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Estoppel – used to defend an Employer’s deduction?

11 June 2015 #Construction

In a recent case, the Technology and Construction Court (TCC) has provided some guidance on the legal doctrine known as “estoppel by convention”.

In the case of Mears Ltd v Shoreline Housing Partnership Ltd [2015] EWHC 1396 (TCC), the court decided that the Employer could not withhold payments to the contractor in reliance on the payment terms in the contract. This was because the two parties had, in fact, followed a very different payment regime, which they had relied upon throughout the performance of the contract, the fact of which meant it would then be “unjust and unconscionable” for the Employer to revert to the original payment terms set out in the contract. Therefore, the terms that the parties had actually been operating precluded the deduction the Employer was seeking to make (the right to which deduction was expressly included in the terms of the contract). The Employer was “estopped”.

This case concerned an NEC3 Term Service Contract, which included a price list and cost target. The Employer had not been calculating the sums paid to the contractor in accordance with that price list, but later sought to revert to it in order to reclaim sums paid.

The lesson here is as follows: if you take the time to negotiate and agree a contract that you believe to be in your best interests, you should act in accordance with it. If you fail to follow the terms of the contract, you may be prevented from relying on them later – you may be “estopped”.

Finally, it should be noted that estoppel is a “shield not a sword”, which means that the contractor would not be entitled to make a claim based on the ‘changed’ price list, but was entitled to use estoppel to defend the claim (to a deduction) made by the Employer.

For those of you interested in the ‘nitty gritty’ (i.e. legal jargon), here is the court’s description of what is required in order to rely on (as a “shield”) an estoppel by convention:

  1. “An estoppel by convention can arise when parties to a contract act on an assumed state of facts or law. A concluded agreement is not required but a concluded agreement can be a "convention".

  2. The assumption must be shared by them or at least it must be an assumption made by one party and acquiesced in by the other. The assumption must be communicated between the parties in question.

  3. At least the party claiming the benefit of the convention must have relied upon the common assumption, albeit it will almost invariably the case that both parties will have relied upon it. There is nothing prescriptive in the use of "reliance" in this context: acting upon or being influenced by would do equally well.

  4. A key element of an effective estoppel by convention will be unconscionability or unjustness on the part of the person said to be estopped to assert the true legal or factual position. I am not convinced that "detrimental reliance" represents an exhaustive or limiting requirement of estoppel by convention although it will almost invariably be the case that where there is detrimental reliance by the party claiming the benefit of the convention it will be unconscionable and unjust on the other party to seek to go behind the convention. In my view, it is enough that the party claiming benefit of the convention has been materially influenced by the convention; in that context, Goff J at first instance in the Texas Bank case described that this is what is needed and Lord Denning talks in these terms.

  5. Whilst estoppel cannot be used as a sword as opposed to a shield, analysis is required to ascertain whether it is being used as a sword. In this context, the position of the party claiming the benefit of the estoppel as claimant or indeed as defendant is not determinative or does not even raise some sort of presumption one way or the other. While a party cannot in terms found a cause of action on an estoppel, it may, as a result of being able to rely on an estoppel, succeed on a cause of action on which, without being able to rely on the estoppel, it would necessarily have failed.

  6. The estoppel by convention can come to an end and will not apply to future dealings once the common assumption is revealed to be erroneous.”

...and here is a link to the full Judgment of Mr Justice Akenhead:

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