Applying Estoppel by Convention in Construction Contracts
Estoppel by convention is a legal principle and equitable remedy that can arise in construction contract disputes where parties are prevented from denying facts or legal positions, they have acknowledged to have accepted based their actions.
This doctrine is especially relevant in construction industry, where agreements may not always be in writing and parties may proceed and conduct themselves on shared understandings that directly affect project costs, timelines, and overall success.
In the construction industry’s stringent and competitive environment, ‘estoppel by convention’ provides some protection for parties relying on a shared understanding. It ensures that once parties have acted on an agreed set of facts or legal assumptions, neither can suddenly dispute this shared understanding to the detriment of the other.
This principle is not about mere formalities but about preserving the integrity of agreements and preventing unfair advantage, which is paramount in an industry where projects often hinge on tight deadlines and budgets.
If you have a construction dispute, please do not hesitate to contact our expert construction dispute lawyers for a Free Consultation on 0207 459 4037 today.
What is Estoppel by Convention?
Estoppel by convention arises within a broad range of disputes, including those in the construction industry. It prevents parties from departing from a mutual assumption of fact or law if both have acted upon that assumption. It is grounded in principles of equity and fairness, ensuring that contractual relationships are upheld based on shared understandings.
Elements of Proving Estoppel by Convention
Chitty on Contracts (32nd edition, at 4-108) provides the following description of estoppel by convention:
“Estoppel by convention may arise where both parties to a transaction ‘act on an assumed state of facts or law, the assumption being either shared by both or made by one and acquiesced in by the other.’ The parties are then precluded from denying the truth of that assumption, if it would be unjust or unconscionable (typically because the party claiming the benefit has been ‘materially influenced’ by the common assumption) to allow them (or one of them) to go back on it.“
The elements required to establish estoppel by convention which have been shaped and affirmed through case law include:
- Mutual Assumption: There must be an evident mutual understanding or assumption between the parties. This is often derived from the conduct of the parties rather than a formal agreement (Republic of India v India Steamship Co Ltd (The Indian Endurance and Indian Grace) [1993] AC 410).
- Reliance: The party asserting estoppel must have relied on this mutual understanding in their decision-making or actions. The reliance should be reasonable given the circumstances and factual matrix.
- Detriment: The reliance on the mutual assumption must have led to a detriment or it must now be inequitable for the other party to deny the common understanding.
- Knowledge and Acquiescence: Both parties must have been aware, or it should have been reasonable for each party to assume that the other was acting on the mutual understanding. Acquiescence implies a level of acceptance or non-challenge to the assumption (Amalgamated Investment & Property Co Ltd v Texas Commerce International Bank Ltd [1982] QB 84).
- Unconscionability: It must be unconscionable, often meaning unfair or unjust, for one of the parties to resile from the assumed situation. The principle of unconscionability is a cornerstone in estoppel cases, underpinning the need to prevent injustice, as discussed in Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130 (High Trees Case).
Each element of estoppel by convention must be considered collectively to understand and apply the doctrine effectively. This understanding is not just about legal compliance; it is about ensuring equitable and predictable outcomes in the challenging and dynamic environment of construction projects.
Illustrative Example of Estoppel by Convention
To demonstrate how Estoppel by Convention may work in practice within a construction case study, our lawyers consider an illustrative example below in a construction project involving a small local contractor (Contractor A) and a homeowner (Client B).
Contractor A agrees to do an extra £5,000 worth of kitchen fittings for Client B’s home renovation without additional charge, believing that Client B will hire them for a larger upcoming project worth £50,000 based on previous discussions.
However, once the renovation is complete, Client B decides to hire a different contractor for the upcoming project. Client B refuses to acknowledge any agreement about the £5,000 worth of extra fittings being free. Contractor A, having completed the extra work without charging, faces a loss of £5,000.
To apply Estoppel by Convention to the above scenario:
- Mutual Assumption: Both Contractor A and Client B had operated under the assumption that the extra £5,000 work would not be charged due to the promise of future work.
- Reliance: Contractor A relied on this understanding and completed the additional work without charging, expecting a larger future project.
- Detriment: Contractor A is now £5,000 out of pocket due to the reliance on the mutual understanding.
- Knowledge and Acquiescence: Both parties had acted on this understanding during the project. Client B had never objected or clarified until the work was completed.
- Unconscionability: It would be unfair for Client B to now refuse to acknowledge the arrangement, especially after Contractor A completed the work based on this understanding.
In this illustrative case example, ‘estoppel by convention’ would seek to prevent Client B from denying the mutual understanding and ensure that Contractor A is not unfairly disadvantaged by the reliance on their agreement.
Difference Between Estoppel by Convention and Other Estoppels
Understanding the differences between estoppel by convention and other types of estoppel arguments is crucial for accurately applying these principles in legal disputes.
Estoppel by Convention vs. Promissory Estoppel
Promissory Estoppel involves one party altering their position based on a promise made by another, which the promisor then seeks to go back on. It typically requires an unambiguous promise, reliance by the promisee, and a resulting detriment (Woodhouse AC Israel Cocoa Ltd SA v Nigerian Produce Marketing Co Ltd [1972] AC 741).
Promissory estoppel usually involves a one-sided promise and reliance, while estoppel by convention is based on a mutual belief or assumption shared by both parties.
Estoppel by Convention vs. Proprietary Estoppel
Proprietary Estoppel arises in property disputes where one party is led to believe that they will acquire rights over property, leading them to act to their detriment. It typically involves promises or assurances related to property ownership or rights.
Proprietary estoppel is specifically related to property and involves assurances about property rights, whereas estoppel by convention can apply to any mutual agreement or understanding, not just those about property.
Estoppel by Convention vs. Estoppel by Representation
Estoppel by Representation occurs when one party relies on a statement or representation made by another party to their detriment. It is about preventing the representor from contradicting their previous statement if the representee has relied on it.
Estoppel by representation focuses on reliance on a specific statement or representation, while estoppel by convention involves a mutual practice or understanding acted upon by both parties.
As you can see each type of estoppel addresses different situations and issues, and recognising these nuances ensures that parties can effectively protect their rights and interests in various legal contexts.
Supreme Court Clarifies Application of Estoppel by Convention
The doctrine of estoppel by convention is enriched and shaped by various case laws and legal precedents that illustrate its application and boundaries; the principle can apply to various contractual disputes.
A recent case involved a dispute between Mr Tinkler and HMRC over the validity of a tax enquiry notice. HMRC sent a notice of enquiry to an old address of Mr Tinkler, which he did not receive.
The taxpayer argued that both parties had acted on the understanding that no decision had been made. However, HMRC argues that both parties agreed that a valid notice had been served.
The issue however went to Court where it had to determine whether Mr. Tinkler was estopped by convention from denying that a valid enquiry had been opened.
The Supreme Court decided for HMRC, concluding that all the requirements for establishing an estoppel by convention were satisfied. The court held that both parties shared a mistaken assumption that a valid enquiry had been opened and that it was unjust to allow Mr Tinkler to resile from this shared assumption. The decision clarified the following principles in applying estoppel by convention:
- Shared Common Assumption: There must be a shared assumption between the parties, either expressed or implied, beyond mere understanding. Parties must show clear agreement to the assumption.
- Responsibility in Expression: The party being estopped must have communicated in a manner indicating an assumption of responsibility, making it reasonable for the other party to rely on the shared assumption.
- Reliance on Assumption: The party alleging estoppel must have relied on the common assumption rather than their independent view.
- Connection with Subsequent Dealings: The reliance must be connected to some subsequent dealings between the parties.
- Detriment or Benefit: There must be some detriment suffered by one party or benefit gained by the other, making it unconscionable for the party to deny the common assumption
Practical Tips to Avoid Estoppel in Contract Negotiations
Navigating contract negotiations in construction or any other field requires awareness and strategic planning to avoid unintended estoppel, particularly estoppel by convention. Here are some practical tips to help parties avoid estoppel and ensure clear, enforceable agreements:
- Document Everything Clearly
- Understand the Contract Fully
- Communicate Openly and Promptly
- Seek Legal Advice from our expert lawyers
By following these tips, parties can significantly reduce the risk of becoming involved in an estoppel dispute. Being proactive in contract negotiations, maintaining clear and consistent documentation, and seeking professional advice when necessary are key strategies for protecting your legal and commercial interests.
Winning Approach to Construction Dispute Resolution
Our lawyers’ extensive industry-specific knowledge and our commitment to justice make us the preferred choice for many businesses in the construction industry. Our construction dispute lawyers are passionate about this industry and are members of the Society of Construction Law and the Adjudication Society.
Our lawyers are recognised among the best lawyers in England & Wales, and have regularly been asked and featured to write authoritative articles in the Financial Times, the Law Society and LexisNexis and have been quoted in City AM, the New Law Journal, Law Society Gazette and Litigation Futures.
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