Question 3 April 2006

Question 3 April 2006

Paul Ltd. made a promise to Chuck and agreed to reduce his rent. Now that the flooding problem has been rectified he wants to know if he can claim full rent for the two year period during which the rent was reduced. To take an action in a case like this one may think that it would be sufficient to prove that the promise, from Paul’s Ltd. to Chuck, is not enforceable as there is a lack of consideration. Generally for a promise to be enforceable it must be shown that the person to whom the promise was made has supplied something in return for that promise, something by way of quid pro quo, consideration. Chuck did not give any consideration for the promise from Paul Ltd. However there can be exceptions to the general rules of consideration. One of these exceptions is known as promissory estoppel.

Promissory estoppel essentially provides that where a person makes a promise which he reasonably expects will be acted upon by the promisee - then such a promise will be enforceable if non-enforcement would lead to injustice. An example of promissory estoppel being used as a defence and a case which is very similar to the case at bar, is Central London Properties Trust v High Trees this case involved the owner of a block of flats who leased the whole block to a property company who in turn leased the individual units. This agreement was entered into before WWII when demand for property in central London was high. The war began and demand dropped, the owner voluntarily agreed to reduce the rent by half during the war and after the war when demand raised again the rent went back to the original sum. The owner company went into liquidation and the liquidator took an action for the arrears of the rent. They argued that the owner’s promise to extract only half of the rent was not enforceable since it lacked consideration. Denning MR ruled that the liquidator was estopped from denying the earlier promise not to enforce the full rent. This case concerned a variation of the terms of a contract. After High Trees and WWII this was used more frequently by the courts as a method of preventing hardship on people as a result of changes in contracts during the war being unenforceable.

The principle only applies where the promise of a waiver is given voluntarily; an example of this is in the case of D&C Builders v Rees where a debtor owed £480 to a small firm of builders. They agreed to accept £300 in full settlement as they had financial difficulties of which the debtor was aware. The court held that the debt had to be paid in full as the plaintiffs were forced to make the promise, it was not voluntary.

There are other rules, however, to where this principle applies:

• Promise; There must be a promise made which is intended to affect the legal relationship between the parties. It doesn’t have to be express can be implied. It must be clear and unambiguous, must not be equivocal.
• Reliance; Reliance on the promise is essential before it will be treated as enforceable. Denning J pointed out in Alan v Nasr Export & Import what must be shown is that the claimant conducted his affairs on the basis of the promise and that it would subsequently be inequitable not to enforce the promise.
• Pre-existing Relationship; Promissory estoppel is not confined to variations of existing contracts but can be applied where there is a relationship based on statutory provision. In Durham Fancy Goods v Michael Jackson (Fancy Goods) all that was required was a pre-existing legal relationship.
• Suspensory Effect; As a general rule promissory estoppel operates only to suspend rights accruing under a contract and not to extinguish them. Thus in High Trees the owners could claim full rent from the date of notification of withdrawal of the promise to the defendants, only the arrears had been placed in suspense. This brings up a question; if the time of the withdrawal of the promise would lead to injustice what would happen, e.g. if the owner company in High Trees withdrew their promise during the war, would the defendants have a case to argue that the promise remains until the end of the war?
• Shield not a Sword; It is often stated that that promissory estoppel can only be used by a defendant as a defence to a claim by the plaintiff. In Coombe v Coombe, Denning J stated:

“The principle stated in High Trees case…does not create new causes of action where none existed before. It only prevents a party from insisting on his strict legal rights, when it would be unjust to allow him to enforce them.”

In that case a promise made by a husband to a wife regarding the payment of maintenance to his wife was not honoured, but her suit for performance of the promise was dismissed since she could not plead it in the affirmative. Presumably it would have been possible for the husband to plead her agreement to the arrangement if he had been sued by the wife for increased maintenance, for then he would be using the doctrine as a defence.

                                                                                               

This case falls on all fours with the High Trees case, it is clear from the previous case law that Paul’s Ltd.’s voluntary promise to reduce the rent to E20, 000 is enforceable despite the absence of consideration. They are only owed E20, 000 per annum per apartment from the date of the promise to the date of notification of revocation of the promise. They are allowed however collect the original sum of E30, 000 per annum per apartment from that date forward.

NOTE: 2^nd part involves breach of contract which I haven’t done yet

In regard to the second problem the contract had been breached when Hugh failed to deliver the goods on time, to avoid the promise, made by the managing director of Paul’s Ltd., being enforced we will look more closely at the rule of reliance on the promise when using the doctrine of promissory estoppel. In determining whether the claimant relied upon the promise you must ask:

i)          Was the claimant justified in relying upon the promise?

It is not sufficient for the claimant to plead on a promise that is clearly a mistake. He must act reasonably in relying on thee promise made. Whether or not the promise is a mistake is irrelevant; what is important is the reasonable response of the claimant upon receipt.

ii)         Was the promise outstanding for a sufficiently long period of time that non-enforcement will result in injustice?

            If the promise is revoked before any reliance has occurred, then promissory estoppel will not apply; but where the reliance has occurred, and the promise is then revoked, the doctrine will only apply where the reliance itself cannot be reversed. In the case of Socité Italo-Belge pour le Commerce et l’Industrie v Palm and Vegetable Oils (Malaysia) the promisor withdrew from his promise within two days. Court held that this was allowable. The short space of time during which the promise had been in existence meant that its revocation caused no injustice to the promise.

iii)        Did the promise induce the reliance?

In practice provided the claimant alters his position after the promise then the onus will be on the promisor to disprove such reliance which is a difficult task.

iv)        Will the enforcement of the original contract result in injustice in any event?

Even where there is reliance it may be that it remains unenforceable since either the claimant is not prejudiced by enforcement of the original contract or the actions of the promisor are not unjust. In the case of Williams v Stern the claimant had purchased furniture on instalments and where under a term of the contract, if payment were not made on a due date, it would be seized by the lender. The claimant asked the lender to give him an extra week to pay the latest instalment and not to seize the furniture. The lender so promised, but three days later seized the furniture when he discovered that it was about to be seized by the claimant’s landlord in satisfaction of arrears of rent. The promise was held unenforceable because:

-          Enforcement of the original contract would result in no injustice to the claimant since the property was being used to satisfy another debt.

-          The revocation of the promise in light of the changed circumstances was not inequitable on the part of the lender. He acted merely to preserve his own rights over those of another.

In this instance it can be argued that the claimant, Hugh, did not fully rely on the promise made by Paul’s Ltd. Hugh was to have the goods ready and delivered for a certain day in failing to do this he breached their contract. The promise of giving one extra week for delivery did not mean that Hugh altered his position in anyway as to say he relied on the promise made. He informed Paul’s Ltd. that the office fittings would not be delivered on the day stipulated in the contract. If Paul’s Ltd. had said that late delivery would not suffice it can’t be said that Hugh would have then delivered the goods on time and not breached the terms of their contract. Therefore Hugh did not rely on the promise so the promise cannot be enforced. The actions of Paul’s Ltd. in refusing to accept the goods because of breach of contract are not unjust and Hugh is not prejudiced by the enforcement of the original contract. Reliance on the contract by Hugh did not occur so the promise cannot be enforced.