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Disclaimer: I’m not a lawyer and I have no claim that this advice should be taken as legal advice in replacement of seeking out professional help. What I hope to do is educate you over a series of small posts about what constitutes a contract and you should be able to figure out when you might need to see a real lawyer. Although this series is in the Australian context many of the principles apply in other countries.

In the previous installments of the Contracts 101 series the discussion covered the six elements required of a contract: the agreement, consideration, capacity, legality of object, possibility of performance and genuine consent. However, there are situations where the lack of a contract will be addressed by the court. This is the area of contract law called promissory (or equitable) estoppel.

In short, promissory estoppel can be thought of as a breach of promise. It would become an issue for the court where somebody was led to believe that a contract would become reality but the other party reneges – in which case the court has the power to estopp the other party (prevent them) from using the lack of a contract as a defence. In which case it would be as though there was a contract in place. To prove a case of promissory estoppel six criteria need to be met.

1. The assumption of a particular legal relationship by A with B
2. B was responsible for the assumption
3. The actions or inactions of A were based on that assumption
4. B intended A to act
5. A suffered losses if their assumption was not fulfilled
6. B has taken no steps to put that assumption to rest as being false

In cases where these six criteria are met… Walton Stores (Interstate) Ltd v Maher (1988); Sword v Shiel – High Trees (1947); Commonwealth v Verwayen (1990); Giumelli v Giumelli (1999), the court has the power to estopp the other party from contesting there was no signed contract in the dispute. In effect, the offending party will be held to their promise as there has been an unfair loss to the injured party which was avoidable given the forgone opportunity to put them straight about their wrong assumption.

Promissory estoppel also applies to situations where one party to a contract, either through their words or actions, leads the other party to believe that some legal right under a contract will not be enforced, and where the other party alters their position based on that assurance. However, for example, where rent has been agreed to be accepted below the contract rental, with due notice the party which promised the reduced rent can resume the suspended right to claiming the full rental under the original contract, if the contract is one which is ongoing (not a one-off)… Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd (1955). Although this may be a matter of whether there had been a change in the lessee’s position… Je Maintiendrai Pty Ltd v Quaglia (1980), or there had not been a change of position… Gollin & Co Ltd v Consolidated Fertilizer Sales Pty Ltd (1982). The promissee has to show they have suffered a material loss, having altered their position, in reliance on the promise, and because of it there would be an injustice to let the promiser renege from their word… Chin v Miller (1981).

Similarly, promissory estoppel may also involve situations where promises to land are created or encouraged by another person (such as the mother in Australia promising title to her house if her son and daughter-in-law migrated from England, then reneged when they arrived), resulting in the handing over of the promised land… Riches v Hogben (1986).

Be aware that it is not sufficient to just have a reliance and a loss; there also needs to be an encouragement from the party making the promise… Commonwealth v Verwayen (1990); Giumelli v Giumelli (1999).

In the next installment of the Contracts 101 series the issue of ending a contract will be explored.

Note: Resources used for this series are identified in the first installment – Contracts 101 – Part 1: Outline.

Installments in Contracts 101

• Contracts 101 – Part 1: Outline
• Contracts 101 – Part 2: Which Contract?
• Contracts 101 – Part 3: The Six Elements
• Contracts 101 – Part 4: The Agreement
• Contracts 101 – Part 5: The Offer
• Contracts 101 – Part 6: The Acceptance
• Contracts 101 – Part 7: Battle of the Forms
• Contracts 101 – Part 8: Consideration
• Contracts 101 – Part 9: Capacity
• Contracts 101 – Part 10: Legality of Object
• Contracts 101 – Part 11: Possibility of Performance
• Contracts 101 – Part 12: Genuine Consent
• Contracts 101 – Part 13: Promissory Estoppel
• Contracts 101 – Part 14: Ending the Contract
• Contracts 101 – Conclusion: Protect your Business