LAW EXTENSION COMMITTEE
WINTER COURSE 2005
CONTRACTS
LECTURE NOTES
WEEK FOUR
CONSIDERATION & PROMISSORY ESTOPPEL
CONSIDERATION
1.
What is consideration?
Perhaps the simplest definition of consideration is that of Sir Frederick Pollock, adopted
by the House of Lords in Dunlop Pneumatic Tyre Company Ltd v Selfridge & Company
Ltd [1915] AC 847 at 855. Pollock had written:
An act or forbearance of one party, or promise thereof, is the price for
which the promise of the other is bought, and the promise thus given for
value is enforceable.
Thus, consideration is the price paid for the promise.
The fundamental aspect of the requirement of consideration is as to the enforcement of a
promise contained in an agreement. If A’s promise or obligation to B is to be enforceable
by B, B will only be able to do so if he/she has given consideration for the promise. In
this example A is the promisor and B is the promisee.
In the 18th century the fact that A, the promisor, was under some moral obligation to the
B, the promisee, was seen as sufficient consideration to allow B to sue A on the promise.
However, in the 19th century this approach was firmly rejected in Eastwood v Kenyon
(1840) 113 ER 482. Eastwood v Kenyon was decided at a time when the notion of a
contract as a bargain took hold in contract law. A consequence of this was that a contract
was seen as an exchange of something of value between the parties to the contract.
For example an agreement by A to sell a book to B for $ 10 is a bargain and a contract. It
contains two promises:
(i)
(ii)
A’s promise to transfer title in the book to B
B’s promise to pay A, $ 10.
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B’s consideration for A’s promise is the promise to pay A $ 10 for the book. A’s
consideration for B’s promise is to transfer title in the book to B.
In these cases it is important not to confuse the fact that a promise has been made by a
party to a contract and that party’s failure to perform that promise. The failure to perform
does not mean that the party has not provided consideration. As seen the consideration is
the making of the promise. The failure to perform is a breach and generally entitles the
other party to a remedy for that breach.
However, an agreement can also be, in terms of consideration, an exchange of a promise
for an act.
For example A promises to pay B $ 10 if B finds A’s lost dog. In this case A’s promise is
only enforceable by B, if and when B actually performs the task, ie. finds A’s lost dog.
B’s consideration is thus the act of finding A’s lost dog. B’s consideration for A’s
promise is not a promise of his own.
2.
Deeds and Consideration
Contracts fall into two types: formal and simple agreements. Formal agreements were
historically referred to as agreements entered into under seal, but are more commonly
referred to today as deeds. In deeds it is common to refer to the promisor as the
covenantor and the promisee as the covenantee.
Simple agreements are contracts not entered into as deeds.
In simple contracts consideration is always necessary: Rann v Hughes (1778) 101 ER
1014.
In deeds consideration is not necessary. Thus, if for example B owes A a debt of $ 100,
and A promises in a deed to release B from all liability on that debt in return of payment
of $ 70, A’s promise to B is binding upon A even though B provides no consideration for
A’s promise. If A’s promise was not made within a deed, it would not be binding upon A,
who could sue B for the outstanding $ 30. However, because a deed is used, the promise
is binding upon A. This example is confirmed in Pinnel’s Case (1602) 77 ER 237 where,
at 238, the court noted:
[I]f a man acknowledges himself to be satisfied by deed, it is a good bar,
without anything received.
Furthermore, in a situation where a promise is made by A to B and set out in a deed, it
will be enforceable by B even if B has not provided any consideration of the promise, eg.
the agreement is that A promises to transfer title in his book to B, but B makes no
promise to pay anything for it.
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In relation to B’s right of enforcement in this example it must be noted that he/she can do
so only at common law, ie. he/she can seek the remedy of damages: Cannon v Hartley
[1949] Ch 213 at 217. In this respect the deed amounts to a true exception to the
requirement for consideration, in that B can get the same remedy for a breach of contract
as a person who had provided consideration. In fact, the deed is the only true exception to
the requirement of consideration.
However, B has no right to seek equitable remedies such as specific performance:
Colman v Sarrel (1789) 30 ER 325 at 227; Re Ellenborough, Towry Law v Burne [1903]
1 Ch 697.
This is because of the fundamental basis upon which equity acts. Equitable principles are
based upon principles of unconscionability. Because B has not provided any
consideration for A’s promise, it would not be unconscionable for A to refuse to carry out
his/her promise. This is reflected in the equitable maxim: ‘Equity will not assist a
volunteer’ – a volunteer being a person who has not given consideration. In this example
B is a volunteer and equity will not lend its assistance to B in the form of the remedy of
specific performance.
As noted deeds were historically referred to as ‘agreements under seal’. This reflected the
manner in which they were executed. Seals are no longer necessary for a valid deed. The
procedure for execution and delivery of a deed is now largely governed by statute: see s.
38, Conveyancing Act 1919 (NSW).
3.
Consideration Must Be Bargained For
An important aspect of the doctrine of consideration is that before B’s promise or act can
be regarded as consideration it must be established that B’s promise or act is given in
return for the promise by A. As is often said the consideration must be bargained for.
This is confirmed in Australian Woollen Mills Pty Ltd v The Commonwealth (1954) 92
CLR 424. From this case set out:



The facts
The issue that had to be determined by the High Court
The decision and reasoning of the High Court, in particular noting what the Court
saw as the crucial factor that established that the Commonwealth’s announcement
was nothing more than a conditional promise of a gift.
When the case went to the Privy Council the appeal was dismissed: Australian Woollen
Mills Pty Ltd v The Commonwealth (1955) 93 CLR 546. However, the Privy Council
noted, at 550, that the presence of a request, as discussed by the High Court, will not
always necessarily establish a contract, thereby indicating that the High Court had
overemphasised the significance of the request in this type of case.
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It is important to note that a contract arises merely because a person performs an act in
reliance of the promisor’s promise. The act must also be shown to have been done in
return for the promise for a contract to arise: Beaton v McDivitt (1987) 13 NSWLR 162.
If the act done is merely in reliance on the promise, the promisee may have a remedy in
promissory estoppel. This topic will be discussed after the rules of consideration have
been analysed.
4.
Only a party providing consideration can enforce a promise
This rule expresses the essence of the doctrine of consideration. It can be said that there
are two parts to this rule.
(a)
(b)
Consideration must move from the promisee, and
It need not move to the promisor.
In Dunlop Pneumatic Tyre Company Ltd v Selfridge & Company Ltd [1915] AC 847,
Lord Haldane LC said, at 853:
[I]f a person with whom a contract not under seal has been made is to be
able to enforce it consideration must have been given by him to the
promisor or to some other person at the promisor’s request.
Thus, if A and B enter into a contract in which B (promisor) agrees to mow A’s law and
in return A (promisee) agrees to pay $ 100 to C, A’s promise to pay is consideration that
has moved from him/her, but not to the promisor (B), but to C who is a third party to the
promise. C who has not provided any consideration at all cannot, on that ground alone,
enforce the promise that A made to B – only B can do that because he has provided
consideration for A’s promise.
An important qualification to this rule relates to joint promisees. In a case where A makes
a promise to B and C jointly as promisees, it is only necessary for one of the joint
promisees to provide consideration. If one joint promisee (B) has provided consideration,
the other joint promisee (C) can enforce the promise against the promisor (A). The
authority for this proposition is Coulls v Bagot’s Executor & Trustee Co Ltd (1967) 119
CLR 460.
Read Coulls and from this case set out:



5.
The facts
The issue to be determined by the High Court
The decision of thew High Court and its reasoning. Note however, the importance
of Windeyer J’s judgement even though he was a dissenter on the facts.
‘Past consideration’ is not consideration
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So-called ‘past consideration’ is not consideration. The expression ‘past consideration’ is
in fact a misnomer.
By past consideration we mean a situation where something is done before a promise to
pay for it is made, eg. B gives A a dog. Later A promises to pay $ 20 to B for the dog – B
cannot sue for the $ 20 because his act of giving the dog is past consideration.
The more typical situation where the past consideration rule arises is where a contract is
entered into and completed and subsequently one party makes a further promise to the
other. That other’s having previously contracted with the promisor does not amount to
consideration for the subsequent promise – the earlier contract is past consideration. This
is shown in Roscorla v Thomas (1842) 114 ER 496.
Read Roscorla and Re Casey’s Patents; Stewart v Casey [1892] 1 Ch 104 for examples
and statements of relevant principles. The state of the law on this issue is summarised in
Pau On v Lau Yiu Long [1980] AC 614 at 629 where it is said that the later promise to
pay will be enforceable if:
(i)
(ii)
(iii)
6.
the earlier act was done at the promisor’s request,
the parties understood at the time that the act done would attract some
payment or other form of remuneration, and
payment, or other form of remuneration must have been legally enforceable
had it been made in advance of performance of the act.
Consideration cannot be illusory
The use of the expression ‘illusory consideration’ here relates to circumstances in which
it is claimed that there is consideration by the performance of some act, but where there is
also a discretion as to whether to perform the act. This conditional obligation to perform
is not seen as proper consideration.
In Placer Development Ltd v The Commonwealth (1969) 121 CLR 353, Kitto J said, at
356:
[T]he general principle is ... that wherever words which by themselves
constitute a promise are accompanied by words showing that the promisor
is to have a discretion or option as to whether he will carry out that which
purports to be the promise, the result is that there is no contract on which
an action can be brought at all.
His Honour then approved a short statement of the principle as found in Leake on
Contracts (3rd edition):
Promissory expressions reserving an option as to the performance do not
create a contract.
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In British Empire Films Pty Ltd v Oxford Theatres Pty Ltd [1943] VLR 163, the facts
concerned an agreement between Oxford Theatres and British Empire Films (BEF)
whereby Oxford agreed for a period of five years to only screen films distributed to it by
BEF. Oxford wanted to screen films from other distributors. BEF sought an injunction to
stop them doing so. To succeed, BEF had to show that there was a contract and that the
restraint of trade imposed upon Oxford was reasonable and thus enforceable. In relation
to the restraint the court said it was reasonable.
The existence of a contract revolved around whether BEF provided consideration for the
restraint of trade in its favour. A clause in the agreement stipulated that:
… under no circumstances shall [BEF] be in any way liable for failure to
supply to [Oxford Theatres] any of the programmes as contemplated by
this agreement.
In effect the supply of films by BEF was discretionary.
O’Bryan J, at 167-168, quoted the same passage from Leake on Contracts as did Kitto J
in Placer Development v The Commonwealth and held that the above clause was:
… not a real consideration … [because BEF] is not obliged to supply
anything, and a supposed consideration which is entirely dependant upon
the will of [BEF] whether it will ever become operative is illusory.
However, there were other clauses in the contract which did establish consideration from
BEF, and the injunction was granted in its favour.
7.
Consideration need not be adequate - it must be sufficient
The principle discussed here relates to the threshold of the legal validity of what is
offered as consideration. The same rules apply to both executory and executed
consideration.
The major concern here is whether what is offered as consideration has to have some
parity in terms of value to the promisor’s promise. In short the answer is: No.
Consideration in this sense does not need to be adequate. As long as what is offered is of
some value it will be seen as sufficient. Even a token value will be sufficient. In such
cases of consideration of a token value the expression ‘nominal consideration’ is used.
Thus, a contract for the sale of a luxurious waterfront mansion that has a market value in
excess of $ 1,000,000 for a sale price of $ 10 is a good contract and the purchase price of
$ 10 is proper consideration. It is not adequate, but it is sufficient.
In Thomas v Thomas (1842) 114 ER 330, a lease of a house for the life of a tenant at an
annual rent of £ 1 per annum was one in which the consideration was of ‘some value in
the eye of the law’ (at 333) and therefore good consideration.
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This is not to say that the adequacy of consideration is never of relevance. In some cases
it is. We have already noted that equitable remedies are not available to a volunteer.
However, applying the equitable maxim ‘equity follows the law’, equity accepts as
consideration that which the common law accepts as consideration. On the other hand in
some circumstances the adequacy of consideration can be a significant factor in the
application of equitable principles. Thus, when we look at the remedy of specific
performance, we shall see that the court can refuse to grant the order in favour of a
plaintiff if the result of the order would be to inflict unconscionable hardship upon the
defendant. One of the factors that can establish hardship to the defendant is the fact that
the plaintiff’s consideration for the defendant’s promise was inadequate.
The policy behind the common law’s acceptance of the sufficiency of consideration
principle was discussed in Woolworths Ltd v Kelly (1991) 22 NSWLR 189, where, at
193-194. Read these pages to see the reasons set out by Kirby P.
8.
When is there Sufficient Consideration?
(a)
Promise to perform an existing public law duty
The issue here is whether a promise to perform an obligation already imposed upon a
person by the State – one’s public law duty – can amount to consideration. The answer is
that such a promise is not good consideration
In Collins v Godefroy (1831) 109 ER 1040, the defendant subpoenaed the plaintiff to give
evidence in court and promised to pay him for his attendance. The plaintiff attended court
but did not have to give evidence. The defendant refused to pay the promised amount.
The court held that a person who receives a subpoena is under a legal duty to give
evidence. A promise to pay that person for loss of time incurred in such attendance is a
promise without consideration. Lord Tenterden said: at 1042:
If it be a duty imposed by law upon a party regularly subpoenaed, to
attend from time to time to give his evidence, then a promise to give him
any remuneration for loss of time incurred in such attendance is a promise
without consideration.
However, if what is promised is in excess of one’s public law duty there will be good
consideration.
Read Glasbrook Bros v Glamorgan County Council [1925] AC 270, and from this case
set out:



The facts
The issue to be determined by the Court
The decision and reasoning of the Court.
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(b)
Performance of an existing contractual duty already owed to the promisor
The promise to perform and existing contractual duty already owed to the promisor is not
good consideration for some benefit promised by the promisor to the promisee. Thus, if A
and B have a contract whereby B is obliged to certain work for A, and A then promises B
and Extra $ 100 for B to do that work, B’s promise to that work for the extra $ 100 is not
good consideration for the promise for the extra money. The principle was stated in
Wigan v Edwards (1973) 47 ALJR 586 by Mason J, at 594:
The general rule is that a promise to perform an existing duty is no
consideration, at least when the promise is made by a party to a preexisting contract, when it is made to the promisee under that contract, and
it is to do no more than the promisor is bound to do under the contract.
In Stilk v Myrick (1809) 170 ER 1168, the plaintiff, a seaman, agreed to become a crew
member of a ship. During the voyage, two crew members deserted ship and the Captain
agreed to pay extra monies to the remaining crew members upon return to London. These
monies were not paid and the plaintiff sued to recover them.
The court held there was no consideration for the promise to pay increased wages. Under
the original contract, the plaintiff and the other crew members contractually promised ‘to
do all they could under all emergencies of the voyage’. The desertion of two crew
members was an emergency; therefore the plaintiff was already under a contractual duty
to help bring the ship back.
However, if what is promised is in excess of an existing contractual duty already owed to
the promisor, that excess will be sufficient consideration.
Thus, in Hartley v Ponsonby (1857) 119 ER 1471, the plaintiff, a mariner, signed on as a
crew member on a ship’s voyage. The ship, the Mobile, had a crew of 36 men. Upon its
arrival in Port Phillip, an intermediate port, 17 of the crew deserted and that meant that
there were only 19 men to sail the ship back to Bombay. Of those remaining men, only
five had the training and qualifications to sail the ship. To induce the remaining crew,
including the plaintiff, to sail to the next port, the defendant, who was the Captain,
offered them additional payments. These were never paid and the plaintiff sued.
The court held the plaintiff had not just performed an existing duty. The ship was
unseaworthy because of the shortage of skilled crew and there was no obligation to
continue with the voyage. The plaintiff therefore provided good consideration to support
the promise to pay increased wages. The plaintiff had promised more than his existing
contractual duty which was to man a seaworthy ship.
The above two cases reflected the fairly orthodox application of the existing contractual
duty rule. However, the correctness of the Stilk v Myrick decision is now in some doubt
following the decision in Williams v Roffey Bros & Nicholls (Contractors) Ltd [1990] 1
QB 1.
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Read Williams and note the circumstances in which the consideration issue arose. The
importance of the case is in what the Court of Appeal said about consideration in this
context and the statement of principles set out by Glidewell LJ at 15-16.
Although Williams did not over-rule Stilk v Myrick, the two decisions are irreconcilable.
If there practical benefit principle is applied then the ship’s captain also gained a practical
benefit by the promise to pay extra wages to his seamen in Stilk v Myrick.
The decision in Williams v Roffey Bros has been endorsed, with some qualifications in
Australia in Musumeci v Winadell Pty Ltd (1994) 34 NSWLR 723. In that case Santow J,
at 747, adopted the principles from Glidewell LJ in Williams v Roffey Bros with added
qualifications. Read the relevant pages on this case and note the qualifications.
The decision in Musumeci was assumed to be correct by Owen J in Conlan v
Registrar of Titles (2001) 24 WAR 299 at 338.
(c)
Performance of an existing contractual duty already owed to
a third person
A promise to perform an existing obligation is sufficient consideration where the promise
is made to a different person.
In Shadwell v Shadwell (1860) 142 ER 62, the Shadwell agreed to marry Ellen Nicholl.
His uncle promised in writing to pay him, for as long as the uncle lived, £150 pounds per
annum for each year that Shadwell’s income did not exceed 600 guineas. Shadwell
married Ellen Nicholl and the uncle didn’t make some, but not all, of the payments. After
the uncle’s death, Shadwell sued the uncle’s estate to recover the outstanding payments.
It was argued that Shadwell had not provided consideration for the promise of annual
payments.
The court ruled that a promise to do something which has also been promised with
respect to somebody else (in this case Shadwell’s promise to marry Ellen Nicholl) can be
good consideration. In this case the uncle obtained a real benefit (the benefit of having a
near relative marry) and Shadwell had materially altered his position.
In Pao On v Lau Yiu Long [1980] AC 614, A had made promises to perform certain
obligations to B, a public company. Later A made the same promise to C, the majority
shareholders in the public company, in return for promise of indemnity given by C. The
Privy Council held that A’s promise to C was sufficient consideration for the promise of
indemnity. The Court said, at 632, that ‘a promise to perform, or the performance of, a
pre-existing contractual obligation to a third party can be valid consideration’.
(d)
Compromise of a claim or forbearance to sue
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A compromise of a claim is where A, without admitting liability to B, agrees to settle B’s
claim out of court, usually by A agreeing to pay money B. Here B has compromised his
claim against A.
A forbearance to sue is where A has admitted liability to B and agrees to settle B’s claim
out of court, usually by agreeing to pay money to B. Here there is a forbearance to sue by
B.
The issue is, in what circumstances will B’s compromise of the claim or forbearance to
sue be good consideration for A’s promise of payment.
For B to be able to enforce A’s promise B will need to show that his/her claim is
reasonable, and not frivolous and vexatious. B must show that there is liability on A’s
part or that B has a bona fide belief in liability on A’s part: Miles v New Zealand Alford
Estate Co (1886) 32 Ch D 266. There must be an honest belief by B that his/he claim
would be successful if litigated: Wigan v Edwards (1973) 47 ALJR 586. The fact that B’s
claim is in fact bad in law is of no consequence: Spies v Commonwealth Bank of
Australia (1991) 24 NSWLR 691 at 698. A’s belief as to the validity of B’s claim is
irrelevant.
In Hercules Motors Pry Ltd v Schubert (1953) 53 SR (NSW) 301, Schubert purchased a
car from Hercules Motors. He later found that the car had faulty paintwork. Initially,
Schubert demanded a new car, but eventually allowed the car company to repaint it and
put it in an ‘as new condition’. A representative of a paint company was to supervise the
work and report on it. The report was unsatisfactory and Schubert took the car and sued
on the promise to put the car in an ‘as new condition’. The company argued that there
was no consideration for its promise.
The court held there was a genuine dispute between the parties as to their respective
rights and obligations. The agreement to repaint was a compromise of that dispute. Such
a compromise would afford consideration for the new contract. Schubert’s compromise
was good consideration for the company’s promise even though he may not have had an
enforceable claim against the company at the time.
For a further example read Wigan v Edwards (1973) 47 ALJR 586.
(e)
the Rule in Pinnel’s Case
The rule in Pinnel’s Case (1602) 77 ER 237 is that part payment of a debt is not
sufficient consideration for a discharge of the whole debt. The question raised is whether
the creditor’s promise not to sue the debtor for the balance of the debt is supported by
consideration from the debtor in the form of the promise to pay part of the debt. In this
case Lord Coke said, at 237:
Where the condition is for payment of 20 pounds, the obligor cannot at the
time appointed pay a lesser sum in satisfaction of the whole, because it is
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apparent that a lesser sum of money cannot be a satisfaction of a greater ... if
the obligor pay a lesser sum either before the day or at another place than is
limited by the condition and the obligee receives this, this is a good satisfaction
... also the gift of a horse, hawk or robe etc., in satisfaction is good for these
might be more beneficial to the plaintiff than the money.
The rule was applied in Foakes v Beer (1884) 9 AC 605. Read this case and set out:



The facts
The issue before the House of Lords
The decision and reasoning of the House of Lords.
The promisee can escape from the harshness of the rule in Pinnel’s Case by showing that
additional consideration was given. The promisee can show this in several ways:
1.
The promisor can promise to pay the lesser sum at a time earlier than originally
promised.
2.
The promisor can promise to pay the lesser sum at a place different to that
originally promised.
3.
The promisor can promise to pay the lesser sum and to do something else.
4.
The promise can be part of a composition arrangement. The Bankruptcy Act 1966
(Cth) allows a debtor to make an arrangement to pay a lesser sum to creditors.
Once a composition is made, a creditor cannot go behind the agreement and claim
the full amount. This would amount to a fraud on the other creditors.
5.
Where a lesser sum is paid by someone else to discharge the debt, the creditor
cannot then claim the amount unpaid from the original debtor.
In Hirachand Punamchand v Temple (1911) 2 KB 330, the plaintiff lent money to
Temple. Temple could not repay the loan. Temple’s father agreed with the
plaintiff to pay a lesser amount in full settlement. The father paid. The creditor
then sued the son for the balance. The court held the debt owed by the son had
been extinguished. It would be fraud upon a stranger who paid part of a debt in
discharge of the whole to allow the creditor to bring an action. According to
Fletcher-Moulton LJ, at 340:
It may be that it would be an abuse of the process of the court to
allow the creditor under such circumstances to sue, or it may be,
and I prefer that view, that there is an extinction of the debt.
In the light of Williams v Roffey Bros the question arises as to whether the practical
benefit rule can be used to overcome the consequences of the rule in Pinnel’s Case. If
part payment of a debt results in a practical benefit to the creditor, Williams v Roffey Bros
12
would suggest that there is consideration present. The issue arose for discussion in Re
Selectmove Ltd [1995] 2 All ER 531. Peter Gibson LJ, speaking for the Court of Appeal,
said, at 538:
When a creditor and debtor who are at arm’s length reach agreement on
the payment of the debt by instalments to accommodate the debtor, the
creditor will no doubt always see a practical benefit to himself in so doing.
In the absence of authority there is much to be said for the enforceability
of such a contract.
However, it was precisely because of the authority of the House of Lords decision in
Foakes v Beer that the Court of Appeal felt constrained to apply the rule in Pinnel’s Case
in such circumstances.
PROMISSORY ESTOPPEL
The requirement of consideration has often been seen as leading to injustices. The
doctrine of promissory estoppel has evolved to overcome many of these injustices. The
word ‘estopped’ means ‘precluded’ or ‘prevented’. The very essence of promissory
estoppel is that a promisor is precluded from going back on his or her promise even
though the promise is not supported by consideration moving from the promisee.
An illustrative early case of promissory estoppel is Central London Property Trust v
High Trees House Ltd [1947] KB 130. In that case Central London Property Trust (CPT)
leased a block of flats to High Trees House (HTH) under a 99 year lease. In 1940 CPT
agreed to accept a reduced rent, which was paid for the next 5 years by HTH. CPT
accepted the reduction because of the low occupancy rate for the flats due to World War
II. In 1945, with the flats all fully let, CPT asserted a claim for the full rent thereafter.
Denning J said that CPT was entitled to the full rent as claimed, on the basis that the
agreement for a reduced rent was only for as long as the flats were not fully let.
The critical aspect of the case was the statement by Denning J that, if CPT had claimed
the full rent for the years 1940-1945, it would have failed. Even though the promise to
accept a reduced rent was not supported by consideration, the principle of promissory
estoppel would have been raised against CPT, preventing recovery of the forgone rent.
For many years the operation of promissory estoppel principles were subject to two
important limitations:
(i)
the promise had to be in the context of a pre-existing legal relationship. In High
Trees, this was satisfied in that the parties were in a lease relationship and the
promise was in relation to terms agreed under that lease.
(ii)
promissory estoppel could only be used as a defence to an action bought by the
promisor against the promisee. It was said that it could only be used as a ‘shield’
and not as a ‘sword’. In High Trees, this was satisfied as it was HTH, the
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defendant/promisee, that would have used promissory estoppel as a defence to a
claim for the foregone rent by CPT, the plaintiff/promisor.
In Australia, the doctrine of promissory estoppel was first authoritatively accepted by the
High Court in Legione v Hateley (1983) 152 CLR 406.
However, the most significant High Court decision on the subject was to come 5 years
later in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. The significance of
this case was that it was a key case which has led to the removal of both of the above
limitations on the operation of the doctrine of promissory estoppel.
Read and note the facts of Waltons.
On the basis of these facts, the Mahers sued Waltons for damages for breach of contract
(lease) on the basis that Waltons was estopped from denying the existence of the lease.
The majority of the High Court (Mason CJ, Wilson, Brennan JJ) found for the Mahers on
the basis of promissory estoppel. (The minority of Denae, Gaudron JJ foun for the
Mahers on the basis of common law estoppel).
In finding in favour of the Mahers on the basis of promissory estoppel, the majority did
so in circumstances where there was no pre-exisiting contract between the parties and on
the basis that the Mahers used estoppel as the basis for a cause of action and not merely
as a defensive mechanism.
In making their decision the majority made it clear that promissory estoppel was but a
species of the broader principle of equitable estoppel – the other major species being
proprietary estoppel. The underlying rationale for equitable estoppel was firmly based in
the notion of unconscionability. Read the judgement of Mason CJ, Wilson J at 404.
Elements of Promissory Estoppel
To establish a case based upon principles of promissory estoppel there needs to be a
promise or a sufficiently clear and unambiguous representation. In relation to
representations, in Galaxidis v Galaxidis [2004] NSWCA 111, Tobias JA (Giles &
Hodgson JJA agreeing) said, at para 93
[E]ven if a representation is insufficiently precise to give rise to a contract (as
in the present case), that fact does not necessarily disqualify the
representation from founding a promissory estoppel. Much will depend upon
the circumstances in which the representation is made and the context against
which it is to be considered. In its context, the representation is sufficiently
clear and unambiguous if it is reasonable for the representee to have
interpreted the representation in a particular way being a meaning which it is
clearly capable of bearing and upon which it is reasonable for the representee
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to rely. In these circumstances, it would be unconscionable for the representor
to deny responsibility for the detriment that arises because of that reliance.
For the promise or representation to lead to a claim based upon promissory estoppel, in
Waltons at 428-429 Brennan J set out what he saw as the elements that had to be
satisfied. Read and note these elements.
This passage by Brennan J has been cited on many occasions as a statement of relevant
principles. However, it must be noted that it has not been approved by the High Court as
a whole. Nevertheless, we turn to a closer examination of the six elements noted by
Brennan J.
(a)
Assumption or Expectation
The nature of the assumption is important in relation to the type of estoppel that arisies. If
the assumption is one of an existing fact, a case of common law estoppel arises. (In
Waltons the minority found for the Mahers on this basis, viewing the evidence as
establishing that the Mahers believed that Waltons had completed the exchange of the
lease.)
With equitable estoppel, it will arise if the assumption is that the promisor will act in a
particular way in the future. According the Brennan J the promisee needs to show that he
or she assumed that a particular legal relationship existed or would exist between the
parties to the dispute. This was the case on the facts of Waltons.
However, Brennan J’s requirement of a legal relationship would exclude equitable
estoppel from a promise made where the promisee assumes that the promisor will behave
in a manner outside the context of a legal relationship, eg. A promises to pay B $ 200
within 10 days. In this example A’s behaviour is outside any existing or expected legal
relationship between A and B.
A similar approach is detected in Mobil Oil Australia Ltd v Lyndell Nominees Pty Ltd
(1998) 153 ALR 198, where the Full Court of the Federal Court said that ‘it is a
necessary element of the principle that the defendant has created or encouraged an
assumption that “a particular legal relationship” of “interest” would arise or be granted’.
A broader view was taken by Priestley JA in Austotel Pty Ltd v Franklins Selfserve Pty
Ltd (1989) 16 NSWLR 582, at 610, where His Honour indicated that it was enough that
the assumption was in relation to ‘a promise [would] be performed’.
It is not all that clear, but it may also be the case that the promisee’s assumption must
also be, in all the circumstances, reasonable. Some cases have held that the plaintiff’s
equitable estoppel claim failed because it was not reasonable for the plaintiff to have
adopted the assumption: Salienta Pty Ltd v Clancy [1999] NSWSC 916, at paras. 79-90.
(b)
Inducement
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The assumption adopted by the promisee must have been induced by the conduct of the
promisor. In most cases the conduct will be an express representation or promise. In
Legione v Hateley, at 438, it was said that the promise must be clear and unequivocal.
However, as Waltons makes clear, in some cases it can be implied. Waltons, at 379-399,
407, 413, 428-429, 442, 458-463, stresses that it is the assumption that is induced, rather
than a promise or representation, that establishes equitable estoppel. Similar comments
are found in Commonwealth v Verwayen (1990) 170 CLR 394, at 413-417, 444-449, 453460, 500-502.
In Waltons the inaction by Waltons, in the circumstances, induced the Mahers to act on
the basis of the assumption they had made.
(c)
Reliance
The promisee must act or refrain from acting in reliance on the assumption.
It is not clear whether the promisee’s action taken on the basis of the assumption has also
to be reasonable in the circumstances.
(d)
Knowledge or Intention
The promisor must know or intend that the promisee will act or refrain from acting in
reliance on the assumption or expectation. That knowledge can be actual or constructive
knowledge. In cases of assumptions based upon a promise or representation, knowledge
is ‘easily inferred’: Waltons, at 423, per Brennan J.
In cases where the assumption arises outside the context of a promise or representation
the requirement of knowledge or intention is more difficult to establish: Waltons, at 423,
per Brennan J. However, it can be established, as was the case in Waltons itself.
(e)
Detriment
The plaintiff must suffer, or stand to suffer, detriment if the assumption made by the
plaintiff is not fulfilled. There must be a link between the detriment and the assumption
or expectation. In Thompson v Palmer (1933) 49 CLR 507, Dixon J, at 547, said that the
plaintiff must suffer detriment in the sense that ‘as a result of adopting [the assumption or
expectation] as the basis of action or inaction, [the plaintiff] will have placed himself in a
position of material disadvantage if departure from the assumption is permitted’.
The notion of detriment conjures up the idea that the plaintiff will be worse off in some
way. It is not enough that the plaintiff acted upon the defendant’s promise. In Je
Maintiendrai Pty Ltd v Quaglia (1980) 26 SASR 101, the Full Court in South Australia
held, per King CJ at 106, that it was necessary that the promise would ‘result in some
detriment and therefore some injustice’ to the plaintiff. The detriment suffered can’t be
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minor: Hawker Pacific Pty Ltd v Helicopter Charter Pty Ltd (1991) 22 NSWLR 298, at
308. It has been variously described as needing to be material or significant or
substantial.
In assessing the existence of detriment one must distinguish between expectation and
reliance loss. In the context of the facts of Waltons, the expectation loss suffered by the
Mahers was the loss of rent they expected Waltons to pay during the term of the
anticipated lease. The reliance loss was the wasted expenditure incurred in demolishing
and rebuilding the premises. It was the reliance loss, and not the expectation loss that
established detriment in that case.
The significance of the establishing detriment is that it is this factor which makes it
unconscionable or unjust for the promisor to depart from the assumption.
(f)
Failure to Avoid Detriment
The defendant must have failed to act to avoid the plaintiff suffering detriment. One way
in which action could be taken to avoid the detriment is by simply fulfilling the
assumption or expectation.
However, it must be understood that the object of equitable estoppel is not to compel the
plaintiff to fulfill the assumption or expectation, but rather to avoid detriment if the
assumption or expectation goes unfulfilled. Thus, this might be done by advising the
plaintiff, before irreversible detriment is incurred, that the assumption is mistaken.
Similarly the plaintiff may be able to withdraw from the promise and the assumption that
it has generated before any irreversible detriment is incurred.
Relief Based Upon Promissory Estoppel
It is important to appreciate that promissory estoppel is not an exception to the
requirement of consideration. Were it so, a plaintiff would have available to it the usual
remedies that apply to a breach of contract case. In this sense the use of a deed represents
a true exception to estoppel because the promisee who has not provided consideration is
entitled to sue for the contractual remedy of damages.
A promisee who has not provided consideration, but is able to establish the elements of
promissory estoppel, is not entitled to the contractual remedy of damages.
Establishing the elements of promissory estoppel gives rise to an equity in favour of the
plaintiff/promisee. This simply means that the plaintiff is entitled some equitable relief.
The court will enforce this equity. The court does not enforce the promise.
The equity is enforced by the court making whatever order it deems to be appropriate to
the circumstances. In this sense the relief available to the plaintiff is at the discretion of
the court. In some cases it may be that the only way to enforce the equity is to order the
equivalent of would have been damages assessed on the basis of a breach of contract.
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In exercising this discretion, the courts have generally made it clear that the orders to be
granted are based upon avoiding the plaintiff from suffering detriment: Waltons at 427,
per Brennan J, Commonwealth v Verwayen at 411-412, per Mason CJ, 429, per Brennan
J, 501, per McHugh J. In Mobil Oil v Lyndell Nominees, at 238, the Court summed it up
as follows:
It is intended to relieve against detriment suffered and not to make good an
expectation.
In Galaxidis, at para 118, Tobias JA said:
[T]he relief equity will afford is only that which is necessary to avoid the
detriment suffered as a consequence of the representee’s reliance.
However, there have been cases where suggestions have been made that in the
appropriate case the remedy should be framed on the basis of making good the
assumption or expectation relied upon by the plaintiff. Thus, in Verwayen, at 487,
Gaudron J said:
Where the nature or likely extent of the detriment cannot be accurately or
adequately predicted it may be necessary in the interests of justice that the
assumption be made good to avoid the possibility of detriment even though
the detriment cannot be said to be inevitable or more probable than not.
More recently the High Court in Giumelli v Giumelli (1999) 73 ALJR 547 said there was
nothing in earlier cases that precluded a court from granting relief in equitable estoppel
cases, on the basis of making good the plaintiff’s assumption or expectation.
In Giumelli, parents promised their son that, if he continued to live on a property owned
by his the parents, they would subdivide it and give him the portion containing the house
that he lived in. On the basis of this the son stayed and gave up a career opportunity that
would have taken him away from the property. The relationship between the parents and
son broke down when the son married a woman the parents did not approve of and the
parents refused to transfer the property to the son.
The High Court granted the son monetary relief to the value of the property that should
have been transferred to him by the parents. The High Court did not order a transfer of
the property to the son. However, the monetary compensation was nevertheless a remedy
based upon the expectation rather that the any reliance loss or actual detriment suffered
by the son.
By way of conclusion, it would appear that the courts will initially seek to award a
remedy on the detriment suffered basis where that can be readily determined and
established. If it cannot, then a remedy based upon making good the plaintiff’s
assumption or expectation is more likely.
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