Contractual Estoppel

Alexander Trukhtanov

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CHAPTER 5 Limits

5.01 This chapter considers the limits to contractual estoppel. It should come as no surprise that they are in essence the same that apply to contracts generally.1 Contractual estoppel is a creature of contract; contract at once provides the foundation for it and determines its boundaries. Where by their contract the parties create a “parallel factual or legal universe governing their relationship”,2 that universe is akin to a soap bubble, enclosed within and kept together by the film of contract. The bubble will not form unless the film is stable, and will live only so long and expand only so far as the film holds. 5.02 This chapter is not intended as a recapitulation of all those matters which under the general law of contract might prevent, restrict, or qualify formation or enforcement of contracts. As a matter of principle, it is clear that by affecting the contract those matters will affect the estoppel that might have been raised by it. This chapter only considers such of those matters as have been the subject of decision, discussion, or argument in decided cases involving contractual estoppel.

Contract is a prior requirement

5.03 The making of a complete contract is a prior requirement to the raising of estoppel by that contract. It does not matter how a contract comes about.3 It matters that there should be something that the law will recognise as a contract.4 Contractual estoppel cannot be raised in the absence of a complete contract. It is unable to supply the want of a missing element required to form a contract by reason of simple logic, since to do that would be to lift oneself by one’s own bootstraps and allow something that can only be created

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by a complete contract to create the contract instead. Likewise, an estoppel cannot logically be raised by a contract that is void or has been avoided. A void or voided contract cannot validate itself.5 The position is more nuanced where a contract is voidable, and it will be seen that in some cases strict logic cannot quite support a policy-driven result.6

Whether estoppel raised by contract can establish validity of that contract

5.04 In Merrill Lynch v Commune di Verona7 the court made eleven declarations on the basis that the defendant was contractually estopped from denying the truth of matters declared. The broad effect of the declarations was that the transaction made by a contract between the litigants was binding, and one of the declarations was apparently given on the basis of a representation by the defendant that its obligations under the contract were valid and binding.8 This sort of representation is ubiquitous in commercial practice, but that it should have translated into the particular declaration is quite intriguing. A contractual statement can only raise an estoppel if that statement is valid and binding as a contract; it is unsound logic and subversion of policy for the issue whether a contract is valid and binding to be determined by estoppel purportedly created by the same contract. Such a determination should only be possible where there is a distinction between contractual validity of the statement that raises the estoppel (which is established independently of that estoppel) and validity of other obligations to which the statement is addressed.9 The judgment in Merryl Lynch does not recite the precise wording of the representation and does not consider the problem in full.10

Contractual estoppel raised by separate contract

5.05 A contract that is itself valid may raise contractual estoppel to resolve issues that affect the validity of a different contract. In Credit Suisse International v Stichting Vestia Groep11 an admittedly valid Master Agreement contained a warranty that a party had capacity to enter into subsequent transactions. It was held that where such subsequent transactions were found to be void as ultra vires, the warranty would raise

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contractual estoppel to preclude the warrantor from relying on the absence of vires and the resulting invalidity of the transactions. The recipient of the warranty was permitted to enforce the Master Agreement as if the ultra vires transactions were valid (although it could not enforce the transactions themselves).12 Although this decision is doubtful as authority for it,13 the principle that by a valid agreement the parties may conclusively agree the validity of another, otherwise void, contract is sound, and can be a proper case of contractual estoppel. In HSH Nordbank AG v Intesa Sanpaolo spa14 it was observed that a party was contractually estopped from denying her own assumption of the risk of invalidity of a separate contract. A warranty in a valid and binding loan agreement that separately made security instruments were valid, raised contractual estoppel in Standard Chartered Bank (Hong Kong) Ltd v Independent Power Tanzania Ltd.15 On a few occasions the courts stated obiter that a contractual representation that a separate, arguably non-contractual, document constitutes a valid, binding, and enforceable obligation of the representing party renders that document a freestanding contract, by the terms of which the representing party is again bound in estoppel; this results in a double estoppel, or sequential estoppels.16

Capacity to contract cannot be established by estoppel raised by the same contract

5.06 A corporate entity or public body cannot extend its capacity to contract by estoppel purportedly created by the terms of that very contract.17 But it is a prior question of law whether the estoppel is sought to be raised to answer the issue of capacity. A party’s status as a qualified investor for the purposes of an Italian financial regulation was treated as not involving capacity to contract, and was resolved by application of contractual estoppel.18 Likewise, where a company or statutory body was given borrowing powers

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by statute for a specific purpose, it was estopped by a statement in a bond that the funds were borrowed for that purpose.19

Whether unenforceable contract can raise estoppel

5.07 A void contract has no contractual effect.20 Not so with a contract that is unenforceable. An unenforceable contract, such as a guarantee that does not comply with the requirements of s 4 of the Statute of Frauds 1677 or a consumer loan agreement improperly executed within s 61 of the Consumer Credit Act 1974, is one that cannot be enforced by action. It is established that “agreements or securities that are unenforceable are not devoid of all legal effect”.21 That the agreement is unenforceable by procedural action does not mean that substantive rights created by it do not exist or are voided.22 Contractual intention manifested by the pasrties can be given effect if that does not involve the bringing of an action.23 The same is true of raising contractual estoppel: though a method of effectively enforcing a contract, it does so without the need to bring an action on that contract. Contractual estoppel that is relied on to complement a cause of action in contract will not benefit from that distinction, as the cause of action itself will be barred by the contract’s unenforceability. A defensive estoppel, though capable of being raised by unenforceable contract, would be strictly unnecessary in view of the bar to action on the contract that would call for a defence. However, one can conceive of an action brought by a party to the contract whose cause of action is not barred (guarantor in a guarantee or borrower in a consumer loan agreement) even though her defendant’s action in reliance on the same contract would be barred. It is also possible that contractual estoppel could be raised by an unenforceable contract in response to an action between the same parties brought other than on that contract, such as a claim for breach of non-contractual duty of care or for non-contractual misrepresentation.

Whether agreement that raises estoppel can itself be contractual consideration

5.08 Recognition that a statement of fact may be a contractual promise,24 coupled with the classic proposition that good consideration may be given by way of exchange of promises,25 opens up the possibility that consideration for a contract which raises an

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estoppel may be found in an exchange of the very estoppel-raising promises to agree stated facts or propositions as true. It would satisfy the requirements that consideration must be capable of being identified and its recipient must be aware of it being offered.26 The requirement that some benefit should be conferred both ways27 will most of the time be satisfied by the mutuality of agreement to admit the truth of a contractual statement, or, where one party only agrees to that, by her obtaining in exchange the benefit of other terms that make up the contract. It assists that the courts are not supposed to inquire into the adequacy of benefit and will accept the very fact that an arrangement has been made as evidence enough that the parties drew some benefit from it.28 5.09 The requirement of consideration is so diluted that courts will strive to declare it satisfied in order to avoid commercial intentions of contracting parties being defeated by a technicality.29 Nevertheless, difficulties may arise, for instance with standalone receipt clauses which may appear manifestly uncommercial. In Prime Sight Ltd v Lavarello,30 contractual receipt for a sum stated as paid in consideration of the assignment of an underlease was held to be binding by way of contractual estoppel even though nothing had been paid. Since the action in Lavarello was a statutory winding up petition which pleaded that the receipted sum was an unpaid contractual debt, the existence of contract was not there argued but assumed.31 If the question is asked whether there was any consideration to support the contract, the only possible candidate for consideration by the assignee is the receipt clause itself, which stated that the assignment was made in consideration of “the sum ... now paid by the Assignee to the Assignor (receipt and payment of which the Assignor hereby acknowledges)”. This was not an executory promise,32 so non-payment of the receipted sum would go not to breach of covenant to pay (against which contractual estoppel could be, and was in fact, raised) but to the very existence of contract because disputing the receipt would dispute the (purportedly executed) consideration. Further, construction of the receipt clause as a mutual agreement to treat payment as already made would have raised the problem of one-sided benefit, in that on its face the agreement would appear to benefit the assignee

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only, by giving her the underlease free of charge. The problem could be resolved if it were accepted that the agreement to treat the assignment as a sale, not gift, was of sufficient practical benefit to the unpaid assignor to constitute good consideration.33 The issue of consideration did actually arise for decision in the subsequent case of Chen v Ng, and the Board decided that the receipt clause provided no answer:

the agreed statement that consideration had been paid was clearly gratuitous, and for the benefit of one side only. Both parties knew that it had not been paid, and neither can have relied on the statement that it had been paid. Their intention to be bound, or any reliance they placed on their agreement to be bound, without consideration cannot suffice; otherwise gratuitous promises could readily be made binding.34

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