Estoppel in the Contract Law - Case Study Example

A Contract is a promise enforceable by law. In English Law for a simple contract to be valid there must be consideration from the party accepting theoffer. Valid consideration has the following characteristics: 1. The person making the offer must be expecting something in return. 2. It may be something of value (however negatory) to the offeror - the person making the contract -, or something detrimental to the offeree - the person accepting the contract. 3. Consideration must be sufficient in Law but it need not be sensible in fact. 4. It must usually impose an obligation in the future; it is usually inadequate to base an offer on some consideration that was gained in the past. (Kevin's collaborative English law glossary, Consideration, 30 Mar 2005). The principle of promissory estoppel is that if someone makes a promise, which another person acts on, the promisor is estopped from going back on the promise, even though the promise does not provide consideration. This modern doctrine of promissory estoppel is based on the dicta of Denning J. In Central London Property Trust Ltd V. High Trees House Ltd ( 1949) 1 KB 130 and also on the decision of the House of Lords in Tool Metal Manufacturing Co Ltd V. Tungsten Electric Co Ltd (1955) 1 WLR 761. This doctrine can be traced to Hughes V. Metropolitan Railway (1877) 2 APP CAS 437. The requirements of promissory estoppel are: 1. Contractual/Legal Relationship. There should be a contractual or legal relationship. 2. Promise. In addition, there should be a clear and unambiguous statement by the promisor that his strict legal rights will not be enforced, i.e. one party must make a promise which is to be binding. The Scaptrade [1983] QB 529. However, it can be implied or made by conduct as in the Hughes Case (1877). 3. Reliance. Further, there should be reliance on the part of the promisee, i.e. he should have acted on the reliance of the promise. Lord J Denning ruled that it was sufficient if the debtor acted on the promise by paying a lower sum. In this connection he also said, "he must have been led to act differently from what he otherwise would have done." (Lord Denning, Alan Co Ltd V. El Nasr Export & Import Co (1972) 2 QB 189). 4. Inequitable to Revert. It is deemed unfair if the promisor goes back on his promise and reverts to his strict legal rights. A promise obtained by improper pressure can be broken. The sequel serves to illustrate the foregoing, D&C Builders, a small building company, had completed some work for Mrs Rees amounting to482. D&C Builders being in severe financial difficulties was continually, pressing for payment. Finally, Mrs Rees told the company that she would pay them only 300 as full settlement or else nothing. She took this stance after coming to know of the financial difficulties being envisaged by the company. The company reluctantly accepted this amount and subsequently sued Mrs Rees for the balance amount. The Court of Appeal held that the company was entitled to succeed. In his judgment, Lord Denning was of the view that it was not inequitable for the creditors to go back on their word and claim the balance as the debtor had acted inequitably by exerting improper pressure. (D & C Builders v Rees (1965) 2 QB 617). 5. Shield or Sword. In Coombe V. Coombe (1931) 2 KB 250, it was observed that this doctrine may raised for defence purposes and not as the basis of a case, in other words it can be used "as a shield and not as a sword." 6. Extinctive or Suspensive of Rights. Another question raised by this doctrine is whether; it extinguishes rights or suspends them. The concerned authorities are in favour of suspending the rights, which can be revived by giving reasonable notice or by changing conditions. In Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761 - Patent owners promised to suspend periodic payments of compensation due to them from manufacturers from the outbreak of war. It was held by the House of Lords that the promise was binding during the period of suspension and that the owners after giving reasonable notice to the other party could revert to their legal entitlement to receive the compensation payments. It is not settled law that there can be no such resumption of payments in relation to a promise to forgo a single sum. Based on the foregoing relevant developments, we will now analyse the following case. The facts of the case are that Cliff agreed to supply a Boiler to Desmond for his laundry business. The delivery of the Boiler was to be on the 1st of July. The amount to be paid to Cliff was 50000. A contract to this effect was entered into on the 1st of May. On the 1st of June, Cliff approached Desmond and expressed his inability to supply the Boiler on the 1st of July as agreed upon, due to the shortage of staff. However, Desmond had to fulfil a number of profitable deals, which were dependent on the delivery of the Boiler by the 1st of July. With this intention, in view Desmond promised to pay Cliff 6000 as a bonus to be paid in monthly instalments of 1000 each commencing from the 1st of July. Accordingly, Cliff worked very hard and for long hours and even cancelled a summer holiday planned much earlier to do this work. This enabled Cliff to deliver the Boiler, as promised on the 1st of July. Desmond told Cliff that he was in financial difficulties and hence he would pay 3000 only as bonus. He further persuaded Cliff to accept this reduced amount in six monthly instalments of 500 each. However, after Desmond had paid three such instalments Cliff stated that he also was in dire financial straits and that therefore he wanted to be paid the difference amount of 1500 for the first three instalments already paid, and 3000, which was the remainder of the bonus amount. In this case, the requirements of promissory estoppel are satisfied because: 1. There is contractual or legal relationship between the parties, which came into existence when they had entered into the contract on the 1st of May. Further, this relationship had not yet been extinguished. 2. The promise on which, Cliff had acted upon fulfils the requirement that there should be a clear and unambiguous statement by the promisor to pay him a bonus amount for completion of the work within the stipulated time. The underlying principle of promissory estoppel is that if someone makes a promise, which another person acts upon, then the promisor is estopped from breaking his promise even if the other person does not provide consideration. To elaborate on this requirement, we will consider the case Williams V Roffey (1990). In this case, Roffey had a contract to refurbish a block of flats. He sub-contracted the carpentry work to Williams, who after the commencement of the work came to realize that he had underestimated its cost and as a result, he was placed in financial difficulties. Roffey, realizing that the work would not be completed on time and that this would result in the breach of a penalty clause in their main contract with the owner, agreed to pay Williams an extra payment per flat. Williams completed the work on these flats but did not receive full payment. He stopped work and brought in an action for damages. In the Court of Appeal, Roffey argued that Williams was only doing what he was contractually bound to do and had therefore not provided any consideration. It was held by the Court of Appeal that where a party to an existing contract later agrees to pay an extra "bonus" in order to ensure that the other party performs his obligations under the contract, then that agreement is binding if the party agreeing to pay the bonus has thereby obtained some new practical advantage or has avoided a disadvantage. In the present case, there were benefits to Roffey such as: (a) making sure Williams continued his work, (b) avoiding payment under a damages clause of the main contract if Williams was late, and (c) avoiding the expense and trouble of sub contracting the work to someone else. Therefore, Williams was entitled to payment, (Williams V. Roffey Bros. (1991)). In CTN Cash and Carry Ltd v. Gallaher Ltd [1994] 4 All ER 714, it was decided that the practical benefit accruing to the promisor must be treated as consideration for extra payment. In the present case also, based on Desmond's promise Cliff completed the work within the stipulated time, after taking great pains and foregoing rest and holidays. Though the completed work is the existing work of the contract, Desmond is benefited, as he will be able to complete many lucrative job works and that too without having to employ extra workers. This is the consideration for the bonus amount to be paid by Desmond to Cliff. This plea can be supported by the decision in the aforementioned case of Williams V. Roffey Bros. (1991). The issue of part payment made by Desmond to Cliff is resolved by the case Foakes v. Beer (1884). Mrs Beer had obtained a judgement for a debt against Dr Foakes. Dr Foakes subsequently, asked for time to repay the debt. Mrs Beer agreed that she would take no further action in this regard if Dr Foakes paid 500, immediately and the rest in half - yearly instalments of 50 each. Dr Foakes complied with this. Judgement debts however carry interest and The House of Lords before whom this case was heard, held that Mrs Beer was entitled to the interest of 360. Dr Foakes had not provided any consideration and hence Mrs Beer's agreement was not binding on her. In our case the agreed upon bonus is 6000, however Desmond persuaded Cliff to take 3000 in instalments. Cliff accepted this reduced amount without the involvement of any consideration. Hence, Cliff cannot be precluded from claiming the full amount of bonus as agreed upon by them. Therefore, Cliff is eligible to claim 1500 as the difference amount in the first three instalments. Cliff is also well within his rights to claim the remaining portion of the bonus amounting to 3000. This particular aspect of part payment as applicable to our case was also discussed in the case Central London Property Trust Ltd V. High Trees House Ltd. (1947) KB 130. In this case, it was held that the agreement to accept lower rent is an acceptance of part payment and hence, there is nothing to prevent the plaintiff from pursuing the full rent in arrears later. The agreement to accept the lower rent was a promise unsupported by consideration and hence was not binding. Another landmark case with regard to part payment is Pinnel's case, (1602). In this case, Cole owed Pinnel 8-10s-0d (8.50) which was due on 11 November. At Pinnel's request, Cole paid 5-2s-2d (5.11) on 1 October, which Pinnel accepted in full settlement of the debt. Subsequently, Pinnel sued Cole for the amount owed. It was held that part payment in itself was not consideration. However, it was held that the agreement to accept part payment would be binding if the debtor, at the creditor's request, provided some fresh consideration. Consideration might be provided if the creditor agrees to accept: part-payment on a date earlier to the due date (i.e., as in Pinnel's Case itself), chattel instead of money or part payment in a different place to that originally specified. In our case these conditions are not complied with, hence the part payment received by Cliff is without consideration. Therefore, Cliff is entitled to the full amount of bonus. The present case comes under the purview of promissory estoppel, wherein Desmond agreed to pay a bonus to Cliff for the completion of the work in time. Though the payment was in respect of an already existing contract, Desmond was benefited by the completion of the work in time. This factor can be treated as consideration for the bonus amount paid to Cliff. Since there is no change in the conditions akin to that obtaining in the case Central London Property Trust Ltd V. High Trees House Ltd (1949), Cliff is entitled to the arrears of instalments amount of 1500, which represents the difference of the first three instalments at the rate of 500 per instalment. Further, Cliff is entitled to the balance of the bonus amount of 3000 in accordance with the ruling in the case Foakes v. Beer (1884). References. Kevin's collaborative English law glossary. Consideration. Retrieved 30 Mar 2005, from http://law.web-tomorrow.com/twiki/bin/view/Main/Consideration. Central London Property Trust Ltd V. High Trees House Ltd ( 1949). 1 KB 130 Tool Metal Manufacturing Co Ltd V. Tungsten Electric Co Ltd (1955). 1 WLR 761. Hughes V. Metropolitan Railway(1877). 2 APP CAS 437. Alan Co Ltd v El Nasr Export & Import Co (1972) 2 QB 189. D & C Builders v Rees (1965) 2 QB 617. Coombe V. Coombe (1931) 2 KB 250. Williams v Roffey Bros. and Nicholls (Contractors) Ltd (1991) 1 QB 1. Foakes v. Beer (1884) 9 App Cas 605. Central London Property Trust Ltd V. High Trees House Ltd (1947) KB 130. Pinnel's Case (1602). CTN Cash and Carry Ltd v. Gallaher Ltd (1994) 4 All ER 714. Read More