Although it sounds archaic, ‘promissory estoppel’ is actually quite a modern and useful concept to help ensure fairness in business dealings. It is especially important in building and employment contracts where the negotiations may be prolonged but the need for action is immediate. But what is promissory estoppel exactly and how does it affect you? Our commercial lawyers have broken it down for you. Read on.
Overview:
What is promissory estoppel?
What is an example of the doctrine of estoppel?
What elements are required for the promissory estoppel doctrine to apply?
Promissory estoppel and contract law
Promissory estoppel case example: Waltons Stores (Interstate) Ltd v Maher
What is promissory estoppel?
A promissory estoppel is a legal doctrine that prevents a person from going back on a promise even if a legal contract doesn’t exist.
What is an example of the doctrine of estoppel?
Imagine for instance, that an employer and prospective employee have a long business relationship. The employer offers the prospect a job to begin in two weeks, and they agree that the contract would be forthcoming when the prospect moves from Adelaide to Sydney. A few minor details including the use of a company car remained to be resolved.
Then the prospect quits their existing job and moves to Sydney. Before finalising the agreement, however, the employer calls the whole thing off and hires someone else for the position.
Most would agree that, in the spirit of fairness, the prospect is owed something. The prospect might argue that a court should invoke the doctrine of promissory estoppel to stop the employer from walking away from the promise of a job without any recompense.
What elements are required for the promissory estoppel doctrine to apply?
In order to ask a court to intervene to do justice on the grounds of promissory estoppel, an aggrieved party must show that:
- Some kind of legal relationship either existed or was anticipated between the two parties;
- One party must have made some kind of promise or representation to the other;
- The party receiving the promise or representation must have acted in justifiable reliance on that statement;
- The party who acted in reliance must somehow be worse off (usually in economic terms) than if he or she had not relied on it; and
- Under the circumstances, it would be unfair to allow the promisor to step away from the promise.
Promissory estoppel and contract law
For a commercial contract to be enforceable under contract law, there needs to be legal ‘consideration’. ‘Consideration’ is something of value that is exchanged between parties when they enter into an agreement or a promise.
Promissory estoppel is the exception to this rule. Under promissory estoppel, the existence of a promise may be sufficient enough to enforce an agreement, especially if the other party has suffered damage (such as monetary damage) as a result of acting on that promise.
Promissory estoppel case example: Waltons Stores (Interstate) Ltd v Maher
For a real life example of promissory estoppel, let’s look at the case of Waltons Stores (Interstate) Ltd v Maher. In this case, Maher (a builder) agreed to build a premises on the understanding that Waltons Stores would lease it. Waltons sent Maher an unsigned, commercial lease agreement, which Maher signed and returned. Understanding that time was of the essence, Maher demolished an existing building on the land and began to build a new one to Walton Stores specifications. When the construction was 40 percent complete, Waltons Stores decided not to continue with the lease.
The court held that Maher was entitled to recover from Waltons, even though no contract had actually been executed. Maher, it held, was justified in relying on the preliminary negotiations even though Waltons Stores thereafter remained silent about whether it had accepted Maher’s signed contract. The urgency of completion was another factor justifying Maher’s reliance. Given all the facts the court found that it would be unconscionable for Waltons Stores to ignore the promise.
Get advice about promissory estoppel (NSW)
If you find yourself embroiled in an employment or building contract dispute involving (or allegedly involving) a broken promise, the attorneys at Owen Hodge Lawyers would be happy to help you explore your options. We can also answer any other related questions to ‘what is promissory estoppel?’. Please call to schedule a consultation at 1800 770 780. At Owen Hodge Lawyers, we always strive to provide you with the best legal advice and guidance – no matter your commercial litigation issue.