Although it sounds ancient and archaic ‘promissory estoppel’ is actually quite a useful modern concept to help ensure fairness in business dealings. It especially important in building and employment contracts where the negotiations may be prolonged but the need for action is immediate.
Imagine for example, that an Employer and Prospective Employee had a long business relationship. Employer offered Prospect a job to begin in two weeks, and they agreed that the contract would be forthcoming when Prospect moved from Adelaide to Sydney. A few minor details including use of a company car remained to be resolved. Prospect quit his existing job and moved to Sydney. Before finalising the agreement, however, Employer called the whole thing off and hired someone else for the position.
Most would agree that, in the spirit of fairness, Prospect is owed something. 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.
Classic contract law
Under basic contract law, whether a contract exists depends on whether there was an offer (defined as an acceptance that precisely mirrors the offer and consideration). ‘Consideration’ is something of value – usually money, but it can be an action or an agreement to refrain from some action. If I accept your offer to buy your car, my payment to you is consideration. Your agreement to sell the car to me, rather than someone else, is consideration as well. Certain contracts, like those for the sale of land, must also be written. Unless an agreement satisfies these requirements, courts may be reluctant to enforce it.
On the other hand the requirements are tricky and there are a lot of ways that a contract can fall apart, especially in the hurly-burly of negotiations. Under certain circumstances this result may seem unjust.
Promissory estoppel as a ‘fairness’ exception
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.
Courts have quite a lot of discretion in fashioning a remedy when these factors can be shown by someone who has been harmed by the broken promise.
Waltons Stores (Interstate) Ltd v Maher
The most recent developments in the doctrine of promissory estoppel in Australia arises from the case of Waltons Stores (Interstate) Ltd v Maher. In which Maher (a builder) agreed to build a premises on the understanding that Waltons Stores would lease it. Waltons sent Maher an unsigned 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.
The case is also notable because it extends the doctrine of promissory estoppel to a situation in which the representation upon which Maher relied was about future conduct rather than an existing fact.