A contract that is not a contract

Date: Jun 09, 2015
Document Type: Article

Equitable Estoppel is a cause of action that protects parties’ reliance on promises which have the appearance of a contract, but which do not satisfy the elements needed to create binding legal relations, that result in detriment to one party. The case of Waltons Stores (Interstate) Ltd v Maher is a landmark case which has greatly affected the common law of contract.

Waltons Stores and Maher had been negotiating the lease of premises, which were to be demolished and rebuilt under a joint arrangement. Maher had relied on an apparent agreement which was reflected in a contract that was never signed by Waltons Stores. After Maher had completed a substantial portion of the works, Waltons advised Maher it did not want to proceed. Maher had relied to his detriment on their representations.

The court found in favour of Maher. From the judgment of Brennan J:

 “34. In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff's action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant's property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff's reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.

35. This is such a case, as a brief recapitulation of the facts will show...”

The decision made promissory estoppel a cause of action on its own in cases where there is an assumed or expected contract, where inducement to contract is made and subsequently relied upon, and where a detriment results from that reliance.

Mason CJ and Wilson J stated: the “failure to fulfil a promise does not of itself amount to unconscionable conduct”. Later in their judgment their Honours stated:

“38. It seems to us, in the light of these considerations, that the appellant was under an obligation to communicate with the respondents within a reasonable time after receiving the executed counterpart deed and certainly when it learnt on 10 December that demolition was proceeding. It had to choose whether to complete the contract or to warn the respondents that it had not yet decided upon the course it would take. It was not entitled simply to retain the counterpart deed executed by the respondents and do nothing.... The appellant's inaction, in all the circumstances, constituted clear encouragement or inducement to the respondents to continue to act on the basis of the assumption which they had made. It was unconscionable for it, knowing that the respondents were exposing themselves to detriment by acting on the basis of a false assumption, to adopt a course of inaction which encouraged them in the course they had adopted. To express the point in the language of promissory estoppel the appellant is estopped in all the circumstances from retreating from its implied promise to complete the contract.”

It therefore appears that a requirement is that it must be unconscionable for the “deal” not to continue. However, another view is that business is risky, and loss should fall at the feet of those who take risks. A choice was made by the presiding judges as to which ideal was to prevail in the circumstances. As a result, an alternative means of promise enforcement has, on one view, weakened the doctrine of consideration and, hence, the common law of contract.

Although the decision was unanimous, the judges were divided in their reasoning on what some considered a case of common law estoppel, and others, including the lower courts which had previously ruled on the case, deemed promissory estoppel. The facts of the case were such to cast doubt on which was applicable. This serves to demonstrate that the interpretation and application of legal doctrine is often disputed, even at the judicial level, and that legal doctrine alone is often unable to provide a determinative answer in any given factual scenario.

Phone us if you need help with a contract dispute.

This web page was prepared on 4 June 2015, and the law or facts contained in this article might have since changed.

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