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Put a cork in it!

Earlier this year, a couple of my articles dwelt on circumstances when pre-contractual statements would be admissible, and looked at one of those instances, when a party contends that the doctrine of Waiver applies. You may remember the other doctrine cited in Investors Compensation Scheme v West Bromwich Building Society [1997] UKHL 28 was Estoppel and, having handed the reins of the Construction and Engineering Team back to Jon on his return from his sabbatical, I thought I’d better complete the picture, at least in relation to contracts.

Estoppel has many sub-species. You may have heard of proprietary estoppel, which applies in relation to holdings of land, or promissory estoppel, where a donor promises to transfer land as a gift and the donee spends money on the property in reliance on the promise.  

‘The word “estoppel” means stopped, from the Norman-French word “estoupail.” - a cork! The doctrine concerns situations where the law will prevent someone from doing something that they would otherwise be entitled to do. The doctrine can be confusing, but the judges have recently attempted to rationalise the doctrine and its applicability in the case of Amalgamated Investment and Property Co Ltd v Texas Commerce International Bank Ltd (1982) 1 QB 84 in which Lord Denning said:

“The doctrine of estoppel is one of the most flexible and useful in the armoury of the law. But it has become overloaded with cases. That is why I have not gone through them all in this judgment. It has evolved during the last 150 years in a sequence of separate developments: proprietary estoppel, estoppel by representation of fact, estoppel by acquiescence, and promissory estoppel. At the same time it has been sought to be limited by a series of maxims: estoppel is only a rule of evidence, estoppel cannot give rise to a cause of action, estoppel cannot do away with the need for consideration, and so forth. All these can now be seen to merge into one general principle shorn of limitations. When the parties to a transaction proceed on the basis of an underlying assumption - either of fact or of law - whether due to misrepresentation or mistake makes no difference - on which they have conducted the dealings between them - neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands.”

There are two likely routes by which estoppel might arise when parties enter into contracts:

Estoppel by representation, which requires a clear and unequivocal representation of fact by a representor, in reliance on which the representee must have acted to its detriment, and as a result it would be inequitable, i.e. unfair to allow the representor to deny or withdraw the representation.  If the representation is made in a deed, concerning the vendor’s ownership of land for example, this becomes known as Estoppel by Deed.

Estoppel by convention, which requires that the parties must act on an assumed state of facts or law which they either both share.  They will be precluded from denying that assumption where it would be unjust or unconscionable to allow one of them to go back on it.

A recent example of the application of estoppel in construction contracts is Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC). Mears had been employed to repair and maintain Shoreline’s properties. Work had begun six months before the contract was signed and in the interim it had been agreed that Mears would submit its invoices on the basis of agreed prices in a schedule of rates, notwithstanding the clear understanding that the contract to be signed required invoicing by reference to a defined cost plus fee. After the contract had been signed, Shoreline became concerned that some of the jobs were being paid at too high a rate and deducted £300,000 from the payments for those jobs. Mears acknowledged that the contract had retrospective effect back to commencement of the work, but nevertheless contended that Shoreline was estopped from making the deduction. Mears’ estoppel contention succeeded; there had been an agreement and therefore a convention between the parties that Mears would be paid against the schedule of rates, and the parties acted in this way for six months. Both parties therefore relied upon that shared assumption, and it would therefore be unjust and unconscionable for the employer to deny the convention and common assumption upon which they agreed to operate. There had also been representations by words and conduct by Shoreline which were clearly relied upon by both parties with it being unjust and unconscionable for them to depart from such representations. Estoppel by convention and by representation both applied.

The emphasis on ‘equity’ and ‘unconscionability’ might lead you to believe that estoppel is always about fairness. Statute lends a hand to the innocent too; when pre-contractual statements turn out to be untrue, the aggrieved party who relied on a false statement can also rely on the Misrepresentation Act 1967 to provide a way of escaping from the contract altogether as well as seeking damages. 

However, estoppel in contract is more commonly about commercial certainty, and often tends to be anything but ‘fair’. Commercial contracts commonly seek to exclude the misrepresentation remedy, and estoppels like those in Mears, by means of ‘non-reliance’ clauses. These rely on estoppel by representation, because each party represents to the other that they have not relied on pre-contract statements and, so the argument goes, it would be unjust to allow a party to go behind that. 

They were examined in detail in EA Grimstead v McGarrigan [1998-99] Info. T.L.R. 384 where Chadwick LJ said that in order to estop a party who signs a declaration of non-reliance from later alleging reliance on pre-contractual statements, there must be (1) "a clear and unequivocal representation by the one party (‘B’) that B has not relied on any pre-contractual statements [i.e. a non-reliance clause]; and (2) that B intended A to act on the declaration; and (3) that A believed the declaration to be true and acted or relied on it." 

However, in Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317, Chadwick LJ himself remarked that this test presents "insuperable difficulties" and it may even be "impossible" for A to satisfy the court in relation to its third element. That is because A has made pre-contractual representations which he intended B to rely on in deciding whether to enter into the contract, so how can he have believed B’s declaration of non-reliance? The need for A to demonstrate that he believed B’s declaration of non-reliance, and placed actual reliance on it in order to raise an estoppel, meant that these clauses would need to evolve to effectively provide certainty.

Evolve they did. Now, greater rigour has been introduced by clauses which specifically preclude a party from denying a set of facts or state of affairs – explicitly recited in the contract - as forming the basis for the transaction, regardless of whether they are true or not. They were first tested in Peekay Intermark [2006] EWCA Civ 386, where it was held that parties could contractually waive their right to assert that they were induced to enter into the contract by misrepresentation, and that clauses acknowledging that there has been no inducement would give rise to a contractual estoppel. Such clauses typically provide that any pre-contractual representations made are "withdrawn, overridden or of no legal effect so far as any liability for misrepresentation may be concerned" (BSkyB Ltd v HP Enterprise Services UK [2010] EWHC 86 (TCC)). Such clauses will be strictly construed, and to simply state that any representations are superseded and do not, therefore, become terms of the contract is insufficient (AXA Sun Life Services v Campbell Martin [2011] EWCA Civ 133, in which Rix L.J. said, "…there was…no language to the effect that the parties were agreed that no representations had been made or replied upon").

Contractual estoppel overcomes the difficulties in the test for estoppel by representation because the party relying on the clause does not need to prove that he believed the truth of the other party’s declaration of non-reliance, or demonstrate that he actually placed reliance on it. The basis of contractual estoppel is simply the parties’ agreement on the non-application of certain facts. Non-reliance clauses and contractual estoppels will commonly be supported by ‘entire agreement’ clauses, which say that the contract is the sole, authoritative, record of the parties’ agreement, and they are a form of ‘evidential estoppel’, because they seek to exclude consideration of other correspondence.

Non-reliance and contractual estoppel clauses are an attempt to limit the remedy of misrepresentation so, by virtue of section 3 of the Misrepresentation Act 1967, they will be subject to the test of reasonableness set out in section 11(1) and Schedule 2 of the Unfair Contract Terms Act 1977 (Government of Zanzibar v British Aerospace (Lancaster House) Ltd [2000] 1 W.L.R. 2333 QBD). This requires a clause which seeks to exclude or limit liability to be "…a fair and reasonable one to be included [in the contract] having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made". More detailed guidance in relation to the application that test was given in Lloyd v Browning [2013] EWCA Civ 1637; [2014], in which a non-reliance clause in a land purchase contract was upheld. In commercial contracts, ‘big boys’ games, big boys’ rules’ applies, and such clauses are likely to be upheld except where there has been fraudulent misrepresentation or they are contrary to public policy.

While most standard form construction contracts do not contain such provisions, many bespoke contracts and amendments will. Of course, contractors, like any other commercial entity, enter into other contracts too e.g. supply contracts, which may contain these clauses. Vigilance is therefore required if the injured party is to avoid finding themselves ‘estopped’ by such clauses.

You can contact Neil Mason on mailto:neil.mason@bpe.co.uk or 01242 248432.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.  

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