estoppel.

• The court allowed the rejection of the declaration and made two statements of principle on equitable estoppel. 1. The person having made the representation which gives rise to the claim of estoppel "will not be allowed to enforce his rights where it would be inequitable, having regard to the dealings which have thus far taken place between the parties.

• To establish "inequity," it is not necessary to show detriment."