Commercial parties tend to operate in fluid and fast paced environments. Frequently formal contracts are entered into or amended late or possibly not at all. Time constrains, cost constraints or simply oversight are often to blame.
Failing to record deals in contracts puts commercial parties at risk. One party may decide to walk away from the deal after the other party has already kept their side of the deal. With no contract/contract amendment in place, the other party is in a weak legal position.
One of the ways in which lawyers and judges attempt to grapple with this commercial reality is by the doctrine of promissory estoppel. Promissory estoppel prevents a person from unconscionably departing from a representation, promise or assurance made by the first person and relied on by a second person to the second person’s detriment.
To give a concrete example of what this means, imagine two parties are negotiating a lease. The tenant wants the owner to do certain building works to the premises. The works must be done before a certain date so that the tenant can vacate their old premises and move to the new premises. The owner sends the tenant a draft lease and tells the tenant that the lease needs to be agreed by the end of the week so that the owner has enough time to do the works. The tenant says to the owner “I’ll let you know tomorrow if I need any changes made.” The tenant says nothing further and at the end of the week the owner sends a signed copy of the lease to the tenant. The owner then starts the works. The tenant knows the owner has started the works. The tenant never signs the lease. Once the works are part complete, the tenant tells the owner that they no longer wish to lease the premises. In these circumstances, the tenant was estopped from walking away from the lease.[1]
This example shows that promissory estoppel usually operates in the context of promises which have not met the formal requirements of a contract. The tenant never signed the lease and so legally had not agreed to lease the premises.
The express promise or representation does not have to be express, as long as it is clear and unambiguous. In the example, although the tenant did not make an express promise to sign the lease, by its silence the tenant implicitly assured or promised the owner that it would sign the lease. Silence is sufficient for promissory estoppel if the implied promise is clear and unambiguous.
The other key factor is unconscionability. The tenant knew the owner had sent the tenant the signed lease and had started the works. Clearly, the owner had assumed that the tenant would sign the lease in due course. In those circumstances, it was unconscionable for the tenant to say nothing to the owner.
In summary, promissory estoppel may be available where a contract has not yet been formally entered into. At a minimum promissory estoppel requires:
- the first party to make an express or implied promise, representation or assurance (including by silence);
- the second party must rely on the promise, representation or assurance; and
- there must be some reason that it is unconscionable for the first party to depart from the promise, representation or assurance.
In practice promissory estoppel can be a difficult remedy to obtain so always seek legal advice first.
If you would like to discuss this article or its implications on your project or development, please contact our Property and Real Estate Projects Partner, Mike Ellis or Senior Associate, Yanlie Leung.
[1] Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.