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But you promised! Even without a written contract, promises can be enforced and rights given up.

19 May 2020

Broken promises in commercial life can leave businesses in real difficulties. That feels particularly unfair when a party’s only mistake was to take the other at its word. Which is why in the normal course of things businesses should have written contracts to remove risk and uncertainty.

But the coronavirus means that things are far from normal.  Businesses are in survival mode, dedicating resources to essential functions and looking to preserve operations as best they can. The need to survive and the pace at which the economic world is changing means businesses will often sacrifice certainty for practicality and will rely on arrangements not recorded in written contracts.

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 out of furlough” – with parties content to trust longstanding relationships and a spirit of cooperation to ensure people honour statements and promises made during the stress of the Government imposed restrictions. For many there is little option but to rely on statements made to them which offer a welcome lifeline.

The problem arises 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 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 trying to survive in the coronavirus 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

Following 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 they have 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

On the Friday following 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. Its 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 are operating under in these challenging times, it may not always be possible to achieve that objective.

The doctrine of estoppel in its different forms is both a blessing and a curse; if you are 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 make to others in these challenging times.

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 we are operating in such a challenging environment. 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.

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