The Doctrine of Promissory Estoppel

In the previous article of #TuesdayTeachings we understood aspects of consideration under section 2(d) and section 25 of the Indian Contract Act. In today’s article we will discuss the concept of The Doctine of Promissory Estoppel.

The doctrine of promissory estoppel is supposedly a departure from the doctrine of consideration.

The principle of promissory estoppel is described by the supreme court as:

“Where one party has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective of whether there is any pre-existing relationship between the parties or not.”

For example, B wanted to buy a bus pass to travel to college every day. A promised B to sell his cycle at a 40% discount to B. B did not buy the bus pass instead used tickets to travel until the sale is processed. Later A refuses to sell the cycle on a discount. B can hold A accountable for his promise according to this principle of promissory estoppel even if there is no consideration on part of B as he relied on A to sell him the cycle and did not buy the pass which caused him a loss/detriment.

The doctrine of promissory estoppel protects on reliance and not bargains thus differing fundamentally from the traditional contract theory. It does not belong to the realm of contract or estoppel or evidence but it relates to ‘Equity and Fairness in Action’. The doctrine is a principle evolved by equity to avoid injustice. This doctrine is an attempt to step in to mitigate the rigour of the strict law of consideration. It prevents a party from going back on a promise which he/she made to another party who relying on it acted upon it.

The applicability of the principle can be understood with cases that have advanced over the years.

1.      Thomas Hughes v. Metropolitan Railway Co.

This principle was first applied in this English case wherein a landlord gave notice to his tenant that he shall conduct repairs on the premises in six months failing which the lease shall be forfeited. A month after this, the landlord, and tenant entered into negotiations for the sale of the land and consequently during the negotiations the tenant failed to make repairs. Even the negotiations failed to materialise and six months got over shortly after. The landlord claimed that the lease has been forfeited. It was held by the court that the six months given to the tenant shall be calculated from the day the negotiations ended. The act of entering into the negotiations was an implied promise on behalf of the landlord to suspend the notice and the tenant acted on it by not carrying repairs. And thus he was now estopped from going back on that promise

2.     Central London Property Trust Ltd v. High Trees House Ltd.

In this case, the plaintiff leased a block of flats to the defendants at a ground rate of £2500 a year for 10 years. Due to the second world war, several flats could not be filled so the plaintiff agreed to reduce the rent by 50%. In 1945, the conditions returned to normal and the flats became fully occupied, yet the defendants continued to pay the reduced rent. The plaintiff sought recovery of full rental costs from June 1945. It was held that the rent was payable.

The important part in the judgment of this case was the obiter dicta in which the judge opined that if the plaintiffs had demanded the whole compensation from 1940 onwards, they would not have been able to claim it even though there was no consideration for this promise. It was reasoned that there was no need for consideration, if a party leads another party to believe that he will not enforce his strict legal rights, then the courts will prevent him to do so at a later stage. It was also further asserted by Lord Denning-

"that a promise intended to be binding, intended to be acted on and in fact acted on, is binding so far as its terms properly apply".

3.     Combe v. Combe

In this case, a wife had obtained a decree against her husband for a divorce. Her husband promised her during the divorce process that he would give her £100 allowance a year. The husband failed to make payments and consequently, the wife sued him after a couple of years to recover arrears of maintenance. Lord Denning commented about the principle laid down in the Central London Property case,

"That principle does not create new cause of action where none existed before. It only prevents a party from insisting upon his strict legal rights, when it would be unjust to allow him to enforce them, having regard to the dealings which have taken place between the parties."

It was thus held by the court of appeal that there was neither any consideration nor any promissory estoppel against the husband. There was no undertaking by the wife or any request on part of the husband that she would not enforce her normal right to maintenance. Her abstinence was thus not the result of any promise of the husband. The suit was hence not maintainable.

4.     Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh

The state of Uttar Pradesh declared a scheme in the newspaper wherein new industries were exempted from sales tax for three years. The appellant, a public limited company engaged in the manufacturing and sale of sugar who intended to set up a hydrogenation plant for ‘vanasti’ in lieu of this scheme got confirmation of this representation from the Secretary, Industries Department, the Director of Industries, and the Chief Secretary. The government however waived the scheme partially in respect of new Vanaspati units in some time. Ultimately the government after a few months included the new vanaspati units in the exemption. Aggrieved by such actions of the government which led to non-exemption of the appellant’s units from paying the whole sales tax, the appellant filed a petition based on the doctrine of promissory estoppel. This case was a basket case, it decided on various issues like can this doctrine be allowed to be used as a cause of action, can it be implemented against the state authorities, etc. It was finally held by the supreme court that,

i.             Cause of action- This doctrine can furnish a cause of action contrary to English law according to which it is regarded as passive equity and only allowed as a defence. It was opined by the court that, “though allowing promissory estoppel to find a cause of action would seriously dilute the principle which requires consideration to support a contractual obligation, but that is no reason why this new principle, which is a child of equity brought into the world with a view to promoting honesty and good faith and bringing law closer to justice should be held in fetters and not allowed to operate in all its activist magnitude, so that it may fulfill the purpose for which it was conceived and born”.

ii.             Consideration is not a necessary element for the doctrine of promissory estoppel to apply.

iii.         There should be an alteration in position in reliance on the promise immaterial of the fact if there is a detriment or not. Alteration means such a position which makes the court believe that holding the promisor to his promise will do justice to the parties.

iv.        The principle shall apply only in those cases where injustice will be avoided only with the enforcement of that specific promise.

v.            The state is not immune to this doctrine. It cannot use the exception of executive immunity. It may apply to the state in its governmental/public/sovereign capacity if its application is necessary to avoid fraud or injustice. The State is as much as bound as any other private property to perform any obligations imposed upon them. However, the principle does not apply against the state in its legislative capacity.

A close study of all the cases mentioned above helps greatly in understanding this particular doctrine in detail- its elements/requirements. The next article deals with another doctrine related to the concept of consideration. Stay tuned for it!

If you have any query please feel free to contact us at lawvastutah@gmail.com.

 

 BY,

LAWVASTUTAH

References:

1.     Indian Contract Act, 1872.

2.     Pollock & Mulla, The Indian Contract and Specific Relief Acts, 16th edition.

3.     Avtar Singh, Contract and Specific Relief, 12th edition.

4.     Halsbury’s Laws of India Contract, 2e 2015.

5.   Hughes v. Metropolitan Railway Company, (1877) 2 AC 439

6.   Trust Ltd v. High Trees House Ltd [1947] KB 130

7.   Combe v. Combe [1951] 2 KB 215

8.    Motilal Padampat Sugar Mills Co. Ltd. v. State of Uttar Pradesh, (1979) AIR 621