The law on estoppel

Posted on September 8, 2012 by mcbridesguides

Introduction

The law on estoppel can be quite intimidating to students. The biggest problem they have with it is the language – what are we talking about when we talk about estoppel? Lord Denning MR’s judgment in McIlkenny v Chief Constable of the West Midlands (1980) (quoted by John Cartwright in his excellent article on estoppel, ‘Protecting legitimate expectations and estoppel in English law’ 10.3 Electronic Journal of Comparative Law (December 2006)) provides some useful guidance:

‘The word “estoppel” only means stopped… It was brought over by the Normans. They used the old French “estoupail.” That meant a bung or cork by which you stopped something from coming out. It was in common use in our courts when they carried on all their proceedings in Norman-French. Littleton writes in the law-French of his day (15th century) using the words “pur ceo que le baron est estoppe a dire,” meaning simply that the husband is stopped from saying something.’

So the law on estoppel is essentially concerned with situations where the law will stop or prevent someone from doing something that they would otherwise be entitled to do. The law on estoppel has many different branches, as Lord Denning went on to explain:

‘…there has been built up over the centuries in our law a big house with many rooms. It is the house called Estoppel. In Coke’s time it was a small house with only three rooms, namely, estoppel by matter of record, by matter in writing, and by matter in pais. But by our time we have so many rooms that we are apt to get confused between them. Estoppel per rem judicatam, issue estoppel, estoppel by deed, estoppel by representation, estoppel by conduct, estoppel by acquiescence, estoppel by election or waiver, estoppel by negligence, promissory estoppel, proprietary estoppel, and goodness knows what else. These several rooms have this much in common: They are all under one roof. Someone is stopped from saying something or other, or doing something or other, or contesting something or other. But each room is used differently from the others. If you go into one room, you will find a notice saying, “Estoppel is only a rule of evidence.” If you go into another room you will find a different notice, “Estoppel can give rise to a cause of action.” Each room has its own separate notices. It is a mistake to suppose that what you find in one room, you will also find in the others.’

In this note, I want to explore three of the rooms that make up the Estoppel house.

Estoppel by representation

This branch of the law on estoppel really provided the springboard for all future developments in this area of the law. The law on estoppel by representation basically says this: If A and B are litigating a case in court, and A wants to deny that x is true, A will be prevented (or estopped) from doing so if (1) A had previously represented to B that x was true, (2) A intended that B should rely on that representation, and (3) B did rely on that representation. The rule is a rule of evidence – it is a rule about what A can and cannot say in court. Under this rule, A is prevented from playing fast and loose with the truth. He cannot outside court say one thing to B, with the intended effect that B relied on what A said, and then go into court and deny that what he said to B was true.

As a mere rule of evidence, the law on estoppel by representation does not give B a ground for suing A, but as Brandon LJ observed in Amalgamated Investment and Property Co Ltd (1982), B ‘may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, without being able to rely on that estoppel, he would necessarily have failed.’ Here are two examples of how relying on an estoppel by representation could allow B to win a case against A that would otherwise fail.

A owns a large area of land. A tells B that a cottage located on A’s land now belongs to B. B relies on that representation in various ways. In fact, A has done nothing to transfer title to the cottage into B’s hands. A and B later fall out, and while B is away on holiday, A has the locks changed on the cottage and B’s belongings thrown out of the cottage. B wants to sue A for trespass to land. A wants to deny trespass: he wants to argue he was justified in acting as he did as the cottage belongs to him. But he is not allowed to plead this in court, as it would involve going back on a representation that he made to B (‘this cottage now belongs to you’) which B relied on, as A intended he should. So an estoppel by representation arises which prevents A justifying his behaviour, and as a result B is able to sue A for trespass to land.

B takes a dress to be cleaned in A’s dry cleaners. A has B sign a form, setting out the terms on which A is prepared to dry clean B’s dress. B queries one of the terms under which B undertakes not to sue A if the dress is returned to her in a damaged condition. A tells B, ‘Don’t worry about that – that only applies if we are cleaning dresses that have lots of beads and sequins on them: we can’t guarantee our cleaning process won’t damage that sort of thing. But your little black dress will be no problem.’ When B picks up the dress, it is stained. B sues A for breach of contract. A will want to defend the claim by arguing that under the standard terms on which B and A were dealing, B agreed not to sue if her dress was damaged. But A will be estopped from raising such a defence: A told B that the term in question did not apply to the job of cleaning B’s dress, and B relied on that representation by agreeing to allow B to clean the dress. A cannot now go back on that representation and argue that the term did after all apply in B’s case. As a result, B will be able to sue A for breach of contract (assuming that the damage to the dress was the result of a lack of skill and care in the way A cleaned the dress, which presumably it was).

So the law on estoppel by representation can help a claimant sue a defendant by providing the claimant with one of the building blocks that she needs to make her case. But all the other building blocks need to be in place if the claimant is going to winher case. For example, suppose that by making various cryptic remarks and suggestions, A leads B to believe that A is promising to leave B all his property in his will. B relies on that belief – as A intended that she should – by looking after A in his old age. After A dies, it turns out that A has left B nothing in his will. B now wants to claim all of A’s property. The law on estoppel will kick in to prevent A’s representatives from denying that A promised to leave B all his property in his will. But that won’t get B over the winning line. B still has to show that A’s promise to give her all his property is legally binding, or has some legal effect, and the law on estoppel by representation has nothing to say about that. But as we’ll see, other areas of the law on estoppel do have something to say about that.

Promissory estoppel

At some point, the idea underlying the law on estoppel by representation – that you could stop someone going back on a representation if they had intentionally induced someone to rely on that representation – gave rise to the idea that the law on estoppel could also be used to prevent someone from going back on a promise if they had intentionally induced someone to rely on that promise. Thus was born the law on promissory estoppel.

In England, the law on promissory estoppel only applies to prevent someone from going back on a promise that they have made not to enforce some legal right that they have against someone else. So just as the law on estoppel by representation is based on the idea that you can’t play fast and loose with the truth, the law on promissory estoppel – in England at any rate – is based on the idea that you can’t play fast and loose with your rights. If you have a right against someone, you can’t tell them that you won’t enforce it, with the effect that they rely in some way on your promise, and then turn round and say that you’ve changed your mind and that you will be standing on your strict legal rights after all. This principle was first articulated by Lord Cairns LC in Hughes v Metropolitan Railway (1877):

‘[if the parties to a contract] enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings between those parties.’

In that case, the defendants leased some properties from the claimants. The claimants served a notice of repair on the defendants, which basically gave the defendants six months to carry out certain repairs to the let properties, or face forfeiting their lease. The defendants weren’t enthusiastic about carrying out the repairs and suggested that the claimants buy out their lease instead. The claimants asked the defendants how much they wanted to give up their lease, and the defendants replied ‘£3,000.’ The claimants said, ‘That’s too much – come back to us with a more reasonable offer.’ The defendants never replied. The six months that the defendants had been given to repair the premises expired without the repairs having been carried out, and the claimants sued to eject the defendants from the premises, claiming that they had forfeited the lease by not carrying out the repairs. The House of Lords held that the claimants could not do this. They had impliedly promised that they wouldn’t enforce the defendants’ obligation to repair the premises while negotiations for the defendants to surrender the premises were still going on, and those negotiations had never been definitively broken off.

For one reason or another, the law on promissory estoppel – as it was set out in Hughes – slumbered for about 70 years until it was revived by a first instance judge called Alfred Denning in the case of Central London Property Trust Ltd v High Trees House Ltd (1946) (popularly known as the ‘High Trees case’). That was another case about a lease. High Trees leased a block of flats in London from Central London Property Trust (‘CLPT’) in 1937, on a nine year lease, at a rent of £2,500 a year. High Trees then let out the individual flats to tenants. When World War II broke out, and London came under heavy bombing, High Trees found it harder and harder to find tenants who were willing to rent their flats. Accordingly, CLPT agreed in 1940 to halve the rent payable by High Trees, to £1,250 a year. And that is what High Trees paid for the rest of the war. By the time the war ended in June 1945, CLPT was in receivership (which meant its affairs were being administered by a receiver, appointed by the company’s creditors to get as much of their money back) and the receiver went to court to find out: (1) whether High Trees were now liable to pay rent at £2,500 a year; and (2) whether High Trees had been liable during the course of the war to pay rent at £2,500 a year and were therefore liable for about £8,000, which was the difference between the rent that High Trees should have paid if they had been liable to pay £2,500 a year during the course of the war, and what High Trees did pay as they only thought that they had to pay £1,250 a year.

Denning J ruled that CLPT could now put the rent back up to £2,500 a year, but that it would not be allowed to go back on its promise that it would not sue High Trees for the full amount of the rent during the course of the war. He argued that a promise not to sue for the full amount of a debt that was owed to the promisor would be binding if ‘it was intended to be binding, intended to be acted on, and in fact acted on… The courts have not gone so far as to give a cause of action in damages for breach of such a promise, but they have refused to allow the party making it to act inconsistently with it. It is in that sense, and that sense only, that such a promise gives rise to an estoppel… The logical consequence, no doubt, is that a promise to accept a smaller sum in discharge of a larger sum, if acted upon, is binding notwithstanding the absence of consideration…’. Denning J’s judgment in High Trees has given rise to three issues.

(1) Reliance

Denning J made it clear that CLPT’s promise to accept half the rent owing to it under the rental agreement was binding on it because their promise had been relied on by High Trees. But how? What did High Trees do differently that they would not otherwise have done had CLPT not promised to halve their rent?

It was suggested by Arden LJ in Collier v Wright (2008) that in a case where B owes A £1,000 and A tells B that if B pays him £500, he will forget the rest, B’s act of paying A £500 can count as reliance on A’s promise that he will not pursue B for the full amount of the debt. This is difficult to accept. In order for B to argue that when she paid A £500, she was relying on A’s promise not to sue her for the full amount, she would essentially have to argue that, ‘Had A not promised not to sue me for the full amount, I wouldn’t have paid him anything. So A’s promise induced me to do something – pay him half the amount I owed him – that I would not otherwise have done.’ It is not clear that a court would, or should, allow B to say something like that.

In suggesting that part payment of a debt could count as reliance on a promise not to sue for the full amount, Arden LJ was simply following the judgment of Lord Denning MR in the case of D & C Builders v Rees (1965) (builders who were owed £480 for work they had done on the defendants’ property were told that the defendants could only afford to give them £300 in full satisfaction of the defendants’ debt; they accepted the £300 on that basis and then tried to sue for the balance). In that case, Lord Denning said that ‘Where there has been a true accord, under which the creditor voluntarily agrees to accept a lesser sum in satisfaction, and the debtor acts upon that accord by paying the lesser sum and the creditor accepts it, then it is inequitable for the creditor afterwards to insist on the balance. But he is not so bound unless there has truly been an accord between them’ (emphasis in original). (In D & C Builders itself, there was no such ‘true accord’ as the promise not to sue for the full amount had been extorted under pressure.)

There seems no doubt – on the basis of this dictum – that Lord Denning thought that High Trees had relied on CLPT’s promise not to sue for the full amount of the rent by paying half the rent that they owed. But the problem remains: someone who pays half of what they owe can only be said to be relying on a promise that the balance will not be sued for if, in the absence of that promise, they would have paid less than half, or even nothing at all. It is difficult to see how High Trees could have argued that in the High Trees case.

(2) Suspensory, not extinctive

The fact that in High Trees, CLPT was held to be entitled to go back to charging High Trees the full rent of £2,500 a year once the war was over has given rise to the impression that promissory estoppel only operates to suspend, and not extinguish someone’s strict legal rights. There are two reasons why it is misleading to read High Trees as saying that promissory estoppel has a ‘suspensory, not extinctive’ effect on people’s rights.

First, CLPT’s rights to the full amount of the rent that was payable during the war were definitively extinguished under the law on promissory estoppel. They simply could not get that rent back, ever.

Secondly, Denning J’s judgment in High Trees makes it abundantly clear that the reason why CLPT could go back to charging High Trees rent of 2,500 a year once the war was over had nothing to do with any feature of the law on promissory estoppel, but was simply because CLPT’s agreement to accept £1,250 a year in rent from High Trees was only meant to apply while High Trees found it difficult to find tenants for their flats. As Denning J observed: ‘I am satisfied that [CLPT’s] promise was understood by all parties only to apply under the conditions prevailing at the time when it was made, namely, when the flats were only partially let, and that it did not extend any further than that. When the flats became fully let, early in 1945, the reduction ceased to apply.’

However, there is one sense in which the law on promissory estoppel can apply simply to suspend someone’s rights, rather than extinguish them. This sense was identified by the Privy Council in Ajayi v R T Briscoe (1964), in which case the Privy Council ruled that if A promises not to enforce his strict contractual rights against B, with the result that B relies on that promise, ‘[A] can resile from his promise on giving reasonable notice, which need not be a formal notice, giving [B] a reasonable opportunity of resuming his position’. So if B can, with sufficient notice, undo his act of reliance on A’s promise that he would not enforce his strict legal rights against B, then A will only be prevented from enforcing his strict legal rights for as long as is needed to give B a chance to undo whatever it is she did in reliance on A’s promise. It is only in the case where B cannot ‘resume’ her original ‘position’ that A’s promise not to enforce his strict legal rights against her will become ‘final and irrevocable’.

These dicta from Ajayi make the position adopted by Arden LJ in Collier v Wright (and, before her, Lord Denning MR in D & C Builders v Rees) that part payment of a debt can count as a sufficient act of reliance on a promise not to sue for the full amount even more difficult to sustain. If undoing the promisee’s act of reliance allows the promisor once again to enforce his strict legal rights against the promisor, then if the only thing B has done to rely on A’s promise that he would not sue her for the full £1,000 that she owes him is to pay A half of that amount, then it seems that A could escape being estopped from suing B for the money that she owes him by the simple expedient of paying B back her £500. If he does that, they are back where they started and A can then sue B for the £1,000 that she owed him in the first place. But instead of making A repay B the £500 she paid him, and then allowing him to sue her for the full £1,000 that she owed him in the first place, it would seem simpler to allow A to keep the £500 and hold that the law on promissory estoppel does not prevent him suing B for the remaining £500. This was the position taken by Viscount Simonds in Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955) where he observed that: ‘the gist of the equity [that arises in promissory estoppel cases] lies in the fact that one party has by his conduct led the other to alter his position. I lay stress on this because I would not have it supposed, particularly in commercial transactions, that mere acts of indulgence are apt to create rights.’

(3) A shield, not a sword

As I have already said, the law on promissory estoppel in England only works to prevent a promisor going back on a promise that they would not enforce their strict legal rights against the promisee. As such, the law on promissory estoppel in England operates as a ‘shield’, protecting defendants from being sued by claimants who have previously promised not to sue the defendant, and does not operate as a ‘sword’, allowing claimants to sue defendants for breaking a promise that the defendant made to them. Denning J acknowledged as much in High Trees when he said of a promise that was ‘intended to be binding, intended to be acted on, and in fact was acted on’ that ‘The courts have not gone so far as to give a cause of action in damages for breach of such a promise, but they have refused to allow the party making it to act inconsistently with it.’ However, the end of his judgment could have been read as leaving the door open to claimants to sue for breach of such a promise: ‘a promise intended to be binding, intended to be acted on and in fact acted on, is binding so far as it terms properly apply.’

However, Denning slammed that door shut in the subsequent case of Combe v Combe (1951). In that case, a husband and wife were divorcing, and the husband promised to pay the wife £100 a year in maintenance. The promise was not made with the object of persuading the wife not to seek an official order for maintenance from the Divorce Court, so when the wife failed to seek such an order, her failure did not provide consideration for the husband’s promise. When the now ex-husband failed to come through with the promised maintenance payments, his ex-wife took him to court. As she could not argue that his promise to pay her £100 a year was contractually binding on him, she was forced to argue that the law on promissory estoppel prevented him going back on his promise. By this time Alfred Denning had been promoted to the Court of Appeal, and Denning LJ ruled that the wife’s claim must fail:

‘Much as I am inclined to favour the principle stated in the High Trees case, it is important that it should not be stretched too far, lest it should be endangered. That principle does not create new causes of action where none existed before. It only prevents a party from insisting upon his strict legal rights, when it would be unjust to allow him to enforce them, having regard to the dealings which have taken place between the parties.’

Since Combe v Combe was decided, the line that promissory estoppel only works to stop someone going back on a promise not to enforce his strict legal rights against the promisee, and not to stop someone going back on any other type of promise, has been pretty solidly adhered to by the English courts. The only slight weakening came in Williams v Roffey Bros & Nicholls (1991), when Russell LJ said that he would have ‘welcomed’ the opportunity to consider whether a contractor was estopped from going back on a promise to pay a sub-contractor more for getting work done on time. But otherwise it seems to be accepted (as it was by the Court of Appeal in Baird Textiles v Marks & Spencer plc (2002)) that only the UK Supreme Court can change the law so that promissory estoppel can operate as a sword, and not just a shield.

The position is, of course, different in the United States (under s 90 of the Restatement 2d of Contracts)and Australia (thanks to the decision of the High Court of Australia in Waltons Stores (Interstate) Ltd v Maher (1988)). In those countries, if A makes a promise to B with the foreseeable effect that B relies on that promise in some way, B may be entitled to seek some remedy against A if A attempts to resile from his promise. As it is the fact that B has relied on A’s promise that impels the American and Australian courts to grant B a remedy, one would expect that remedy to be tailored towards ensuring that B is left no worse off as a result of relying on A’s promise. The easiest way of doing that is to order A to perform his promise, or put B in the financial position she would have been in had that promise been performed – on the basis that B will not regret relying on A’s promise if the promise is actually kept, or is as good as kept – and that tends to be the remedy (a remedy protecting B’s ‘expectation interest’) that the American and Australian courts have adopted in promissory estoppel cases even though a lesser remedy targeted at just giving back to B what she has given up as a result of relying on A’s promise (a remedy protecting B’s ‘reliance interest’) would sometimes be just as effective in protecting B’s position, and less burdensome to A.

Proprietary estoppel

We now enter the third of the rooms in the house of Estoppel that this essay wants to look at. This room contains the law on proprietary estoppel, which applies when B has relied on a belief that she has, or will have, an interest in land that belongs to A.

If we go back to the section of this essay dealing with the law on estoppel by representation, we saw there that if B relies on A’s representation that B has an interest in land that currently belongs to A, B can take advantage of the fact that A is estopped from going back on that representation to bring a claim against A for trespass to land. It was not so much of a leap for the law to say that in such a case B could also bring a claim asking the court to recognise that she actually did have the interest in A’s land that A told her that she had. Obviously, this could not be done through the law on estoppel by representation because, as we have seen, that area of the law is simply concerned with rules of evidence on what someone can and cannot say in court. So the law on proprietary estoppel was born, under which area of law claimants could go to court to ask for the court to recognise that they had an interest in land when they had been led to believe by the landowner that they had such an interest and had relied on that belief.

The law on proprietary estoppel, unlike the law on promissory estoppel, could therefore work as a sword, not just as a shield – people could bring claims to be granted interests in land under the law on proprietary estoppel, and not just defend themselves from having claims brought against them. But the roots of proprietary estoppel in the law on estoppel by representation meant that for a long time, it was thought that the law on proprietary estoppel would only apply to protect claimants who had relied on a belief that they had an interest in land that belonged to the defendants. In Ramsden v Dyson (1866), Lord Kingsdown suggested that the law on proprietary estoppel might apply to protect a claimant who had relied on a belief that he would be given an interest in land belonging to the defendant:

‘If a man, under a verbal agreement with a landlord for a certain interest in land, or, what amounts to the same thing, under an expectation, created or encouraged by the landlord that he shall have a certain interest, takes possession of such land, with the consent of the landlord, and upon the faith of such promise or expectation, with the knowledge of the landlord, and without objection by him, lays out money upon the land, a Court of equity will compel the landlord to give effect to such promise or expectation’ (emphasis added).

However, this was rejected by the majority. Lord Cranworth LC held that:

‘If a stranger begins to build on my land supposing it to be his own, and I, perceiving his mistake, abstain from setting him right, and leave him to persevere in his error, a Court of equity will not allow me afterwards to assert my title to the land on which he had expended money on the supposition that the land was his own… [But] if a stranger builds on my land knowing it to be mine, there is no principle of equity which would prevent my claiming the land with the benefit of all the expenditure made on it. There would be nothing in my conduct, active or passive, making it inequitable in me to assert my legal rights.’

It was not until the decision of the Court of Appeal in Crabb v Arun DC (1976) that it was held that the law on proprietary estoppel could be used to compel A to keep a promise that A would give B an interest in A’s land when B had relied on that promise. In that case, the claimant owned land next to the defendant council’s land. A fence separated the two pieces of land and a road ran along the council’s side of the fence. When the fence was being constructed, the council gave the claimant a point of access through the fence onto the road, so that he could access and exit his land through that point of access. But the claimant – who was thinking of selling the top half of his land that contained the point of access onto the road – asked the defendant council to grant him another point of access to the bottom half of his land. The council agreed that they would do this, and the fence when it was finally constructed contained two gaps, corresponding to the point of access to the top half of the claimant’s land that the council granted the claimant, and the point of access to the bottom half of the claimant’s land that the council had said they would give him. The claimant then sold the top half of his land. The council subsequently fell out with the claimant and blocked up the gap in the fence through which he was planning to access and exit the remaining bottom half of his land that he retained. The claimant sued, arguing that under the law on proprietary estoppel, the council could not go back on its promise to give him a point of access to the bottom half of his land. The Court of Appeal agreed. It held that the claimant should be given a right of way from his land onto the road running along the defendant council’s land. It also ordered that the claimant should be given the right of way free of charge, as the council had behaved so disgracefully in preventing the claimant gaining access to the bottom half of his land for the six or so years that it had taken to take the case to court.

After Crabb, there was nothing to stop the law on proprietary estoppel being used to grant people interests in land where they had relied on a promise that they would be given such an interest in the land. But Crabb emphasised as well that where such a promise was made, what remedy the promisee would be entitled to under the law on proprietary estoppel was discretionary. As Scarman LJ observed in Crabb, the remedy granted to the claimant in such a case would depend on what was the ‘minimum’ required to ‘satisfy the equity’ raised in favour of the claimant as a result of his relying on the defendant’s promise. Sometimes that would involve giving the claimant the interest he was promised. But sometimes that would involve giving the claimant less, or more, than he might have expected to get from the promises that were made to him.

Crabb was a ‘more’ case, where the unpleasantness of the defendant’s conduct led the court to give the claimant more than he might originally have expected to get. Pascoe v Turner (1979) was a ‘what the claimant expected’ case. The claimant was granted title to the house which she used to live in with her ex-lover, the defendant, and which the defendant had told her he would give her when he walked out on her. However, the Court of Appeal would have given the claimant less than that given her minimal reliance on the defendant’s promises (putting some curtains up) had the defendant not been subsequently so unpleasantly vindictive in trying to throw the claimant out of the house. Gillett v Holt (2001) was a ‘less’ case. The claimant was promised that he would get the defendant’s farming business when the defendant died, and on that basis had worked for the defendant for 40 years. The defendant then went off the claimant, dismissed him as an employee, and changed his will so that the claimant would no longer get anything from him when he died. The claimant sued, and the defendant was ordered to hand over to the claimant the farmhouse and 105 acres of land on which the claimant had been living with his wife before being dismissed, as well as £100,000 – but the claimant did not get the entire farming business.

In allowing: (1) a claimant to sue on a promise that he would receive an interest in land; and (2) leaving it up to the courts’ discretion to determine what remedy to give the claimant, the law on proprietary estoppel has lost touch with the idea that estoppel is about stopping someone doing something. Proprietary estoppel is about green lights, not red lights. It gives the green light to disappointed promisees to sue, so long as the promise in question was a promise to give them an interest in land, and it gives the green light to the courts to decide for themselves what is the ‘minimum equity’ required to ‘do justice’ to those promisees.

Perhaps disturbed by the thought that the law on proprietary estoppel had lost its way, Lord Scott attempted to bring this area of law under some kind of control in Cobbe v Yeoman’s Row (2008). The claimant and defendant had reached an agreement ‘in principle’ that the defendant would sell the land to the claimant if he obtained planning permission to develop the land. But a lot of the details of the deal still needed to be settled, and the defendant – unhappy with those details – pulled out of the deal after the claimant had done a lot of work trying to obtain planning permission. In an attempt to obtain some sort of remedy for his client, counsel for the claimant made five different types of claim against the defendant. One of the claims was that the claimant was entitled to a remedy under the law on proprietary estoppel.

The House of Lords held that the law on proprietary estoppel did not apply in this case. Lord Scott gave the leading judgment. He argued (at [14]) that ‘An “estoppel” bars the object of it from asserting some fact or facts…that stands in the way of some right claimed by the person entitled to the benefit of the estoppel. The estoppel becomes a “proprietary estoppel”…if the right claimed is a proprietary right…’. As the claimant was not arguing that he had a proprietary right in the defendant’s land, and was not seeking to stop the defendant’s raising an argument that would deny that he had such a right, then the law on proprietary estoppel was irrelevant here. Moreover, Lord Scott held (at [18]) that for the law on proprietary estoppel to apply, a claimant would have to received assurances that he had a ‘certain interest’ in the defendant’s land, and there was no certainty in this case that the claimant would have any kind of interest in the defendant’s land as whether or not he would obtain such an interest would depend on whether his negotiations with the defendant were successful. Furthermore, Lord Scott expressed the view (at [29]) that the law on proprietary estoppel could not be used to sue on an agreement which a statute had rendered invalid and unenforceable.

The limitations that Lord Scott attempted to place on the operation of the law on proprietary estoppel in Cobbe v Yeoman’s Row led two academics, Ben McFarlane and Andrew Robertson, to announce ‘The death of proprietary estoppel’ in [2008] Lloyd’s Maritime and Commercial Law Quarterly 449. However, normal service in the law on proprietary estoppel was resumed just a year later when the House of Lords decided Thorner v Major (2009). In that case, David Thorner worked for 30 years unpaid for his father’s cousin, Peter Thorner, on Peter’s farm. At various times, Peter said things that made David believe that he would inherit the farm on Peter’s death. However, Peter died without having made a valid will; the one will he did make, which did leave the farm to David, he had destroyed when he fell out with one of the legatees. David claimed that he was entitled to the farm under the law on proprietary estoppel given that he had done substantial work for Peter because he had been led to believe that he would inherit the farm on Peter’s death.

Consistently with his judgment in Cobbe v Yeoman’s Row, Lord Scott was unhappy about allowing Peter to take advantage of the law on proprietary estoppel to obtain an interest in the farm: ‘I would prefer…to confine proprietary estoppel to cases where the representation, whether express or implied, on which the claimant has acted is unconditional…’ (at [20]). Cases involving ‘representations…of future benefits, and subject to qualification on account of unforeseen future events’ should be dealt with by other areas of the law, such as the law on when a claimant can claim a constructive trust over property belonging to another.

However, this time Lord Scott was in the minority. The leading judgment was given by Lord Walker, who saw no problem in the fact that Peter’s promises (such as they were) that David would inherit the farm on his death must have been conditional on nothing else happening that would require him to dispose of the farm (for example, to fund his being cared for in his old age). He quoted (at [57]) Hoffmann LJ in Walton v Walton (1994): ‘equitable estoppel…does not look forward into the future and guess what might happen. It looks backwards from the moment when the promise falls due to be performed and asks whether, in the circumstances which have actually happened, it would be unconscionable for the promise not to be kept.’ As Peter had now died, his promises that David would inherit had fallen due to be performed, and in the circumstances it would have been unconscionable if David did not obtain the farm.

The House of Lords’ decision in Thorner seems to make clear that Lord Scott’s attempted retrenchment of the law on proprietary estoppel has failed, and this area of the law has been restored to the position it occupied before Cobbe v Yeoman’s Row was decided (though Lord Walker’s strictures in Cobbe v Yeoman’s Row (at [46]) that the law on proprietary estoppel is not ‘a sort of joker or wild card to be used whenever the court disapproves of the conduct of a litigant who seems to have the law on his side’ will survive).

Knocking down the walls

We have now looked at each of the three different rooms in the house of Estoppel that this essay has been focussing on. I hope that why we have these rooms, and why they have developed in the way they have, has been made relatively clear. But looking at each of these rooms in isolation creates a tendency to think of each room in isolation and to simply concentrate on what aspects of each room could do with improvement or tidying up, given what that room is trying to do. But comparing the rooms with each other raises a number of very difficult issues which are going to have to be addressed at some stage, either by the courts or by Parliament.

First, should the law on estoppel have ever gotten into the business of stopping people going back on their promises? Did cases like Hughes v Metropolitan Railway and the High Trees case in fact impede the rational development of the law of contract by relieving the law of contract from the necessity of determining whether cases like Foakes v Beer (1884) were rightly decided in denying contractual effect to promises not to sue for the balance if a debt was paid in part? And given that Foakes v Beer decided not to recognise that such promises were contractually binding, was it legitimate for a first instance judge like Denning J to rule that such promises were binding anyway under a different area of the law?

Secondly, could the law on promissory estoppel learn something from the law on proprietary estoppel and not be so one-dimensional in terms of its response to the fact that A’s promise to B that he will not enforce his strict legal rights against B has been relied upon by B? Instead of preventing (estopping) A from enforcing his strict legal rights, could the law allow A to enforce his strict legal rights but as a condition of doing so, require A to indemnify B against the consequences of having relied on A’s promise? The decision of the Privy Council in Ajayi v R T Briscoe (1964) provides the courts with the justification they would need for taking such a step: there is nothing wrong with A’s enforcing his strict legal rights, so long as B’s reliance on A’s promise can be unwound. But would adopting such a ‘tailored’ response to the fact of B’s having relied on A’s promise render the law unacceptably uncertain?

Thirdly, can it be justified that the claimants who have relied on a promise to give them an interest in land can sue on those promises, while claimants who have relied on a promise to give them money cannot? It is hard to see why promises in relation to land are privileged – in terms of the sanctions against breach that they attract – over other kinds of promises. Either the law on proprietary estoppel needs to be scaled back, along the lines suggested in Cobbe v Yeoman’s Row, or the law on promissory estoppel needs to be expanded, as has already happened in the United States and Australia. But the current position seems unsustainable.

The doctrine of consideration

Posted on September 7, 2012 by mcbridesguides

What is it?

Unless a promise is made in a deed, it will not be contractually binding (though it may still give rise to legal consequences under the law on promissory estoppel, or the law of tort, or public law) unless it is supported by consideration. This is the doctrine of consideration. Most contract textbooks will trot out the following definition of when a promise will be supported by consideration, taken from the case of Currie v Misa (1875):

‘A valuable consideration, in the sense of the law, may consist either in some right, interest, profit, or benefit accruing to the one party, or some forbearance, detriment, loss, or responsibility, given, suffered, or undertaken by the other’ (per Lush J).

This is so wide as to be useless as a definition. For example, it won’t help you to determine whether or not the following promise is supported by consideration:

A is thinking of buying a car. B tells A ‘If you buy a car, I’ll give it a free servicing every year.’ A buys a car. B’s promise played some part in A’s decision to buy a car.

Whether or not A’s buying a car provided consideration for B’s promise, so as to make it contractually binding, depends crucially on whether B’s promise was made with the object of getting A to buy a car. If B was a car dealer, and A was on B’s car lot, and B made the promise with the object of persuading A to buy a car from him, then there is no doubt that if A does buy a car from B, then B will be contractually bound to give the car a free servicing every year. But if B was A’s friend, and B was simply offering to give A’s car a free servicing if he happened to buy a car, and B was not trying to get A to buy a car when he made his promise, then A’s buying a car will not provide consideration for B’s promise, and B will not be contractually bound to give A’s car a free servicing every year.

Here is my definition of when a promise will be supported by consideration:

There will normally exist consideration for A’s promise to B if: (1) A’s promise was made as part of an agreement reached between A and B under which they each promised to do things for the other; (2) A invited or requested B to do x and A made his promise to B in order to induce B to do x, and B was so induced.

Two points need to be made about this definition.

First, it only defines when we will normally find that there was consideration for A’s promise. There may be occasions when there B will not have provided consideration for A’s promise even though the above definition applies to their case; for example, where what B promised to do for A or what B was induced to do by A’s promise was something that B was legally bound to do for A anyway.

Secondly, it is not possible to simplify the above definition without eventually getting confused. For example, it is sometimes said that the doctrine of consideration requires that something be given in return for A’s promise, or that A receive some quid pro quo for his promise. And consideration is consequently often referred to in the books as the ‘price of the promise’. I think this is misleading. In situations covered by the second limb of my definition (under which there will be consideration for A’s promise to B if A was inviting or requesting B to act in a particular way, and A made his promise to B in order to induce B to act in that way, and B was so induced), B’s act isn’t really given in return for A’s promise (which it would be if B said to A, ‘If you promise to do y for me, then I will do x for you’). It’s normally the case that A’s promise is given in return for B’s act: in these kind of situations, A is usually saying, ‘If you do x, then I promise I will do y for you.’ However, as a rough and ready working definition of when consideration will be provided for A’s promise, it’s acceptable to think of consideration as something that is given in return for A’s promise.

Why do we have it?

It is, again, often observed in the contract textbooks that jurisdictions on the European continent don’t have a requirement that a promise be supported by consideration before it will be legally binding. So why does the common law have such a requirement? To answer this question, we need to know a bit about legal history.

So – in England, in medieval times, there were local courts and royal courts. Justice in the local courts was random and arbitrary. A plaintiff (nowadays, claimant) who brought a claim against a defendant in a local court would lose his case if the defendant could find enough people to swear (through a process known as ‘compurgation’ or ‘wager of law’) that he was not liable. So powerful defendants tended to be immune from ever being held liable in a local court. The royal courts were better: they made an attempt to find out what had actually happened in a case brought before them, and tried to come up with a reasoned conclusion as to what the legal outcome of the case should be. However, a plaintiff who wanted to sue a defendant in the royal courts on the ground that the defendant had done him some wrong (or ‘trespass’) would face the problem that the royal courts were only interested in dealing with cases where the defendant’s trespass was ‘against the King’s peace’. In other words, they were only interested in remedying violent wrongs. Normally, this wasn’t much of a problem. The plaintiff who wanted to complain that the defendant had done him wrong would simply bring a claim of trespass in the royal courts and tack onto his complaint that the defendant had acted violently, in breach of the King’s peace, in doing him wrong. The case would then be heard and no one would be that bothered about whether the ‘contra pacem’ part of the claim was made out.

However, there were some claims where it was simply impossible for the plaintiff to allege with a straight face that the defendant had acted violently in doing him wrong. This would be particularly the case where the plaintiff wanted to complain that the defendant had performed some service (such as shoeing the defendant’s horse) badly. It was simply not possible for the plaintiff to say ‘The defendant did me wrong by undertaking to shoe my horse, and then in breach of the King’s peace he shoed the horse so badly that it was made lame.’ The peaceful nature of the defendant’s undertaking and failure to do a good job made it impossible to allege that the defendant’s wrong was committed violently, in breach of the King’s peace. So plaintiffs who wanted to sue for this kind of wrong were shut out of the royal courts and had to sue in the local courts instead, where – as I have said – it was a matter of chance whether or not justice was done.

This changed from about 1350 onwards. From then on, the royal courts showed themselves willing to hear ‘actions for trespass on the case’ (or ‘actions on the case’, for short) under which the plaintiff would not need to allege a breach of the King’s peace to get the royal court to hear his claim. The actions on the case that the royal courts then started hearing including a number of claims where an essential element of the plaintiff’s claim was that the defendant had undertaken, or promised, to do something for him. These claims were known as assumpsit claims (‘assumpsit’ being Latin for ‘he promised’ or ‘he undertook’). The sort of assumpsit claims that the royal courts were willing to hear included:

(1) From 1369: claims that the defendant had undertaken to perform some service for the plaintiff and had injured the plaintiff’s person or property in performing that service.

(2) From 1449: claims that the defendant had undertaken to look after the plaintiff’s property, and that he had failed properly to look after it.

(3) From 1450: claims that the defendant had deceitfully deprived the plaintiff of money by promising to sell the plaintiff land, accepting the purchase price of the land, and then selling the land to someone else or (from 1504) refusing to hand over the land.

(4) From 1520: claims that the defendant had deceitfully induced the plaintiff to hand over goods to a third party by promising to pay for those goods, and then failing to pay for them.

(5) From 1550: claims to enforce the defendant’s promise to pay a debt that he owed the plaintiff in consideration of the plaintiff’s supplying the defendant with certain goods or services.

(6) From 1577: claims to enforce a bet under which the defendant promised to pay the plaintiff money, and the plaintiff promised in return to pay the defendant money, depending on what the outcome of a game was; the plaintiff having won the bet, he sought to enforce the defendant’s promise.

In all of these cases, it was never enough for the plaintiff simply to say ‘the defendant promised’ and sue the defendant for failing to keep his promise. Assumpsit claims were never simply based on an assumpsit: they were always assumpsit plus something else. An attempt was made in 1400 to bring an assumpsit claim for a carpenter’s mere failure to keep his promise to build a house, but that claim – and others like it brought in the following few years – was dismissed on the basis that mere failures to keep a promise could only be sued for in covenant, for which the promise had to be made in a deed.

We owe the doctrine of consideration to the fact that plaintiffs were not allowed to bring assumpsit claims simply on the basis the defendant promised to do something for the plaintiff: something else had to be established for the plaintiff to be allowed to bring his claim. The doctrine of consideration both expressed that fact, and attempted to define what that ‘something else’ had to be before an assumpsit claim could be brought. The vagueness of Currie v Misa’s definition of what would amount to consideration may be attributable to the fact that assumpsit claims could be brought in so many different situations. The fact that an assumpsit claim could be brought in situations (3) and (5) accounts for why definitions of what amounts to consideration say that there will be consideration for the defendant’s promise if the defendant has obtained some benefit from the plaintiff. The fact that an assumpsit claim could be brought in situation (4) accounts for why such definitions also say that there will be consideration for the defendant’s promise if the plaintiff has incurred some detriment as a result of the defendant’s promise. And the fact that an assumpsit claim could be brought in situation (6) – basically, a bilateral executory contract where two people have made reciprocal promises to each other – accounts for why definitions of what amounts to consideration say that the plaintiff’s making a promise to the defendant can amount to consideration for the defendant’s promise to the plaintiff.

This brief history lesson should teach us three things.

(1) Rationale of consideration

The variety of situations where an assumpsit claim could be brought makes it very unlikely that the royal courts allowed those claims to be brought for the same reason in every case. Given this, it is unlikely that we can come up with a unified explanation of why promises that are supported by consideration are legally binding. It is unlikely that the reason why a promise which forms part of an agreement under which the parties have undertaken to do things for each other will be legally binding is the same as the reason why a promise that was made with the object of persuading the promise to act in a particular way and was successful in persuading the promise to act in that way will be legally binding. The first kind of promise is likely to be legally binding because there is a considerable social interest in making reciprocal agreements binding: modern life would be impossible if such agreements were not legally binding. The second kind of promise is likely to be held to be legally binding in order to avoid the material harm that would be suffered by the promisee if he were induced to rely on a promise which was then broken. The first kind of promise is held to be legally binding in the public interest; the second kind of promise is held to be legally binding in order to prevent the promisee being harmed.

(2) Non-enforcement of gratuitous promises

The reasons why assumpsit claims could not be brought for mere breach of a promise were purely formal in nature. There already existed a cause of action that allowed plaintiffs to sue defendants for merely breaching a promise, and that was covenant. The royal courts refused to allow assumpsit claims to be brought for the mere breach of a promise because they did not want: (1) to undermine the rules limiting when someone could bring a claim for breach of covenant by allowing claims for assumpsit to be brought by the plaintiffs who could not bring themselves within the rules for bringing a claim for breach of covenant; and (2) to provide plaintiffs who actually did have a good claim for breach of covenant with an alternative claim in assumpsit. Neither of these reasons, being purely formal in nature, were actually good reasons for refusing to allow a claim for the mere breach of a promise to be brought in assumpsit. So it still has to be established that the modern law of contract does have a good reason for refusing to enforce gratuitous promises that have not been made in a deed.

(3) Limits on when the courts will find that there is consideration for a promise

I have argued that the doctrine of consideration originated in: (1) the fact that a claim in assumpsit could not be brought simply on the basis that the defendant had failed to keep a promise, and that something more needed to be established before the plaintiff could bring such a claim against the defendant, and (2) the need to explain to litigants what that ‘something more’ involved. Given this, it’s hard to understand why at some point before the end of the 18th century, the doctrine of consideration became immutable in that its list of situations where there would be consideration for a defendant’s promise became closed. (I say ‘before the end of the 18th century’ because by the time Pillans v Van Mierop (1765) was decided, not even a judge as bold as Lord Mansfield tried to argue that a written promise to pay a third party’s debts was supported by consideration; instead he argued that such a promise did not need to be supported by consideration to be binding – a suggestion that was disapproved in Rann v Hughes (1778).)

There is a saying that ‘the categories of negligence are never closed’ (Donoghue v Stevenson (1932), per Lord Macmillan). What this means is that the law does not take the view that there is a limited list of situations in which one person can sue another for negligence and if your case doesn’t come within that list, then you have no case. It is a pity, for the rational development of the law, that we do not have an equivalent saying that ‘the categories of consideration are never closed’, so that if a claimant who wanted to sue a defendant for breaching a promise would not necessarily be prevented from doing so just because his case does not fall within the list of situations where the courts have recognised in the past that a defendant’s promise will be supported by consideration. But the categories of consideration are now definitively closed, and a claimant who wants to enforce a promise not made in a deed and whose case does not fall within one of the two limbs of my definition of consideration, set out above, is forced to cast about for some other area of law, such as the law on estoppel or public law, as a way of getting an effective remedy; the law of contract will not help him out. I suppose this does make the law more certain – the law of negligence is notoriously unstable precisely because ‘the categories of negligence are never closed’ – but it does not help the law develop in a clear and rational way. Ideally, we would have one area of law dealing with the issue of when a promise will be legally binding, but at the moment we have three or four grappling with this issue because the area of law that is most apt to deal with this issue – the law of contract – has stopped developing.

Of course, if it were true that ‘the categories of consideration are never closed’ then the start of this essay would look very different. We would have to adopt something like Patrick Atiyah’s view of the doctrine of consideration (see Atiyah, ‘Consideration: a restatement’ in his Essays on Contract (1986)), and say that ‘A defendant’s promise will be supported by consideration if the courts think that there is a good reason to enforce it even though it was not made in a deed. As the law stands at the moment, the courts will hold that a defendant’s promise is supported by consideration if the promise is made as part of a reciprocal agreement under which the parties to the agreement have promised to do things for each other, or if the promise was made with the object of persuading the plaintiff to act in a particular way and was successful in that object. However, it has been argued that there are other kinds of promise which should be enforceable, and it has been suggested that the courts should also recognise that a promise is supported by consideration if…’ All this very much represents the road not taken by English law. There are only two situations in which the courts will recognise that a promise is supported by consideration and it is hard to see nowadays – given the current state of the law – how that list of situations could, or will ever, be added to by the courts.

Should we have it?

I think academics and judges who argue that we should abolish the doctrine of consideration are not thinking straight. In a case where A makes a promise to B, we might want to find that that promise is legally binding because of: (1) something that B has done, or (2) something that A has done.

If we are going to find certain promises binding because of something the promisee has done, then we will need the law to specify when a promise will be legally binding because of something the promisee has done – and that is basically the function that the doctrine of consideration performs today. If we abolished the doctrine of consideration, we would just need to reinvent it (though perhaps in a modified form) to deal with the issue of when a promise will be legally binding because of something the promisee has done. Of course, it is always possible that we would never want to enforce a promise because of something that the promisee has done, and that our reasons for enforcing a promise would always be based on what the promisor has done in making that promise. But this is hardly likely.

No – the real question is whether the current law on deeds and consideration needs to supplemented. And that question turns on this one: Do we think that the courts should ever recognise that a promise not made in a deed is legally binding when the promisee has done absolutely nothing that might give us reason to want to enforce that promise? If the answer is ‘yes’ then the law needs to be reformed so that it says that ‘A promise that has not been made in a deed and is not supported by consideration will still be legally binding if…’ where what comes after the ‘if’ sets out the conditions under which we would want to enforce a promise not made in a deed even though the promisee has done absolutely nothing for his part to make us want to enforce the promise. If the answer is ‘no’ then the current law on deeds and consideration does not need supplementation – though the doctrine of consideration may need modification if it is too restrictive at the moment in specifying the circumstances in which we will enforce a promise based on what the promisee has done.

So – should we ever recognise that a promise not made in a deed is legally binding even though the promisee has done absolutely nothing that might give us a reason to want to enforce the promise? In Pillans v Van Mierop (1765) (which, remember, was disapproved by the House of Lords in Rann v Hughes (1778)), Lord Mansfield and Wilmot J thought the answer was ‘yes’. Two reasons were given by Mansfield and Wilmot as to why we might want to enforce such a promise. These remain the two principal reasons that anyone has ever been able to think of as to why we might want to enforce a promise when the promisee has done nothing that might give us a reason to want to enforce it.

(1) Commercial demand

In Pillans v Van Mierop, the plaintiff bank (Pillans & Rose) effectively lent a merchant, White, £800 so that he could buy some goods from someone called Clifford. They did so on White’s assurance that the defendant bank (Van Mierop & Hopkins) would guarantee the debt. The defendants subsequently indicated that they would guarantee White’s debt. However, White then went bankrupt and the defendants declined to cover the debt White owed the plaintiffs. The plaintiffs sued the defendants. Lord Mansfield observed that the case was ‘a matter of great consequence to trade and commerce’ and held that the defendants’ promise should be found to be legally binding as ‘It would be very destructive to trade, and to trust in commercial dealing if they could [breach their promise].’

There are situations where the needs of the marketplace do seem to demand that gratuitous promises be held to be binding even though they are not made in a deed. The most obvious example is the promise that a bank makes when it issues a documentary credit. The way a documentary credit is as follows. Seller is shipping 10,000 widgets to Buyer. Seller wants some assurance that he will paid for those widgets when they are shipped. The fact that Buyer is contractually bound to pay for the goods won’t be of much good to Seller: Buyer is in another country and may be of doubtful credit. So Buyer gets a Bank to issue a documentary credit to Seller, under which Bank promises to pay Seller the price of the widgets when Seller presents Bank with documentary proof (in the form of what’s called a bill of lading) that he has shipped the widgets to Buyer. Now – Seller will not have provided any consideration for Bank’s promise to pay under the documentary credit. However, it is still commercially vital that Bank’s promise to pay be legally binding as the entire system of international trade would fall down if banks started to refuse to honour documentary credits that they had issued. For this reason, documentary credits are legally binding even though they are not issued in the form of a deed, and are unsupported by consideration. So in this area at least, the demands of commerce have caused the courts to supplement the law on deeds and consideration with a special rule making documentary credits legally enforceable.

(2) Intention to be bound

The demands of commerce were not the only reason Lord Mansfield thought that the promise made in Pillans v Van Mierop should be legally binding. He seemed to take the view that we should enforce any promise that is intended to be legally binding. If a promisor makes a promise intending to be legally bound by it, then that gives us sufficient reason to want to enforce the promise. Lord Mansfield argued that ‘the ancient notion about the want of consideration [making a promise non-binding] was for the sake of evidence only: for when it is reduced into writing, as in covenants, specialities, bonds, &c. there was no objection to the want of consideration.’ The same point was developed by Wilmot J who argued that consideration was normally required to make a promise binding ‘in order to put people upon attention and reflection, and to prevent obscurity and uncertainty…it was intended as a guard against rash inconsiderate declarations: but if such an undertaking was entered into upon deliberation and reflection, it had activity; and such promises were binding.’

The view that a promise should be held to be legally binding if the promisor intended to be bound by it is most strongly associated nowadays with Charles Fried’s Contract as Promise (1981). Two arguments in favour of this view can be gleaned from Fried’s book.

(i) Moral theory. Fried argues that breaking a promise is morally wrong because someone who makes a promise ‘has intentionally invoked a convention whose function it is to give grounds – moral grounds – for another to expect the promised performance. To renege is to abuse a confidence he was free to invite or not, and which he intentionally did invite. To abuse that confidence now is like (but only like) lying: the abuse of a shared social institution that is intended to invoke bonds of trust. A liar and a promise-breaker each use another person.’ Fried sees contract law as existing to give effect to the moral obligation that a promise-maker comes under to keep his promise.

(ii) Transfer theory. The first, introductory, chapter of Contract as Promise suggests a different argument in favour of the position that promises that are intended to be legally binding should be legally binding. Fried argues that contract law is a natural extension of the ‘liberal premise that individuals have rights’ in that it allows us to dispose ‘of these rights on terms that seem best to us.’ So – some academics argue – if I intend to be bound by my promise to paint your house, then I am trying to transfer to you my right to decide whether or not I will paint your house. This was a right which was initially given to me under the law and which – so long as I had it – made it unlawful for you to force me to paint your house. But now I have decided to transfer that right to you by making a legally binding promise to you to paint your house. Given that I have decided to transfer to you my right to choose whether or not I paint your house, why should the law get in the way of my doing that? But that is what the law does when it says that my promise is not – despite my intentions – binding on me because you have provided no consideration for it. Holding that my promise is not binding on me is the equivalent to the courts’ declaring that a gift that I made to you was invalid because you never gave me anything in return.

Both arguments suffer from problems. The moral argument may go too far in that it might be taken as indicating that any seriously made promise should be legally binding, rather than one that was intended to be legally binding. It also unclear why in the area of promises, the law should get involved with requiring people to do the right thing when it does not, for example, sanction much more serious forms of moral wrongdoing such as adultery and failing to raise one’s children properly.

The problem with transfer theories of contract law is that it is not actually clear that I have a right to decide whether or not to paint your house. What I do have is a right that you not punch me, or imprison me, or threaten me with being punched or imprisoned – and all of those rights make it virtually impossible for you to force me to paint your house. But that does not mean that I have a right – equivalent to my rights that you not punch me, or imprison me, or threaten me being with being punched or imprisoned – to decide whether or not to paint your house. So if I promise to paint your house, intending to be legally bound by that promise, I am not attempting to transfer to you something that was originally mine. I am trying instead to create something entirely new, and it is not clear why the law should assist me in doing that just because that is what I want to do.

Summary

Students might find the following summary of this lengthy essay helpful:

(1) The doctrine of consideration tells us that promises not made in a deed will only be contractually binding if they are supported by consideration.

(2) A promise will only be supported by consideration, if (i) the promise was made as part of an agreement under which both parties to the agreement promised to do things for each other; or (ii) the promise was made with the object of persuading the promisee to act in a particular way and was successful in achieving that aim.

(3) It is unlikely that the law enforces promises (i) and (ii) for the same reason. It is likely that a promise that falls into category (i) is enforced for reasons of commercial convenience. It is likely that a promise that falls into category (ii) is enforced in order to protect the promisee from suffering harm as a result of relying on that promise.

(4) Proposals to abolish the doctrine of consideration should be dismissed as nonsensical so long as it remains the case that we will want, in certain situations, to enforce a promise because of what the promisee has done; the function of the doctrine of consideration is to identify what those situations are.

(5) The doctrine of consideration may require modification in so far as it fails currently to identify all of the situations where we would want to enforce a promise because of what the promisee has done. However, such modification is impossible due to the fact that before the end of the 18th century, the categories of situation where the courts would find that there was consideration for a promise became closed, and limited to the two situations identified in (2), above.

(6) The doctrine of consideration and the law on deeds may require supplementation in so far as it is the case that we should enforce a promise not made in a deed even though the promisee has done absolutely nothing that would give us a reason to want to enforce that promise. It may be that certain such promises should be enforced when the needs of commerce demand; it is more doubtful that such a promise should be enforced simply because the person making the promise intended to be legally bound by it.

The objective test

Posted on September 5, 2012 by mcbridesguides

You can’t tell what the parties under a contract are obliged to do unless you know what the terms of the contract say. So it’s pretty crucial that you learn how to determine what the terms of the contract are. But, unfortunately, this is a subject which isn’t dealt with at well by any of the contract law textbooks. Their chapters on ‘The Terms of a Contract’ are far more concerned with explaining how the terms of a contract are to be classified; something which need not concern us at the moment. The prior issue of how you tell what the terms of a contract are is usually only touched on very lightly and discussed at a very superficial level. Hence the necessity for this essay.

Now, of course, you’ll never need to determine what the terms of a contract are if both parties are in agreement as to what the terms are. If they are both agreed then there is no issue between them to be settled. The question – What are the terms of this contract? – only comes up if the parties disagree as to what the terms are. Now I want to distinguish this kind of disagreement from the case where the parties agree what the terms are but disagree over how they should be interpreted. So if Farmer and Butcher reach an agreement under which Farmer undertakes to sell Butcher 10 tonnes of ‘good quality’ British beef and Butcher agrees to pay him £5,000 for said beef on delivery, Farmer and Butcher will basically agree as to what the terms of the contract are but they might not agree on what meaning should be given to the term ‘good quality’ – Butcher might have higher standards in this regard than Farmer. And Farmer and Butcher may end up asking the courts to rule on whether the beef supplied by Farmer to Butcher was of ‘good quality’. I’m concerned in this note with much more fundamental disagreements: cases where A and B cannot even agree as to what the terms of their contract say. Some examples:

(1) Lazy types a letter to Gardener saying that he will give him ‘£100’ if Gardener mows Lazy’s lawn. Lazy meant to type ‘£10’ but pressed the ‘0’ key once too often. Gardener went round to Lazy’s house and mowed Lazy’s lawn. Gardener contends that under the terms of their contract, Lazy has to pay him £100 for the work he did; Lazy contends that he only has to pay £10.

(2) Industrious goes door to door offering to clean people’s windows for them. He goes round to 65 Mill Road and knocks on the door. Happy opens the door and Industrious says ‘Can I clean your windows? I’ll do a good job for £50.’ Happy says, ‘Okay – £50 it is. I’m just going out but I should be back by the time you’ve finished and I’ll pay you then.’ Happy goes out and Industrious starts work. By the time he comes back, Industrious has finished cleaning all the windows at 65 Mill Road. Industrious asks Happy for £50 but Happy replies, ‘Why should I give you £50? You haven’t even started cleaning my windows.’ It turns out that Happy lives at 67 Mill Road, next door to 65 Mill Road. (Happy was in 65 Mill Road when Industrious came round because he was doing some redecorating work for his neighbour, who is on holiday.) Industrious contends that under the terms of their contract, Happy is obliged to pay him £50 for cleaning the windows at 65 Mill Road. Happy contends that he doesn’t have to pay Industrious anything: under the terms of their contract, he only undertook to pay Industrious £50 if he cleaned the windows at 67 Mill Road.

(3) Desolate places an advertisement in the paper: ‘Lost cat – black with a white nose. Responds to the name “Red”. £100 reward for anyone who returns him.’ Curious sees the advertisement and later finds Red dead by the side of the road; he had been run over. (Curious identified him by his description and a name tag around Red’s neck.) Curious returns the dead cat to Desolate and claims his £100 reward. Desolate refuses to pay Curious anything, claiming that he is only obliged to pay the reward to someone who returned Red in a safe condition. Curious claims that Desolate is obliged to pay the reward to anyone who returned Red to Desolate, whatever his condition.

(4) Professor specialises in International Law and placed the following advertisement in the paper: ‘Personal assistant wanted to work full time to assist busy academic with part-time practice in international law on the side. Some travel involved due to international nature of academic’s job.’ Graduate applied for the job and was successful. Soon after Graduate started working for Professor, Professor told her to pack her bags because they were going to Afghanistan to do some research on whether the US-led military action there involved any breaches of international law. Professor told Graduate that if she had any dependants, it might be an idea if she took out some life insurance ‘because things are still pretty dangerous out there’. Professor also told Graduate that his funding for the trip to Afghanistan was pretty limited, so they would have to share a room in the hotel he had booked for them. On hearing all this, Graduate refused to go to Afghanistan. Professor insists that Graduate is required under the terms of her contract of employment to accompany him to Afghanistan. Graduate claims that she is not.

(5) Student was in charge of arranging the drinks for her College’s Winter Ball. She contacted Merchant and Merchant agreed to supply Student with 100 bottles of champagne at £20 a bottle; the wine to be delivered on the night of the ball. Come the night of the ball, one of Merchant’s employees turned up with 100 bottles of Farmer Giles’ Natural Sparkling Wine, worth about £2 a bottle. When Student protested, she was informed that according to Merchant’s standard terms, ‘In the event that we have difficulties obtaining the wine ordered, we reserve the right to supply another brand of wine in its place, at the same price as the wine that was originally ordered.’ Merchant contends that Student is obliged to pay him £2000 for the 100 bottles of sparkling wine supplied on the night of the ball (which Student reluctantly accepted, for fear that a riot would break out if she didn’t supply any alcohol). Student contends that she is not; and further contends that Merchant committed a breach of contract when he supplied the bottles of sparkling wine instead of the champagne originally agreed on.

So – how do we determine what the terms of a contract are? The answer is – we apply what is known as the objective test for determining the terms of a contract. No one has yet come up with a definitive statement as to how the objective test works – mainly because the contract law textbooks shy away from the whole issue of how we determine what the terms of a contract are. But I think the following fairly summarises the law.

Suppose that A and B are parties to a contract and they disagree over what the terms of the contract are. Now one of them will invariably be claiming that the other is bound by a particular term and the other will be claiming that he or she isn’t. Let’s say that in the case we’re considering A is claiming that B is bound by term x (that term x imposes an obligation on her) and B is claiming that she isn’t. In order to determine whether B is bound by term x, you simply ask two questions:

(i) When B entered into the contract with A, did A think B was agreeing to term x’s being part of the contract? If the answer is ‘no’ then that’s the end of the game: B will not be bound by term x. A cannot claim that B is bound by a term if he knew that she hadn’t agreed to it when she entered into the contract with A. (This is the message of Hartog v Colin & Shields (1939).) But if the answer is ‘yes’, you ask:

(ii) Was it reasonable for A to think this? If the answer is ‘no’ then, again, B will not be bound by term x. But if the answer is ‘yes’ then B is bound by term x (unless, of course, some statutory provision makes term x unenforceable).

So going back to the cases set out above –

In case (1), Gardener is claiming that Lazy is bound by the following term: ‘Lazy will pay Gardener £100 if Gardener mows Lazy’s lawn.’ To see whether this term is part of the Gardener–Lazy contract, we ask first of all – when Gardener mowed Lazy’s lawn, did he think that Lazy was promising to pay him £100 for doing so? Maybe he didn’t – maybe he knew that Lazy had made a mistake in typing his letter. If so, then Lazy doesn’t have to pay Gardener £100 for mowing his lawn. (Does he even have to pay him £10? Under the contract, probably not as Lazy never offered to pay Gardener £10 for mowing the lawn. He only offered to pay Gardener £100, an offer which – we’re supposing – Gardener knew was a mistake. But Gardener may still be entitled to bring a non-contractual claim for a reasonable sum – a quantum meruit – for the work he did.) But maybe Gardener thought Lazy was being generous and genuinely did think that Lazy was promising to pay him £100 for mowing his lawn. If that is the case, we then have to ask whether it was reasonable for Gardener to think this, given all the circumstances. There seems no reason why it wouldn’t have been reasonable for Gardener to think this, and so Lazy will be bound to pay Gardener £100 for mowing Lazy’s lawn.

In case (2), Industrious is claiming that, under the terms of the contract, Happy is required to pay him £50 for washing the windows of 65 Mill Road. For this to be true, it has to be established first of all that when Industrious and Happy talked, Industrious thought Happy was promising to pay him £50 if Industrious cleaned the windows of the house Happy was in when he talked to Industrious. Presumably he did; otherwise why would Industrious have done what he did? Secondly, it has to be established that it was reasonable for Industrious to think this. And I think it is – it was reasonable for Industrious to think that when Happy agreed to pay Industrious £50 for washing Happy’s windows, Happy was referring to the windows of the house he was in when he talked to Industrious. So I would have thought that Industrious would have a good claim against Happy in case (2).

In case (3), Desolate will be bound under the terms of the contract to pay Curious the reward if Curious thought Desolate was offering to pay £100 to whoever returned Red even if Red was dead and it was reasonable for Curious to think this. Curious may find it difficult to show that it was reasonable for him to think that Desolate was offering to pay a reward for the return of his cat, even if the cat was dead. Given this, Curious probably will not have a claim against Desolate in case (3).

In case (4), Professor wants to claim that under the terms of his contract with Graduate, Graduate is required to accompany him on foreign trips even if those trips require her to put her life at risk, and that she is also required to share a room with him if he doesn’t have enough money for separate rooms. It’s highly unlikely that Professor will be able to establish this under the objective test. For one thing, it’s unlikely that Professor seriously thought Graduate was agreeing to do these kinds of thing (put her life in danger, share a room with Professor) when she took up her position with him. Even if it did, it’s highly unlikely that Graduate did anything that made it reasonable for Professor to think Graduate had agreed to do these kinds of things when she signed up to work for him. Of course, if Professor had made it clear at the interview that his job often required him to travel to war-torn countries and that he would expect his personal assistant to accompany him and that on such trips they would often have to ‘rough it’ together, then that would be different. Under the objective test, Graduate would be required – under the terms of her contract with Professor – to go with him to Afghanistan. (Unless, of course, a statutory provision intervened to make this aspect of her contract of employment unenforceable.)

Case (5) is the most complex because it involves two disputes over the terms of the contract between Student and Merchant. First of all, Merchant is claiming that – under the terms of the Student–Merchant contract – Student is required to pay him £2,000 for the sparkling wine that he supplied on the night of the ball (even though the sparkling wine was only worth £200). Under the objective test, Student will be required to pay up if, when she entered into the Student–Merchant contract, (i) Merchant got the impression that Student was agreeing to pay £20 a bottle for the champagne or whatever wine Merchant chose to substitute for the champagne and it was reasonable for Merchant to believe that Student was agreeing to do this. It’s hard to see that this could be made out if, when Student and Merchant agreed their deal, Student had no idea that there was a term in Merchant’s standard form contract allowing him to supply different wine from the wine ordered, at the same price as the original wine, and Merchant was aware that Student had no idea about the existence of this term. But if the existence of the term was brought to Student’s attention and Student said, ‘Fine – I don’t care’ then under the objective test, Student probably will be obliged to pay £2,000 for the sparkling wine supplied by Merchant. Student will have given Merchant the reasonable impression that she was happy to pay £2,000 for whatever wine Merchant supplied her – either the original champagne bargained for or, if that was hard to obtain, whatever Merchant supplied in its place. But if the term wasn’t brought to Student’s attention then Merchant almost certainly won’t be allowed to sue Student for the £2,000 he wants (though he may be allowed to bring a non-contractual claim for the value of the wine that he supplied – this sort of claim is known as a claim for a quantum valebant; a claim for as much as they (the goods) were worth). Secondly, Student is claiming that Merchant was required – under the terms of the Student–Merchant contract – to supply her with champagne and that he therefore committed a breach of contract in failing to supply her with champagne. When we apply the objective test to resolve this question, our attention to switches to Student and we ask – did Student think that Merchant was agreeing to supply her with champagne when they concluded their deal and was it reasonable for her to think that? Our answer to this question will depend on whether the clause in Merchant’s standard terms had been brought to her attention. If it was, it would not have been reasonable for Student to think that Merchant was agreeing to deliver her 100 bottles of champagne, no matter what. If it wasn’t, it seems it would have been pretty reasonable for Student to have thought that Merchant was guaranteeing to supply her with 100 bottles of champagne. So case (5) all turns on whether the term in Merchant’s standard terms – which purported to allow him to supply a different wine from the one ordered, at the original price – was brought to Student’s attention. If it was, then Merchant will be able to sue Student for £2,000 for the sparkling wine that he delivered on the night of the ball and Student won’t be able to claim that Merchant committed a breach of contract in supplying the sparkling wine. But if the clause was not brought to Student’s attention, then the whole thing switches round: Merchant won’t be able to sue Student for £2,000 for the champagne (though he may be able to bring a non-contractual quantum valebant claim against Student) and Student will be able to claim that Merchant committed a breach of contract in supplying sparkling wine on the night of the ball.

Case (5) is a very common situation, where two parties (call them, A and B) agree to deal with each other, and one of the parties (say it’s B) makes it clear (either explicitly or implicitly) that he is only willing to deal with A on his, B’s, standard terms. (When you buy something from a supermarket or buy a ticket at a railway station, you are in this kind of situation: you know when you make your purchase that the supermarket or the railway company is only willing to deal with you on its standard terms.) The rules on ascertaining the terms of a contract in this kind of situation are easy enough to state:

(1) A will be bound by all of B’s standard terms, however unreasonable, if he was supplied a copy of them and indicated with his signature that he was happy to be bound by all those terms: L’Estrange v Graucob (1934). Though it will be different if A was misled as to the effect of one of the terms before signing; in that case A will not be bound by that term: Curtis v Chemical Cleaning (1951).

(2) Where A does not specifically indicate that he is happy to be bound by all of B’s standard terms, but he does not object to his agreement with B being governed by B’s standard terms, he will be bound by all of the reasonable/non-onerous/ordinary terms in B’s standard terms and by any unreasonable/onerous/unusual terms in B’s standards terms which were drawn specifically to his attention and which he did not object to: Thornton v. Shoe Lane Parking (1971); Interfoto v Stiletto Visual Programme (1988).

These rules are merely examples of the objective test for determining the terms of a contract at work. If someone presents you with a standard form contract and you look at it and sign at the bottom, you’re bound by all the terms in that standard form contract, however onerous and obscure because it’s reasonable for the other guy to think that your signature means you’re happy to be bound by all the terms in the contract. If you don’t sign but merely don’t raise an objection when the other guy indicates he wants your deal with him to be governed by his standard terms, then you’re bound by those of his standard terms that are reasonable and those unreasonable terms in his standard terms which were drawn to your attention and you didn’t object to. Why? Well, with regard to the reasonable terms, it’s reasonable enough for the other guy to think that you are happy to deal on those terms. And as regards any unreasonable terms, if they have been specifically drawn to your attention and you haven’t objected to them then it’s reasonable for him to think you’ve agreed to those terms as well. So don’t fall for the idea that cases like Thornton and Interfoto are examples of the courts intervening to protect the little guy from being oppressed by big companies inserting oppressive clauses in their standard form contracts. Thornton and Interfoto are simply examples of the objective test being applied to determine the terms of the contract in situations where one party has indicated his willingness to deal on the other party’s standard terms.

In fact, virtually all of the cases normally dealt with in the contract textbooks in their chapters on ‘Terms of the Contract’ can be seen as applications of the objective test.

For example, A buys a car from B, thinking – on the basis of things B said while A was looking at it – that B has contractually guaranteed that it is of a certain age. Is there such a warranty in the contract? It depends on whether it was reasonable to think that B was making such a guarantee – and that will depend a lot on who B is. If he’s a professional car dealer then it’s more reasonable to think that he’s guaranteeing the age of the car than if he’s a private seller, getting rid of his car to buy a new one: compare Oscar Chess Ltd v Williams (1957) (ordinary car owner sells car to dealer; held owner not bound by her representation that the car was made in 1948) with Dick Bentley Productions Ltd v Harold Smith Motors (1965) (sale by dealer to ordinary consumer: held that dealer was bound by his representation that the car had only done 20,000 miles).

Similarly, A rents a crane from B, as he has many times before. Each time in the past, he has signed a standard form contract which expressly states that he is to cover the cost of any repairs which the crane may need after it’s been used by A. But this time nothing is signed. The crane needs to be repaired after A’s finished with it. Is A liable for the costs of repair? Applying the objective test, he is if B thought – when A hired the crane – that he was agreeing to cover the costs of any repairs that were needed and it was reasonable for her to think that. Well, she certainly thought that he was and it was reasonable for her to think that given that A had always agreed in the past to cover the costs of repair and knew when he ordered the crane this time that B was expecting him to cover the costs of repair. This was the result reached by the Court of Appeal in British Crane Hire Corporation Ltd v Ipswich Plant Hire Ltd (1973), holding that the defendant, who had urgently hired a crane from the claimant without signing the claimant’s standard terms of hire, was bound by the term in the claimant’s standard terms requiring him to pay for any costs involved in returning the crane to the claimant on the basis that a continuous ‘course of dealing’ between the two parties on the claimant’s standard terms meant that it was reasonable for the claimant to believe that the defendant was agreeing on to hire the crane on the claimant’s standard terms even though on this occasion nothing had been signed.

Introduction to contract law

Posted on September 5, 2012 by mcbridesguides

Introduction

Someone enters into a contract if he makes a binding – legally enforceable – promise to someone else. So the ‘law of contract’ tells us in what situations someone will make a binding promise to someone else, and what remedies will be available if that promise is breached. While academics refer to the area of law dealt with in this chapter as ‘contract law’ or the ‘law of contract’, it is more helpful to think of it as ‘contracts law’ or the ‘law of contracts’. This is because there are at least three different ways of making a binding promise to someone else, and therefore at least three different types of contract recognised in English law. They are as follows.

(1) Covenant

Someone enters into a covenant if he makes a promise in a deed. (A deed is a particular kind of legal document. It has to be signed and witnessed to be valid.) Promises made in deeds will automatically be binding, other things being equal. The requirements that have to be satisfied in order to make a deed are laid out in the Law of Property (Miscellaneous Provisions) Act 1989. A document will only amount to a deed if it makes it clear on its face that it is intended to be a deed; if it has been signed by the person making the deed or his representative, and the signature has been witnessed; and the deed has been ‘delivered’ (which simply means that the person making the deed has made clear his intention to be bound by it).

(2) Bilateral contract

A bilateral contract arises if two people enter into an agreement under which they each promise to do something for the other. Under the contract, each party is bound to do what they promised to do for the other under their agreement. For example, if you and I agree that I will mow your lawn next Saturday, and that you will pay me £50 for doing so, we will have entered into a bilateral contract – my promise to mow your lawn next Saturday will be binding on me, and your promise to pay me £50 if I do so will be binding on you. The contract is bilateral in nature because each of us is bound to do something for the other under it.

(3) Unilateral contract

A unilateral contract arises if I make a promise to you with the object of inducing you to act in a particular way. If you do so act, my promise to you will be binding on me. For example, suppose I promise to pay you £100 if you find and return to me my lost dog, Freddy. You immediately start searching for Freddy. As soon as you start searching for Freddy, my promise to pay you £100 if you find and return Freddy will be binding on me. I made that promise with the object of inducing you to search for Freddy, and my promise had the effect of inducing you to search for Freddy. So if you do find Freddy and return him to me, I will have to pay you £100. The contract that arises in this situation is unilateral in nature because only one person is bound to do something under it: me. You don’t have to search for Freddy if you don’t want to. But if you do search for Freddy, then I will have to pay you £100 if you find him and give him back to me.

Estoppel

There is no reason to suppose that the number of types of contract recognised in English law will always be fixed at three. In other words, there is no reason to suppose that there will only ever be three ways of making a binding promise to someone else under English law.

For example, American and Australian law has recognised that a promise might be binding under the law on promissory estoppel. The law on promissory estoppel applies (or at least it does in America and Australia) to make A’s promise to B binding on A if B relies on that promise in such a way that it would be unfair to allow A to break his promise.

For example, suppose that EggheadUniversity is in negotiations to buy a precious manuscript for £1m. Dives has agreed to fund the acquisition, but just before the negotiations are completed, there is a dramatic fall in the stock market and Dives loses a lot of his wealth. As a result, Dives tells Egghead that he can’t help fund the purchase. Egghead asks an old member, Croesus, to help out. Croesus reluctantly tells Egghead that he will stump up the £1m needed if no one else can be found to pay for the manuscript. No one else is willing to help fund the purchase of the manuscript, but Egghead goes ahead and contracts to buy the manuscript for £1m, thinking that Croesus will fund the purchase. Croesus then tells Egghead that he has changed his mind – he won’t be contributing a penny towards the cost of purchasing the manuscript.

Is Croesus’ promise to pay Egghead £1m binding on him? Under English law, it would seem not. The promise was not made in a deed. Croesus’ promise to pay Egghead £1m did not form part of a bilateral contract. His promise was not made as part of an agreement under which Croesus and Egghead undertook to do things for each other. And Croesus’ promise to pay Egghead £1m does not seem to have given rise to a unilateral contract either. Although Egghead relied on Croesus’ promise by contracting to buy the manuscript, Croesus did not make his promise with the object of inducing Egghead to buy the manuscript. Almost certainly, Croesus would have been overjoyed if the negotiations to buy the manuscript had fallen through: he would then have been released from his promise to pay Egghead £1m.

So Croesus’ promise to pay Egghead £1m will not be binding on him under English law. In contrast, the American and Australian courts would probably recognise that Croesus’ promise was binding on him under the law on promissory estoppel. The fact that Egghead foreseeably, reasonably and irretrievably relied on Croesus’ promise makes it unfair for Croesus’ to go back on his word, and as a result he would be bound by his promise to give Egghead £1m. It should be noted that the concept of promissory estoppel is not unknown in English law. If A promises not to enforce a debt owing to him by B, and B relies on that promise in circumstances where it would be unfair for A to go back on his word and enforce the debt, then the law on promissory estoppel may apply to prevent A from going back on his promise not to enforce the debt. Again, if A promises to grant B an interest in land belonging to A, and B relies on that promise in circumstances where it would be unfair for A to go back on his word and refuse to grant B that interest, a different kind of estoppel – what is called a ‘proprietary estoppel’ – will apply to give B a right to go to court to ask the court to compel A to give B the interest that A promised to give B. However, the English courts have yet to take the step of building on these developments and recognising the existence of estoppel contracts in cases such as Croesus’, where there was no promise to waive a debt or grant someone else an interest in land.

Should the English courts take this step? Should the mere fact that a promise has been relied upon in circumstances that make it unfair for the promisor to break his promise suffice to make the promise binding under English law? Obviously, if it would be unfair for the promisor to break his promise then there is a case for the State to intervene and force the promisor to keep his promise. Moreover, as we have seen, English law recognises that some promises – such as promises to grant someone else an interest in land, or promises to waive a debt – will be legally binding under the law on promissory and proprietary estoppel. Given this, it is hard to see why English law does not say that any kind of promise will be binding if it was been relied upon in circumstances that would make it unfair to break it.

On the other hand, if the law held that promises such as Croesus’ were legally binding, the law on when a promise will be binding extremely uncertain. How can we tell with any certainty when the courts would find that it would be ‘unfair’ for someone to break a promise that has been relied upon? On balance, it seems that the unfairness involved in allowing people like Croesus to break their promises is a price worth paying to avoid this uncertainty. The fact that promises such as Croesus’ could be made binding by the simple device of inserting them in a deed means that genuine cases of unfairness created by the English courts’ current refusal to recognise that promises such as Croesus’ are legally binding will be few and far between.

A double-edged sword

There are, of course, immense benefits in having a system of contract law. Without it, it would be very difficult to rely on the promises of anyone but one’s friends and family and therefore very difficult to plan for the future. This is particularly important in the marketplace. It would be impossible for two businesses to make any long-term deals and give effect to them if they were not legally binding.

Suppose, for example, that EggheadUniversity projects that it will need 2,500 computers a year for the next 10 years. Magic Computer plc makes computers of the type needed by EggheadUniversity. In return for getting guaranteed sales of 2,500 computers a year for 10 years, Magic Computer would be willing to sell their computers to Egghead for a special discount price of £300 a computer. There is a deal to be struck here which would benefit both parties – but if it were not legally binding, it would be impossible to make the deal and then put it into effect. Distrust would prevent the parties coming together. Magic Computer would think, ‘We can’t commit ourselves to supply Egghead with 2,500 computers a year. We’d have to take on a lot more workers, and buy a lot more parts, to manufacture the computers – and then after we manufactured the computers, Egghead could make a nonsense of our investment and hard work by refusing to pay for them and buying computers from our rivals.’ Egghead would think, ‘We can’t commit ourselves to buying 2,500 computers a year from Magic Computer. Admittedly, they’re currently available at a bargain price – but after we’d bought the first batch and designed all our systems around them, what would stop Magic Computer from jacking up the price of the next batch of computers?’ Fortunately, the projected deal between Magic Computer and Egghead would be binding – it amounts to a bilateral contract. And it is precisely the bindingness of the deal that allows Magic Computer and Egghead to enter into it and plan their affairs around it – to the benefit of both parties. (It should be clear from the foregoing that the reason why the law enforces bilateral contracts is because doing so allows parties in the marketplace to make and implement long-term deals with each other.)

There is, then, no denying the value of the English law of contract – indeed, modern life would be unimaginable without it. However, the existence of the law of contract does give rise to a range of potential problems. Chief among these is the problem of people trying to use the law of contract to take advantage of other people. For example, suppose that Sandy is driving to Greenville, where she has an important appointment. In order to get to Greenville, she has to go across BlueLake in a ferry. The only available ferry is run by Red Ferry plc. Normally, when travelling on a ferry, Sandy would have a right under the Occupiers’ Liability Act 1957 that the ferry company take reasonable steps to see that the condition of the ferry is such that she will be reasonably safe while travelling on the ferry. Before she is allowed to go onto the ferry, Sandy is presented with a form which says, among other things: ‘I hereby waive any rights I might have that Red Ferry take care for my safety while on the ferry.’ Sandy is told that unless she signs the form she will not be allowed on the ferry. She has no real choice but to sign. Sandy subsequently breaks her leg slipping on a concealed patch of oil on the deck of the ferry. Sandy sues Red Ferry for compensation. In its defence, Red Ferry argues that Sandy is bound by her promise to waive any rights she might otherwise have had that Red Ferry take reasonable steps to ensure that she was reasonably safe on the ferry.

Here Red Ferry is trying to use the law of contract to escape its legal responsibilities to Sandy. What is the best way for the law to deal with this kind of advantage-taking? Four responses suggest themselves.

(1) Do nothing

This response is not actually as stupid as it sounds. The idea is to leave it up to the free market to eliminate Red Ferry’s advantage-taking. If enough customers become dissatisfied with the way they are being treated by Red Ferry, then another ferry company will see an opportunity to compete with the service that Red Ferry provides across BlueLake. The rival company will start running ferries across Blue Lake, advertising itself as a ‘kinder, gentler’ company than Red Ferry – one which takes care of its customers and isn’t afraid to pay compensation when it gets things wrong. At that point, Red Ferry will be faced with the choice of either smartening up its act, or losing all its customers and going bust. Either way, Red Ferry’s advantage-taking will not last.

However, this response to Red Ferry’s advantage-taking suffers from a couple of problems. First of all, it involves the law’s tolerating Red Ferry’s advantage-taking for as long as it lasts, with the result that any claims made against Red Ferry by injured customers such as Sandy will be dismissed on the ground that their promises to waive their rights are binding on them. Secondly, it is too optimistic to think that Red Ferry’s treatment of its customers will allow a competitor to put it out of business. It may be that the money Red Ferry saves by treating its customers so harshly allows it to offer very cheap deals to cross Blue Lake that could not be matched by a ‘kinder, gentler’ company – and it may well be that faced with the choice, the general public would prefer to get a cheap fare from Red Ferry and take the chance of not being able to sue if they get injured than pay more to cross Blue Lake, safe in the knowledge that they will be protected if they are injured due to the fault of their ferry company.

(2) Review

This response involves examining the promise made by Sandy and declaring it not to be binding if it was ‘unfair’ or ‘unreasonable’. This response to wrongdoing is embodied by the Unfair Terms in Consumer Contracts Regulations 1999, which provides that ‘An unfair term in a contract concluded with a consumer by a [business] seller or supplier shall not be binding on the consumer’ (reg 8(1)) and further provide that ‘A contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer’ (reg 5(1)). So if it is judged that holding Sandy to her promise to waive her rights against Red Ferry would be ‘unfair’, given all the circumstances, then it will not be binding on her and Red Ferry will not be entitled to take advantage of it to escape their responsibilities to Sandy.

The problem with this response to advantage-taking is that it leaves people like Sandy in a state of uncertainty as to what their rights are. Suppose Sandy was consulting a solicitor about whether she could sue Red Ferry. The solicitor tells Sandy, ‘You would have an excellent case – but the problem is that form you signed, waiving your rights against Red Ferry. If that’s binding on you, then your case is doomed to fail.’ Sandy asks, ‘Well – is it binding on me or not?’ The solicitor replies, ‘Well, that depends on whether it would be “unfair” to hold that it is binding on you. If it would be “unfair”, then it’s not binding, and you’ll win your case. If it wouldn’t be “unfair” to hold you to your undertaking to waive your rights, then it will be binding on you, and you’ll lose.’ Losing her patience slightly, Sandy asks, ‘Well – would it be “unfair” or not?’ Sighing, the solicitor replies, ‘Well, that’s hard to tell. The courts’ general approach will be to ask – Did the form, contrary to the requirement of good faith, cause a significant imbalance in the rights and obligations between Sandy and Red Ferry to Sandy’s detriment? And in order to answer that question, they’ll look at all the circumstances of the case.’

It is immediately obvious that Sandy will have a big incentive not to carry on with her case against Red Ferry. She simply won’t have enough confidence that she will win the case to enable her to take the chance of carrying on with it, losing and having to cover Red Ferry’s legal costs (which are likely to be substantial). So whether or not the form in Sandy’s case was actually binding on her or not will be irrelevant. The mere existence of the form – and the law’s saying that the form may, in certain circumstances, be binding on Sandy – will be enough to discourage Sandy from continuing with her claim against Red Ferry. So this second form of response to Red Ferry’s advantage-taking – saying that Sandy’s waiver of rights will not be binding on her if it would be “unfair” to hold her to it – sounds eminently reasonable in theory. However, in practice it provides Sandy with an utterly useless form of protection against Red Ferry’s advantage-taking.

(3) Automatic strike-out

This is a very powerful response to Red Ferry’s advantage-taking. Under it, Sandy’s waiver of her rights against Red Ferry is automatically declared not to be binding on her. This response to Red Ferry’s advantage-taking is embodied by s 2(1) of the Unfair Contract Terms Act 1977, which provides that, ‘A person cannot by reference to any contract term or to a notice…exclude or restrict his liability for death or personal injury resulting from negligence.’ (Section 1(3) of the same Act makes it clear that it only applies to attempts to exclude or restrict ‘business liability’.)

Unlike the previous response to Red Ferry’s advantage-taking, this response does not leave people like Sandy in a state of uncertainty as to what their rights are. Replay the above conversation between Sandy and her solicitor, this time factoring in the existence of s 2(1) of the Unfair Contract Terms Act 1977. This time round, the solicitor starts the conversation by telling Sandy, ‘You have an excellent case against Red Ferry – that form you signed waiving your rights against Red Ferry is no problem: it’s simply not binding under s 2(1) of the Unfair Contract Terms Act 1977.’ End of conversation.

Despite its virtues, there is one problem with this response to Red Ferry’s advantage-taking. Suppose that Red Ferry was forced into making all its customers sign the form that Sandy signed because it had been swamped by a large number of claims for compensation by people who had slipped on the decks of Red Ferry’s ferries while crossing BlueLake. (Ferries are, after all, very slippery places.) Almost all of these claims had no merit (in Red Ferry’s view), but they were almost always for such small amounts that no individual claim was worth the expense of fighting. But added together, the claims amounted to a substantial expense that Red Ferry could not afford to incur. So they came up with the idea of getting all their customers to sign a form, waiving their rights that Red Ferry take care to see that they were reasonably safe while crossing Blue Lake. So whenever a claim for compensation was made against Red Ferry by a customer who had slipped on their ferry, the claim would be very easy and cheap to fight. Red Ferry could simply produce the customer’s form and his case would be dismissed on the ground that the customer’s waiver of rights was binding on him.

Section 2(1) of the 1977 Act prevents Red Ferry solving its problem with unmeritorious litigation in this way. Their forms will not work to protect them from being sued. As there seems no other way round Red Ferry’s problem, s 2(1) of the 1977 Act might eventually work to drive Red Ferry into insolvency, sunk by a tidal wave of groundless claims which it has been made powerless to resist by s 2(1). So s 2(1) may in the long run work to the detriment of all the customers who need Red Ferry’s services to cross BlueLake.

(4) Prior restraint

The fourth response to Red Ferry’s advantage-taking is to allow the government to order Red Ferry to stop making its customers waive their rights against Red Ferry if Red Ferry’s doing so is ‘unfair’ or ‘unreasonable’. This response to advantage-taking can be found in the Unfair Terms in Consumer Contracts Regulations 1999, which empowers the Director General of Fair Trading to order a business to remove a term from its contracts if he or she judges it to be ‘unfair’ under the Regulations. (If the Director General makes a mistake in applying the Regulations, the affected business can apply to the courts and ask them to set aside the Director General’s order.)

This is a superior response to advantage-taking than any we have yet considered. If Red Ferry is acting unfairly or unreasonably in requiring its customers to waive their rights, then it will be made to stop, and any customer who is injured while on one of Red Ferry’s ferries will not be in any uncertainty as to what his or her rights are because he or she will never have been made to waive them in the first place. At the same time, Red Ferry retains the liberty to require its customers to waive their rights when it would be ‘fair’ or ‘reasonable’ to do so – which it may well be if Red Ferry is forced into taking such a step in order to avoid being swamped with groundless claims for compensation that threaten to tip the company into insolvency.

However, there are grounds for concern about this response to advantage-taking. It involves granting the government unprecedented powers to meddle in the running of businesses, dictating the terms on which they will be allowed to trade. This cure may well turn out to produce effects far worse than the disease it was intended to treat.

The bindingness of contracts

It is a common error to think that a promise has to be written down to be legally binding. Perhaps Sam Goldwyn, the film producer, made this mistake when he joked that, ‘A verbal contract isn’t worth the paper it’s written on.’ In fact, very few promises have to be made in writing in order to be legally binding. The most notable example is a promise to convey land to someone else. This must be put down in writing (Law of Property (Miscellaneous Provisions) Act 1989) and inserted in a deed (Law of Property Act 1925, s 52(1)) to be binding.

But Goldwyn was not wholly wrong. There are cases where a promise that is supposedly binding under English law will not be worth the paper, if any, it is written on. Suppose, for example, that Liam agreed to buy a particular car on Paula’s secondhand car lot for £5,000. A couple of problems with the car needed attending to: Paula promised that she would have those fixed and that she would then deliver the car to Liam’s house. Liam promised Paula that he would give her the money for the car when she delivered it. Paula then rang Liam up a few days later to tell him she was going to sell the car to someone else, who had offered £6,000 for it. What remedies will Liam be entitled to in this situation?

Could he get the courts to order Paula to hand over the car to him, through the award of what is called an order of specific performance? This is unlikely. If the courts judge that getting Paula to pay Liam damages will adequately compensate him for the losses suffered by him as a result of Paula’s breach of contract, then they will not make an order for specific performance against Paula. If the car in question is unique or of great sentimental value, thus making it hard to put a financial value on the loss that Liam will suffer as a result of not getting the car, then damages might not be an adequate remedy and then an order of specific performance might well be available. But let’s assume the car in question is an ordinary, run-of-the-mill car and there is as a result no question of Liam being awarded an order of specific performance in this case.

So Liam can’t get specific performance, but he can sue for damages to compensate him for the losses suffered by him as a result of Paula’s breach. So how much will he be able to sue Paula for? Well, let’s assume that Liam can buy a virtually identical secondhand car for £4,500 to replace the one that Paula has failed to deliver to him. So – can we say that Liam has lost £4,500 as a result of Paula’s breach? No, we can’t. We’re overlooking the fact that Liam agreed to pay £5,000 for the car Paula was going to deliver him, and that Paula’s breach means that he no longer has to pay her that sum. So Liam has actually saved £500 as a result of Paula’s breach (the difference between the £5,000 that Liam would have had to lay out had Paula performed, and the £4,500 that Liam is now going to have to shell out to buy a car to replace the one that Paula failed to deliver to him). So Liam has suffered no loss as a result of Paula’s breach. Does that mean that Liam cannot sue Paula for anything by way of damages in this situation? Not quite. The courts will award Liam nominal damages of £5 as acknowledgment that he has been the victim of a breach of contract.

So in this situation Paula has committed an obvious and deliberate breach of contract and all she has to pay Liam as a result is £5. It is hard to avoid the impression that Paula’s binding promise to deliver the secondhand car to Liam wasn’t worth the paper, if any, it was written on. Some would see this as a good result. Liam hasn’t suffered any loss as a result of Paula’s conduct, so why should he be able to sue her? Indeed, from one point of view, it would be positively regrettable if the law did anything to encourage Paula to keep her promise to Liam. The second buyer – the one who offered Paula £6,000 for the car – obviously valued the car much more than Liam, who was only willing to pay £5,000 for it. If you take the view that resources should go to those who value them most – where you are counted as valuing a resource more than anyone else if you are ready and willing to pay more for it than anyone else – then you will take the view that it was a good thing that Paula broke her promise to Liam and gave the car to the second buyer.

Others are more disturbed at the prospect of someone’s being allowed to flout their legal obligations without any kind of effective sanction. (In any case, the view that resources should go to those who are ready and willing to pay the most for them is extremely questionable. If you had a bowl of rice and had a choice between giving it to a starving child who had no money to pay for it, and a rich man who was willing to pay a pound for it because had been suddenly seized with a desire for some Chinese food, it simply cannot be true that you should give the bowl of rice to the rich man and not the starving child.) Some effective sanction would be provided for Paula’s breach if Liam were allowed to sue her for what might be called restitutionary damages – that is, damages designed to strip Paula of some or all of the gains she made by breaching her contract with Liam. This would allow Liam to sue Paula for some or all of the £1,000 profit that she made by selling the secondhand car to the second buyer, as opposed to Liam. The courts have recently started allowing claims for restitutionary damages to be made in breach of contract cases. However, they have made it clear that such damages will not be available in cases such as Liam’s, where someone has contracted to buy goods from a seller, and then the seller has sold to someone else because he has received a better offer. (Evidently the courts also believe this sort of behaviour is to be applauded and not discouraged.)

A very effective sanction for Paula’s breach would be provided if Liam were allowed to sue her for punitive damages (otherwise known as exemplary damages) – that is, damages designed to punish Paula for cynically and deliberately breaking her contract with Liam. However, while punitive damages may be awarded against people who commit torts, the courts have always set their face against such damages being awarded against people who commit breaches of contract. It is hard to see why this is so: some breaches of contract (such as an unjustified failure to pay up on an insurance contract protecting one in the event of ill health or unemployment or losing one’s house) can be far more devastating than some torts for which punitive damages may be awarded. However, there is no prospect of the current position being reversed.

Battle of the forms

Posted on September 3, 2012 by mcbridesguides

The problem

A battle of the forms exists when two businesses want to enter into a contractual relationship, but each want the transaction to be governed by their standard terms. When such a battle is entered into, two questions arise: (1) is there a contract between the parties; and (2) if so, on what terms.

The courts have tended to assume that if, despite the battle, one party eventually rendered some kind of performance (albeit perhaps defective) to the other, the answer to (1) is always going to be ‘yes’. See, for example, the leading ‘battle of the forms’ case, Butler Machine Tool v Ex-Cell-O Corpn (1979), where a machine was offered for sale on the suppliers’ terms. The suppliers’ terms included a price variation clause allowing them to charge more if the machine turned out to be more expensive to produce. The buyers ordered the machine, with their terms and conditions attached. These terms and conditions obviously did not include a price variation clause. The suppliers sent back a tear-off slip at the bottom of the order, acknowledging that it had been received, together with a letter saying that they had pleasure in acknowledging the buyers’ order for the machine, which would be delivered in accordance with their standard terms. The machine was subsequently delivered to the buyers, but the suppliers demanded that the buyers pay more for it under the price variation clause. Lord Denning MR observed, ‘No doubt a contract was…concluded.’ For him, the only issue was issue (2) – ‘But on what terms?’

Suggested answers to question (2)

The applicable case law suggests two approaches to determining what terms governed the contract that will (the courts seem to suppose) exist between two businesses that have engaged in a battle of the forms and then gone ahead and performed.

(i) The traditional approach

The traditional approach – favoured by Lawton and Bridge LJJ in Butler Machine Tool and endorsed by the Court of Appeal in Tekdata Interconnections Ltd v Amphenol (2009) – is to see whether there is any point where one party to the battle of the forms can be said to have reasonably given the other party the impression that he (the first party) was agreeing to deal on the second party’s terms. Given the emphasis placed, under this approach, on seeing whether there is some point, at any point, where one person can be said to have reasonably given the other party the impression that he has surrendered in the battle, an alternative name for this approach for resolving a battle of the form is the ‘objective approach’.

In Butler that point was reached when the suppliers sent back the buyers’ tear-off slip. Despite the letter accompanying it, the Court of Appeal found that at that point, the suppliers had done enough reasonably to give the buyers the impression that they had agreed to deal on the buyers’ terms, which did not include a price variation clause.

In Tekdata, Longmore LJ put a case where a buyer offers to purchase goods from a seller, on the buyer’s terms. The seller acknowledges the purchase order, and encloses a copy of his, the seller’s, terms. The seller then delivers the goods, which the buyer accepts. In such a case, Longmore LJ thought that ‘other things being equal’ there would exist ‘a contract on the seller’s terms.’ The reason for this is that by accepting the goods without objection, the buyer would at that point have given the impression that he was agreeing to purchase the goods on the seller’s terms.

This last example may account for why the traditional approach to determining the terms of a contract when there has been a battle of the forms is sometimes called the ‘last shot’ approach. The seller fired the last shot before delivery by insisting when acknowledging the buyer’s order that the deal be on his, the seller’s, terms. By accepting delivery, the buyer has surrendered in the battle. However, as was acknowledged in Butler, the term ‘last shot’ is misleading as a summary of what the courts are looking for under the traditional approach. As Lord Denning MR remarked in that case, ‘In some cases the battle is won by the man who gets the blow in first. If he offers to sell at a named price on the terms and conditions stated on the back: and the buyer orders the goods purporting to accept the offer – on an order form with his own different terms and conditions on the back – then if the difference is so material that it would affect the price, the buyer ought not to be allowed to take advantage of the difference unless he draws it specifically to the attention of the seller’ (emphasis added).

(ii) Lord Denning’s approach

Lord Denning’s approach to determining what the terms of a contract are between businesses that have engaged in a battle of the forms is often presented in the contract textbooks as an alternative to the traditional, or objective, approach to resolving this question. That is one way of looking at. But an alternative is to see Lord Denning’s approach as kicking in when under the traditional, or objective, approach it is not possible to say that a contract was concluded on the terms of either business. So Lord Denning’s approach would only apply when there is no point at which we can say that one party reasonably gave the other party the impression that he was surrendering in the battle. What do we do in that case? In Butler, Lord Denning suggested that in a case where ‘There is a concluded contract but the forms vary…[t]he terms and conditions of both parties are to be construed together. If they can be reconciled to give a harmonious result, all well and good. If differences are irreconcilable – so that they are all mutually contradictory – then the conflicting terms may have to be scrapped and replaced by a reasonable implication.’ Denning never had to do this in Butler itself, as in that case he agreed with his colleagues that the suppliers had reasonably given the buyers the impression that they would deal on the buyers terms. But in a couple of cases – Lidl UK Gmbh v Hertford Foods Ltd (2001, CA) and Ghsp Inc v Ab Electronic Ltd (2010, Burton J) – the courts have found that the battle of the forms was so intractable that neither party’s standard terms could be said to apply, and that the terms of the contract were either supplied by the minimum terms that the parties did agree on (Lidl) or by the general law as represented by the Sale of Goods Act 1979 (Ghsp).

My suggested solution

I think the current law just encourages businesses to engage in battles of the forms. The traditional approach encourages businesses to stand their ground in the battle in the hope that they will be able to convince a court that the other side did something at some point to give the reasonable impression that they were conceding the battle. And Lord Denning’s approach reassures the parties to a battle of the forms that even if neither side backs down (or reasonably gives the impression of backing down) they will still enjoy a great deal of protection from the law of contract, which will enable them to sue for late payment or defective performance, even if it does not allow them to take advantage of their extra special standard terms that they were wanting to get into the contract.

The only way to stop battles of the forms occurring is to follow a simple rule: If a battle of the forms breaks out, the courts will find that there was no contract between the parties unless it is clear that the parties subjectively agreed as to what the terms of their contract would be. Such a rule would wonderfully concentrate the minds of both parties to a battle of the forms. A buyer who was insisting on dealing on his standard terms would worry that if the courts found that there was no contract, he would not be able to sue for defective performance. (The law of tort does not generally allow actions for receiving – this a phrase from Tony Weir – no good goods.) A seller who was insisting on dealing on his standard terms would worry that if the courts found that there was no contract, he would be reduced to suing under the law of restitution for a reasonable sum (in Latin, quantum valebant – ‘as much as they are worth’) for any goods he delivered to the buyer. Both parties would have a substantial incentive to call a ceasefire in the battle, talk things over and reach an agreement.

So I suggest that in this area, the courts should take the exceptional step of abandoning their objective tests for determining whether the parties reached agreement, and if so on what terms, and should instead require that the parties reach a consensus ad idem (a meeting of minds) before they will find that there existed a contract between the parties. So the courts should stop skipping past question (1) by assuming that there was a contract between the parties, and should stop thinking that the only issue arising out of a battle of the forms is question (2) – on what terms? They need to show themselves far more willing to answer question (1) in the negative if the parties to a battle of the forms have not genuinely settled their differences. If they did that, in a few years’ time, battles of the forms would never trouble the courts again.

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