Promissory Estoppel
A doctrine in contract law that stops a person from going back on a promise even if a legal contract does not exist
What is Promissory Estoppel?
Promissory estoppel is a doctrine in contract law that stops a person from going back on a promise even if a legal contract does not exist. It states that an aggrieved party can recover damages from a promisor if the damages incurred were the result of a promise made by the promisor, which the receiver of the promise relied on to his subsequent detriment.
Although a promise must be supported by a legal consideration or a legal agreement to be enforced, the doctrine of promissory estoppel allows the promise to be enforced even though the requirements of a valid contract are not present.
Requirements of a Promissory Estoppel
The following elements must be present for the doctrine of promissory estoppel to be enforceable:
1. Promisor made a significant promise to cause the promisee to act on it
The first element of promissory estoppel is that the promise made to the promisee was significant enough and that a reasonable person would ordinarily rely on it.
2. Promisee relied on the promise
The second element is that the promisee must have acted on the promise made by the promisor, even though it was not supported by consideration.
3. Promisee suffered significant damage by relying on the promise
The third element is that the party relying on the promise suffered an actual detriment in the form of an economic loss. The loss results from the promissor failing to deliver on the promise made at the start of the relationship. In simple terms, the promisee is in a worse position for having acted on and relied on the promise.
4. Fulfillment of the promise is the only way the promisee can be compensated
The fourth element is that the promise becomes enforceable if the court determines that the only way the injustice committed to the promisee can be avoided is by enforcing the promise. However, the court has discretion in choosing what to do in such a case. Ideally, it will take an action that relieves the promisee of the detriment suffered.
Court Case: Central London Property Trust Ltd vs. High Trees House Ltd (1947) KB 130
The High Trees Case is a decision in English contract law that reaffirmed the concept of the promissory estoppel. The case involved High Trees, the defendants, and Central London Property Trust, the plaintiffs. The defendant leased a block of flats located in Clapham, London, from the plaintiff for a flat rate of £2,500/year.
The outbreak of the Second World War in the 1940s drastically reduced the occupancy rates in the area. As a result, the parties agreed to reduce the rent by half, without stipulating the duration of time over which the new agreement would apply. The defendants continued paying the reduced rent and, by 1945, the flats’ occupancy rate had normalized.
Issues Presented to the Court
The plaintiff sued High Trees for the payment of the full rental rates that existed before the agreement to revise the rates downward. The defendants argued that the agreement to pay a reduced rental cost applied to the entire lease period and that Central London Property Trust erred in claiming a higher rent after the end of the Second World War.
Court Judgement
In making the judgment, Denning J relied on a past ruling of the House of Lords in the Hughes vs. Metropolitan Railway Co (1877), which concluded that parties should be prevented from going back on a promise. Denning J argued that there was a promise that the promisor knew was going to be acted upon by the promisee, even though there was no consideration.
The judge reasoned that if one party leads another party to believe that the first party’s legal rights would not be enforced, the courts would prevent that party from subsequently enforcing their rights. The court found that the plaintiffs made a binding promise that only applied during the war.
The judge ruled that the defendants, High Trees, were obligated to pay the full rent once the flats became fully occupied after the Second World War. However, had the plaintiffs attempted to claim the full rent from 1940 onwards, the court would have prevented them from doing so.
Promissory Estoppel in Contract Law
For a contract to be enforceable under contract law, there needs to be a legal consideration for entering into the agreement. The consideration is the exchange of something of value between the parties at the time of entering into an agreement or making a promise. In the absence of consideration, a contract would ordinarily be unenforceable.
However, there are exemptions to this scenario, and the court may enforce a promise made between two parties, even in the absence of consideration. Promissory estoppel prevents a party from going back on a promise he/she made to another party who relied on the promise and acted upon it.
More Resources
CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ certification program, designed to transform anyone into a world-class financial analyst.
To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:
