The coronavirus pandemic and the periods of enforced lockdown have meant that business operations have been far from normal for over a year. The need to mitigate the financial impact of Government restrictions and the pace at which the economic world changed has meant many businesses sacrificed certainty for practicality during the pandemic and relied on arrangements not recorded in written contracts. As restrictions ease, those businesses may have cause to reconsider arrangements which they felt compelled to accept to survive the lockdown.
These informal arrangements often alter the performance of contractual obligations – “I promise not to charge you this month” – “I’m not going to enforce that term during lockdown” – “I’m happy to reduce services until staff are back from furlough” – some parties will be content to trust longstanding relationships and a spirit of cooperation to ensure statements and promises made during uncertain economic times continue to be honoured as business operations recommence.
However, problems may arise as we emerge from lockdown and pressure begins to ease when statements and promises are not honoured, and one party seeks to ignore what was said and enforce the terms of the original contract.
The good news for the innocent party is that in certain circumstances the law may come to their aid.
Estoppel – not all is fair in love and war
Estoppel refers to a legal doctrine which means that in certain circumstances, a court will not allow a party to resile from a statement or promises made to another. There are different forms of the doctrine, but there are some common requirements.
Broadly, the starting point is to assess whether party A has represented to party B that A will not insist on performance of some obligation by B or will not enforce rights which A has under a contract – such as not requiring B to make payments, deferring a deadline or relaxing contractual formalities.
If B has relied on A’s representation, then A may be prevented (estopped) from going back on its representation by seeking to enforce the obligation concerned. Reliance means that B will have changed its position as a result of A’s promise, statement or conduct.
The doctrine is based on the concept that it would be unjust to force an innocent party to perform an obligation when it relied on a representation that it wouldn’t have to perform that obligation. As an equitable doctrine, written contracts do not have to include a right to claim estoppel; it is a right which exists as a matter of law.
Different forms of estoppel
On the face of it, the different forms of estoppel may appear confusing. For businesses finding that an apparent spirit of co-operation during difficult times does not carry over to the harsh realities of the post-lockdown commercial world, it’s worth focusing on two areas which are most likely to prove helpful when holding parties to account:
1. Promissory Estoppel
Where there is an existing contractual relationship, promissory estoppel can be used to prevent A from enforcing a contractual right against B in circumstances where A made a clear and unequivocal representation that it wouldn’t do so.
Whilst the representation can be expressed or implied, for the doctrine to apply A must have intended for the representation to have affected the legal relationship with B.
B must then have relied on A’s promise to such an extent that it would be inequitable for A to renege. That will generally be the case if B would suffer a detriment if A was permitted to resile from the representation it made. If established, promissory estoppel provides a complete defence for B, preventing A from brining a claim to enforce its contractual right or claim damages for B’s failure to perform in accordance with the contract. That degree of protection ensures B is not disadvantaged if it relies on the representation made by A.
Promissory Estoppel - An example
During the long period of lockdown, you negotiated with key suppliers to defer payments. SupplierPLC promised “not to charge you this month”. It made a representation that it would not enforce its’ right to remuneration. You relied upon that representation and were able to pay the less flexible SupplierLTD in full.
A week later, SupplierPLC’s key customer goes into liquidation and SupplierPLC says it will now need to charge you and that it requires payment immediately. Unfortunately for SupplierPLC, you relied on its representation and so SupplierPLC is prevented (estopped) from pursuing you for that month’s charges.
2. Waiver by Estoppel
Waiver is a form of estoppel by which parties may give up their legal rights. Waiver by estoppel may occur when A represents to B that it will not enforce a right or entitlement which it has under the terms of the contract with B.
The representation may be made by conduct that a right will not be enforced. This is a significant difference to promissory estoppel and means that waiver by estoppel may have wider application.
It is potentially very helpful to B as it means A doesn’t have to be aware it has a right which it may, by its own conduct, be giving up. The question to be asked is whether a reasonable person would have understood A to have intended to waive its right. Practically, that means that it is possible for A’s failure to enforce its rights is deemed a representation by conduct that the rights are waived.
B must have relied on the conduct to such an extent that it would be inequitable for A to try and enforce its right. In such circumstances, A may have waived its right so will be estopped from trying to go back on its representation to enforce it’s right.The result may be that B has a complete defence to any claims brought by A in relation to the right which has been waived.
Waiver by Estoppel - an example
One Friday during lockdown, A closed its warehouses and posted notices that it was unable to receive goods at those warehouses until it had produced new guidelines for staff in line with the latest safety advice. B didn’t deliver goods on Saturday morning as was required under the terms of the contract.
A’s conduct will likely amount to a waiver of its rights as there is an implied representation that it would not demand delivery of goods by B until it had produced the guidelines for its staff. B relied on A’s closure of the warehouses and did not attempt to deliver any goods. In these circumstances, it is likely that A will be unable to claim damages for B’s failure to deliver goods in accordance with the contract because that would be inequitable.
Limitations
Estoppel is an equitable doctrine which means that it will only apply for as long as it is unfair for a party to retract a representation it has made and on which the other party has relied. It is therefore important to understand the precise parameters of the representation made so that the limits of the protection can be determined - for example, is payment deferred or capped? Is a deadline relaxed or cancelled?
A party contemplating asserting waiver by estoppel should also pay close attention to all the terms of that contract. Conduct, or the lack of it, which may appear to be a waiver may not be if the written contract states that any delay in the enforcement of a right will not to amount to a waiver. It is common for commercial contracts to include express terms to prevent delay or inaction amounting to a waiver. Accordingly, parties are advised to check all the terms of the contract before attempting to rely on the doctrine of estoppel.
Conclusion
Written contracts and written amendments recording the precise terms agreed should be the objective of all businesses. However, with the pressure businesses have been operating under during lockdown, that may not always have been possible.
The doctrine of estoppel in its different forms is both a blessing and a curse; if you were the recipient of a promise you may be able to hold the other party to account – but you must be cautious about the potential consequences of informal proposals you may have made to others.
We recognise the benefits for contracting parties in co-operating to ensure they can recommence operations as restrictions ease. However, where possible, aim to record all arrangements in written contracts and written amendments and try and avoid being forced to fall back on the doctrine because the actual or perceived amenable approach taken by some during the pressure of lockdown may not last as commercial life returns to some kind of normality. If properly documented contracts and amendments are not possible, then at the very least written records should be kept of all representations made and how they were relied upon.
We have created an initiative called “LS Unlock” to help businesses access legal advice during the uncertain times ahead. LS Unlock comprises a free initial assessment of significant commercial claims together with a menu of alternative fee arrangements which can reduce and, in certain cases, eliminate the upfront cost of pursuing a claim. This initiative has been designed specifically to assist clients in this uncertain economic climate and is part of our commitment to working with clients to help them survive the effects of the Covid-19 crisis.