Application in Australia of Doctrines of Unconscionability

In recent years, there has been a marked quickening of interest in the application in Australia of the equitable doctrines of unconscionability to contract law. The terms ‘unconscientious’ and unconscionable are used across a broad range of the equity jurisdiction. They describe in their various applications the formation and instruction of conscience by reference to well developed principles. Thus, it may be said that breaches of trust and abuses of fiduciary position manifest unconscientious conduct; but whether a particular case amounts to a breach of trust or a breach of fiduciary duty is determined by reference to well developed principles . It is to those principles that the court has first regard rather than entering into the case at that higher level of abstraction involved in notions of unconscientious conduct in some loose sense where all principles are at large. The conscience of the vendor which equity seeks to relieve is a properly formed and instructed conscience. Since then unconscionability has frequently been referred to in estoppel cases, and has been invoked in other cases to enlarge the grounds for equitable relief. Doubts have recently emerged about the utility and relevance of unconscionability in estoppel and other cases, and there has been a significant retreat, particularly in Australia, from the more extreme positions.

Promissory estoppel is a legal term based upon a principle where someone who has relied upon a gratuitous promise may be able to enforce it and based on one definition by the Legal Information Institute is stated as “the doctrine allowing recovery on a promise made without consideration when the reliance on the promise was reasonable, and the promise relied to his or her detriment”. Promissory estoppel is used as a defensive action and because of this is considered best used as a “shield” and not as a “sword” from a legal standpoint. Using Australian cases which have utilized the promissory estoppel tool, defensively it is much easier implemented and easier to realize when a case fulfills the requirements for promissory estoppel. Cases which have attempted to use promissory estoppel as a “sword” have been less successful because often vital elements necessary for the fulfillment of promissory estoppel are not met such as agreement of action, equity, unambiguous consensus and consideration. However, in Australia the role of promissory estoppel that serves as both a shield and a sword. To fully understand and justify that, this paper will review the historical roots of the promissory estoppel doctrine in Australia. Second, it will discuss the evolution of the application of promissory estoppel in different contexts, including a discussion on promissory estoppel as a substitute for consideration in forming a contract and situations where some courts award reliance damages or equitable damages. Additionally, it will discuss its elements followed by a deeper discussion of the concept of promissory estoppel that represents a series of legal doctrines that serve as both a shield and a sword in consideration of Australian legal cases as examples.

The Historical Background of Promissory Estoppel:

The distinction of equitable promissory estoppel can be understood by comparison with the analogous but distinct doctrine of common law conventional estoppel, [1] which precludes either party from denying an assumption which has formed the conventional basis of a relationship between them, [2] and can operate alongside contractual variation and promissory estoppel in the field of consensual departures from contractual rights, sharing some characteristics with each. [3] There is well-established precedent of holding individuals liable on their promises, despite the absence of consideration. [4] In these cases, the courts applied the principle of estoppel to form a contract when the promisee suffered detriment in reliance on a gratuitous promise from the promisor. [5] Promissory estoppel should be distinguished from the similar doctrine of equitable estoppel. Unlike equitable estoppel, where the claimant relies on a misstatement of fact, [6] promissory estoppel is the appropriate term in a case where the promisee relies on a promise. [7] A majority of courts use the term “promissory estoppel” to characterize reliance as a substitute for consideration. [8]

In England, the doctrine was given its modern and widest enunciation by Denning J. (as he then was) in Central London Properties Trust Ltd v. High Trees House Ltd [9] . The plaintiffs claimed rent from the defendants for two quarters of 1945 at a rate agreed between them in 1937 by a lease under seal. The defendants alleged that the plaintiffs either had waived their right to the full amount of rent or were estopped from claiming it by a representation in 1940 that the rent would be reduced. Denning J. found for the plaintiffs on the question of the amount of rent payable for the two quarters of 1945, [10] but in the course of his Honour’s judgment he considered whether the landlord could, notwithstanding his promise in 1940, recover the full amount for the entire period 1940-1945. [11] In terms of traditional legal principles, there were two reasons why the tenant should not have been able to prevent the landlord enforcing his “strict legal rights” under the 1937 lease:

The landlord’s promise was simply a bare promise, not supported by consideration. Such a promise, it was held in Foakes v. Beer, [12] could not be enforced because the promise was not a contract.

The landlord could not be estopped from suing for the full amount because his promise was a representation of future intention, as distinct from a representation of present or past fact. It was held in Jordan v. Money [13] that a representation of the former kind could not give rise at law or in equity to an estoppel.

Notwithstanding those traditional authorities, Denning J. was firmly of the opinion that the tenant could prevent the landlord suing for the full amount for the period prior to the two quarters in issue. Drawing support mainly from the House of Lords’ decision in Hughes v. Metropolitan Railway Co. [14] and the Court of Appeal judgment in Birmingham and District Land Co. v. London and Northwestern Railway C O., [15] his Honor said:

There has been a series of decisions over the last fifty years which, although they are said to be cases of estoppel are not really such. They are cases in which a promise was made which was intended to create legal relations and which, to the knowledge of the person making the promise, was going to be acted upon by the person to whom it was made, and which was in fact so acted on. In such cases the Courts have said that the promise must be honored . . . The Courts have not gone so far as to give a cause of action in damages for breach of such a promise, but they have refused to allow the party making it to act inconsistently with it . . . The decisions are a natural result of the fusion of law and equity . . [16]

This use of promissory estoppel evolved from four main categories of promises: (1) promises by gratuitous bailees; (2) charitable subscriptions; (3) family promises; and (4) gratuitous promises for the conveyance of land. [17] In each category, courts enforced a promise that was made without consideration, based on the promisee’s justifiable reliance on the promise and the hardship that would result to the promisee from the refusal to enforce the promise. [18] These categories of cases prompted the drafters of the Restatement of Contracts and the Restatement (Second) of Contracts to develop the principle of promissory estoppel as a basis for enforcing any kind of promise that induced reliance of a certain type. [19]

Furthermore, the test is subjective, [20] because the focus is on the inactive party and his knowledge at the time. However the requirements of good conscience which have been subsumed in the principles stated by Lord Cranworth LC in Ramsden v Dyson leave no room for a wider inquiry into the unconscionability of the party estopped. Estoppel by representation originated in the Court of Chancery in the late 17th century, [21] and was borrowed, without acknowledgment, by Courts of common law in Pickard v Sears [22] and Freeman v Cooke. [23] Their definition of the constituent elements of the estoppel did not include unconscionable conduct by the representor, and this remained the position until 1980. [24] During this long interval there were many notable estoppel cases in the House of Lords, Privy Council and Court of Appeal but unconscionability was never mentioned. It was not mentioned in Jorden v Money. [25] The position was the same in Australia, as can be seen from the judgments of Isaacs J in Craine [26] and of Dixon J in Thompson v Palmer [27] and Grundt. [28] It was not mentioned in the promissory estoppel [29] cases of Hughes; [30] Birmingham and District Land Co v London and North Western Rail Co [31] and Central London Property Trust Ltd v High Trees House Ltd, [32] or in the important later cases of Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [33] and Ajayi v R T Briscoe (Nigeria) Ltd. [34] Thus, before the decision of Robert Goff J in Texas Bank [35] in 1980 unconscionability was not a triable issue in cases of estoppel by representation, promissory estoppel, or estoppel by standing by although at a high level of abstraction it was undoubtedly the underlying principle of each.

The evolution of the Australian promissory estoppel

It was in the context of representations relating to the enforcement of rights under a pre-existing contract between the parties that the doctrine of equitable promissory estoppel was originally formulated and expounded by Lord Denning MR, [36] and explained by the Privy Council in Ajayi v R T Briscoe (Nigeria) Limited: [37]

The principle, which has been described as quasi estoppel and perhaps more aptly as promissory estoppel, is that when one party to a contract in the absence of fresh consideration agrees not to enforce his rights an equity will be raised in favour of the other party. This equity is, however, subject to the qualifications (1) that the other party has altered his position, (2) that the promisor can resile from his promise on giving reasonable notice, which need not be a formal notice, giving the promisee a reasonable opportunity of resuming his position, (3) the promise only becomes final and irrevocable if the promisee cannot resume his position.

The scope of the doctrine, which was accepted in Australia in Legione v Hateley, [38]  has since expanded beyond pre-existing contractual relations, and in Australia has been authoritatively described by Brennan J, in Waltons Stores (Interstate) Limited v Maher in the following terms: [39]

In my opinion, to establish an equitable estoppel, it is necessary for a plaintiff to prove that (1) the plaintiff assumed that a particular legal relationship then existed between the plaintiff and the defendant or expected that a particular legal relationship would exist between them and, in the latter case, that the defendant would not be free to withdraw from the expected legal relationship; (2) the defendant has induced the plaintiff to adopt that assumption or expectation; (3) the plaintiff acts or abstains from acting in reliance on the assumption or expectation; (4) the defendant knew or intended him to do so; (5) the plaintiff’s action or inaction will occasion detriment if the assumption or expectation is not fulfilled; and (6) the defendant has failed to act to avoid that detriment whether by fulfilling the assumption or expectation or otherwise. For the purposes of the second element, a defendant who has not actively induced the plaintiff to adopt an assumption or expectation will nevertheless be held to have done so if the assumption or expectation can be fulfilled only by a transfer of the defendant’s property, a diminution of his rights or an increase in his obligations and he, knowing that the plaintiff’s reliance on the assumption or expectation may cause detriment to the plaintiff if it is not fulfilled, fails to deny to the plaintiff the correctness of the assumption or expectation on which the plaintiff is conducting his affairs.

The distinction of equitable promissory estoppel can be understood by comparison with the analogous but distinct doctrine of common law conventional estoppel, [40]  which precludes either party from denying an assumption which has formed the conventional basis of a relationship between them, [41] and can operate alongside contractual variation and promissory estoppel in the field of consensual departures from contractual rights, sharing some characteristics with each.

While it has been said equitable promissory estoppel is included in the rubric of estoppel in pais, [42] there are distinctions as well as analogies. It is necessary for a plaintiff to establish (1) that it has adopted an assumption as to the terms of a legal relationship with the defendant; (2) that the defendant has induced or acquiesced in the plaintiff’s adoption of that assumption; (3) that the plaintiff has acted in reliance on its assumption; (4) that the defendant knew or intended that the plaintiff so act; and (5) that it will occasion detriment to the plaintiff if the assumption is not fulfilled. [43]

Promissory estoppel, a creature of equity, is typically focused on the conscience of the defendant: it operates when the defendant has induced or acquiesced in the adoption by the plaintiff of an assumption that the defendant will not assert its strict legal rights, so to prevent unconscientious insistence by the defendant on them. Thus, the impact on the requisite state of knowledge of the defendant, particularly in a case of acquiescence (or inducement by silence) in promissory estoppel, where the defendant has not positively encouraged the plaintiff to adopt the relevant assumption, a plaintiff must show that the defendant at least failed to deny the assumption with knowledge that the plaintiff was relying on it to the plaintiff’s potential detriment, and that the assumption could be fulfilled only by a diminution or suspension of the defendant’s contractual rights. [44] As it has been mentioned, it is essential to an equitable estoppel that the defendant knows or intends that the party who adopts the assumption will act or abstain from acting in reliance on it. [45]

The cases emphasize that a party who seeks to set up an equitable estoppel of this type must show that the other has made, whether by words or conduct, an unequivocal representation that it did not intend to enforce its strict legal rights, [46] and it has been said that to found an estoppel, a representation or assumption must be “clear and unequivocal”. [47] But as Mason and Deane JJ explained in Legione v Hateley, the requirement that a representation – or assumption – must be clear if it is to found an estoppel in pais or a promissory estoppel, does not mean that it must be express, and a sufficiently clear representation – or assumption – may properly be implied from words, conduct or even silence; moreover, it is not necessary that a representation – or assumption – be clear in its entirety, it sufficing that so much of it as is necessary to found the propounded estoppel satisfies the requirement. Their Honours illustrated this by the example that a representation that a particular right will not be asserted for at least x days is not rendered, for the purposes of promissory estoppel, unclear or equivocal merely because the words used are equivocal as to whether the relevant period is x days, x plus one day or x plus two days, so that if what is said or done amounts to a clear and unequivocal representation that the particular right will not be asserted for a period of at least x days, a representation to that effect can be relied on to found an estoppel. [48] And a promise may be definite, in the sense that there is a clear promise to do something, even though exactly what is promised is not precisely defined. [49]

As Tobias JA has observed, even if a representation is insufficiently precise to give rise to a contract, that does not necessarily disqualify it from founding a promissory estoppel, much depending upon the circumstances in which the representation is made and the context against which it is to be considered; thus a representation will be sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted it in a particular way, which it is clearly capable of bearing and upon which it is reasonable for the representee to rely, and in those circumstances it would be unconscionable for the representor to deny responsibility for the detriment that arises because of that reliance. On the other hand, if it is not reasonable for the representee to rely on the meaning he attributes to the representation, then it cannot be unconscionable for the representor to deny responsibility for the detriment that the representee sustains because of that unreasonable reliance. [50] Thus, the requirement that a party should not be estopped on an ambiguity does not mean that the precise terms of the assumption or representation which founds the claimed estoppel must be entirely and unequivocally clear: an estoppel can arise even though the precise terms of the assumption or representation may be difficult to ascertain, so long as it is clear that there was an assumption, and the scope of the assumption, though its full extent may be uncertain, is at least sufficient that it can be said that the defendant’s conduct would involve a departure from it.

Elements of promissory estoppel

For many years the operations of promissory estoppel principles were subject to two important limitations:

The promise had to be in the context of a pre-existing legal relationship. In High Trees, this was satisfied in that the parties were in a lease relationship and the promise was in relation to terms agreed under that lease.

Promissory estoppel could only be used as a defense to an action bought by the promisor against the promisee. It was said that it could only be used as a ‘shield’ and not as a ‘sword’. In High Trees, the defendant/promisee that would have used promissory estoppel as a defense to a claim for the foregone rent by the plaintiff/promisor.

In Australia, the doctrine of promissory estoppel was first authoritatively accepted by the High Court in Legione v Hateley. [51] However, the most significant High Court decision on the subject was to come 5 years later in Waltons Stores (Interstate) Ltd v Maher. [52] The significance of this case was that it was a key case which has led to the removal of both of the above limitations on the operation of the doctrine of promissory estoppel.

Thus, to establish a case based upon principles of promissory estoppel there needs to be a promise or a sufficiently clear and unambiguous representation. In relation to representations, in Galaxidis v Galaxidis, Tobias JA (Giles & Hodgson JJA agreeing) said: [53]

Even if a representation is insufficiently precise to give rise to a contract (as in the present case), that fact does not necessarily disqualify the representation from founding a promissory estoppel. Much will depend upon the circumstances in which the representation is made and the context against which it is to be considered. In its context, the representation is sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted the representation in a particular way being a meaning which it is clearly capable of bearing and upon which it is reasonable for the representee to rely. In these circumstances, it would be unconscionable for the representor to deny responsibility for the detriment that arises because of that reliance.

For the promise or representation to lead to a claim based upon promissory estoppel, Brennan J [54] on the face of it adopted a narrower approach. His Honour held that detriments which merely “flowed from the defendant’s failure to fulfill its promise, but not from any act done or omission made by the plaintiff in reliance on the making of the promise” (that is, detriment in the “broad” sense) were “not relevant detriments thus, his honour set out what he saw as the elements that had to be satisfied:

Assumption or Expectation: The nature of the assumption is important in relation to the type of estoppel that arises. If the assumption is one of an existing fact, a case of common law estoppel arises. [55] With equitable estoppel, it will arise if the assumption is that the promisor will act in a particular way in the future.

Inducement: The assumption adopted by the promisee must have been induced by the conduct of the promisor. In most cases the conduct will be an express representation or promise. In Legione v Hateley, [56] it was said that the promise must be clear and unequivocal. [57]

Reliance: The promisee must act or refrain from acting in reliance on the assumption. It is not clear whether the promisee’s action taken on the basis of the assumption has also to be reasonable in the circumstances.

Knowledge or Intention: The promisor must know or intend that the promisee will act or refrain from acting in reliance on the assumption or expectation. That knowledge can be actual or constructive knowledge. In cases of assumptions based upon a promise or representation, knowledge is ‘easily inferred’. [58]

Detriment: The plaintiff must suffer, or stand to suffer, detriment if the assumption made by the plaintiff is not fulfilled. There must be a link between the detriment and the assumption or expectation. [59]

Failure to Avoid Detriment: The defendant must have failed to act to avoid the plaintiff suffering detriment. One way in which action could be taken to avoid the detriment is by simply fulfilling the assumption or expectation.

Unconscionability and causation: The likelihood of detriment being suffered if the plaintiff’s assumption is not realized is insufficient on its own to found an estoppel; it must be unconscionable for the defendant to insist on his right to withdraw from pre-contractual negotiations. This will always depend on the facts of each case, [60] but an obvious example would be where the defendant knew of (and allowed the continuation of) the plaintiff’s actions with knowledge that the contract would never be concluded, [61] or when the defendant intended to gain the benefit from the plaintiff’s action with the knowledge that they would not be obligated to complete the transaction.

The role of promissory estoppel in Australia

The role of promissory estoppel is much more limited in English contract law than in the law of the United States [62] or Australia, [63] where it has been used to found a cause of action to remedy the non-performance of a promise unsupported by consideration. [64]

In Australia, unlike other common law jurisdictions, estoppel may be used as a cause of action as well as a mere defence; a ‘sword’ as well as a ‘shield’. [65] There are many different species of estoppel in common law jurisdictions. The concept of ‘equitable estoppel’ is exclusive to Australia, and is the result of the High Court’s fusion of formerly distinct heads of estoppel in Waltons Stores (Interstate) Ltd v Maher. [66] In promissory estoppel the representor is estopped from enforcing the contract where it would be ‘inequitable’ or ‘unconscionable’ to do so because of the reliance by the representee on the representation. This language of ‘unconscionability’ also appears as the underlying rationale in the modern cases on proprietary estoppel. But it has not been generalized into a doctrine of unconscionability in English law, nor has it even been used as a common link to draw together promissory and proprietary estoppel—and other forms of estoppel—into a single overarching doctrine, as appears to be the case in Australia. [67] Moreover, equity’s concern is to prevent unconscientious insistence on strict legal right, not the avoidance of detriment. Though there is a relationship between detriment and unconscionability, they are distinct concepts. As Professor Birks has stated: “There is no other kind of unconscionable behavior other than that which consists i