The majority held that, although formal contracts had not been exchanged, Maher was entitled to assume the exchange was a mere formality. Maher could rely on promissory estoppel which extends to representations or promises as to future conduct. In Australia promissory estoppel can be used both as a 'sword and a shield'. It will apply to provide a promisee with a cause of action where:
- Promisor makes a promise
- Promisor creates or encourages an assumption that a contract will come into existence or a promise will be performed
- Promisee relies on this to his/her detriment; and
- It is unconscionable, having regard to the promisor's conduct, for the promisor to ignore the promise.
In these circumstances equity intervenes because it would be unconscionable conduct on Waltons’ part to ignore the assumption.
In this case, while the mere exercise of legal right not to exchange contracts was not unconscionable, there were two additional elements which made Waltons' conduct unconscionable:
(a) the element of urgency; and
(b) M executed and forwarded on 11/11 and assumed that execution by W was formality
In those circumstances Waltons was under obligation to communicate with Maher within reasonable time and certainty when it heard of demolition. It did not and its inaction in the circumstances constituted clear encouragement or inducement for Maher to continue. As a result, Waltons was estopped from retreating from its implied promise to complete.
W negotiated for some months with M for the grant of a lease over property owned by M. It was understood that M would demolish an existing building and erect a new one for W to occupy. W required the plans etc be prepared to suit its needs. Agreement was reached on terms and rent.
Solicitor for W sent draft lease to solicitors for M on 21 October and some changes were discussed and accepted by W. A revised lease with amendments was sent by M to W. In November M informed W that demolition work had commenced so that it was important to conclude the lease quickly before Christmas shutdown.
Later in November W started to have some reservations and (having been informed it was not bound by the agreement) instructed solicitors to ‘go slow’. In early January M commenced building, but later in the month W informed M it did not wish to proceed; building work was 40% complete. M sought to enforce the agreement.
M succeeded at first instance and on appeal.
W appealed to the HC.
Mason CJ and Wilson J
(1) M did not believe that contracts had been exchanged when they embarked on demolition
(2) However, were entitled to assume the exchange was a mere formality
(3) Promissory estoppel extends to representations or promises as to future conduct
(4) No reason in principle why cannot apply to preclude departure from representation that representor will or will not enforce a non contractual right
(5) For a non-contractual promise to be enforceable directly
(a) Promisor must make promise
(b) Promisor must create or encourage an assumption that contract will come into existence/ promise will be performed
(c) Promisee must rely on this to detriment
(d) must be unconscionable, having regard to the promisor’s conduct, for the promisor to be free to ignore it.
Equity grants relief because it would be unconscionable conduct on the promisor’s part to ignore the assumption.
As a consequence, promissory estoppel in Australia may be used as both a ‘sword and a shield’:
"Promissory estoppel, it has been said, is a defensive equity and the traditional notion has been that estoppel could only be relied upon defensively as a shield and not as a sword High Trees ( K.B. 130) itself was an instance of the defensive use of promissory estoppel. But this does not mean that a plaintiff cannot rely on an estoppel. ….
But the respondents ask us to drive promissory estoppel one step further by enforcing directly in the absence of a pre-existing relationship of any kind a non-contractual promise on which the representee has relied to his detriment. … The principal objection to the enforcement of such a promise is that it would outflank the principles of the law of contract.
… the doctrine [of promissory estoppel] extends to the enforcement of voluntary promises on the footing that a departure from the basic assumptions underlying the transaction between the parties must be unconscionable. As failure to fulfil a promise does not of itself amount to unconscionable conduct, mere reliance on an executory promise to do something, resulting in the promise changing his position or suffering detriment, does not bring promissory estoppel into play. Something more would be required. … this may be found, if at all, in the creation or encouragement by the party estopped in the other party of an assumption that a contract will come into existence or a promise will be performed and that the other party relied on that assumption to his detriment to the knowledge of the first party. …
[In this case] the crucial question remains: was the appellant entitled to stand by in silence when it must have known that the respondents were proceeding on the assumption that they had an agreement … "
The answer was no – their Honours considered the ‘element of urgency’ surrounding the negotiation and the belief of the respondents that completion was a mere formality, in circumstances where W knew that M was performing costly work. In those circumstances, W ‘was under an obligation’ to communicate with M within a reasonable time after receiving the executed lease – at least to warn M that it may not proceed. Inaction of W, in the circumstances, ‘constituted clear encouragement or inducement to the respondents to continue to act on the basis of the assumption which they had made’ and that was unconscionable. The appellant was ‘estopped’ from reneging on its implicit promise to complete the contract.
Here the mere exercise of legal right not to exchange contracts not unconscionable - but there were two additional elements: (a) element of urgency and (b) M executed and forwarded on 11/11 and assumed that execution by W was formality
W was under obligation in the circumstances to communicate within reasonable time and certainty when it heard of demolition. Had to choose whether to warn or proceed. Inaction constituted, in the circumstances, clear encouragement or inducement to M to continue to Act on basis of assumption made. Was unconscionable conduct to adapt course they did
Estopped from retreating from implied promise to complete.
Equitable estoppel arises where:
(a) P assumed a particular legal relationship existed between the parties (or expected that it would);
(b) D has induced that assumption in P;
(c) P acts (or abstains from acting) in reliance on the assumption;
(d) D knew or intended him to so act;
(e) P’s action/inaction will case him/her detriment if the assumption is not fulfilled
(f) D has failed to act to avoid that detriment (eg, by fulfilling expectation)
His Honour also made clear that the remedy for promissory estoppel should go no further than what is necessary to prevent the unconscionable conduct – in this respect, the object of the equity is not to compel D to fulfil the expectation/ assumption, but to avoid the detriment that P will suffer if the expectation is not fulfilled
[Deane and Gaudron also dismissed the appeal]