BetterLawNotes-5 (2)

CONTRACT LAW

‘There has been much discussion as to whether promissory estoppel extinguishes or merely suspends the estopped party’s rights. The answer seems reasonably clear: as regards existing obligations it is extinctive, as regards future obligations it is suspensory . . . The suspensory effect can apply only when there is a continuing series of obligations some of which are in the future – to pay rent, royalties, interest, or whatever.’ J C Smith, The Law of Contract (4th edn) 87.

In High Trees, Denning J said that the landlord would not have been able to recover the balance of the unpaid rent for period up to the beginning of 1945: in other words, its right to claim these sums was extinguished as a result of the estoppel. Denning J’s comments on this point were merely obiter: the landlord was only claiming the unpaid balance for the last two quarters of 1945 and so Denning J’s view on this point was not part of the actual decision.

But this point did arise in the Tool Metal case and the Court of Appeal in the first action held that TMM’s right to claim compensation for the period before the filing of the counter-claim was extinguished.

Tool Metal Manufacturing Co Ltd v Tungsten Electric Co Ltd [1955] 1 WLR 761

TMM owned patents relating to the manufacture of certain metal alloys. TMM granted a licence to TE to manufacture the alloys on terms that TE would pay a royalty, together with compensation at a particular rate if TE manufactured more than a particular quantity of the alloys in any month. In 1940 TMM said that it would not seek payment of any compensation, it being contemplated that a new agreement, which might not provide for the payment of compensation, would be negotiated after the war. From then on, TE did not pay, and TMM did not demand, any compensation.

In 1944 TMM sent a draft of a new agreement which TC refused to sign. In July 1945 TC sought, unsuccessfully, to have the original agreement rescinded. In March 1946 TMM counter-claimed for payment of the compensation as from June 1945.

Devlin J held that the submission of the draft of the new agreement was a sufficient notice of termination of the modification of the original agreement and that the period between the date of submission of the draft and June 1945 constituted sufficient notice.

The Court of Appeal held that submission of the draft agreement was not a sufficient notice of termination but that filing of the counterclaim was.

TMM then commenced a fresh action seeking payment of compensation as from January 1947.

The House of Lords held that the period of nine months between the date of filing of the counterclaim and the date from which TMM claimed compensation was a sufficient period of notice, and that TMM’s claim succeeded.

Where Does Promissory Estoppel Leave Foakes v Beer?

It might be asked where promissory estoppel, and in particular the point that it can extinguish the promisor’s rights, leaves the ‘rule’ in Foakes v Beer? Would a modern-day Mrs Beer be estopped from claiming interest on the debt? In High Trees itself, Denning J seemed to think so. More recently, Arden LJ, in her judgment in Collier v Wright thought so too.

Collier v P & MJ Wright (Holdings) Ltd [2007] EWCA Civ 1329

C was one of three partners who had incurred a debt to W. According to C, W agreed that C should only be liable for one-third of the debt and that W would pursue the two other partners for the balance. C paid off his share of the debt only for W to demand payment by C of the balance. The CA held that, applying Foakes v Beer, there was no consideration for W’s promise that C’s liability would be limited to a one-third share of the debt. However, it was arguable that W was estopped from enforcing its strict right to claim payment in full from C.

The immediate significance of Collier v Wright lies in Arden LJ’s statement (at [42]) that where there is a voluntary accord and satisfaction between creditor and debtor it will of itself be inequitable for the creditor to resile from his promise. It follows, she said, that the effect of the estoppel is to extinguish, rather than merely suspend, the creditor’s right to the balance of the debt. In other words, promissory estoppel can be used to circumvent Foakes v Beer.

While in his judgment in Collier v Wright, Longmore LJ agreed that it was arguable that C’s claim might succeed were there to be a trial, he confessed to finding the promissory estoppel point ‘more difficult’ (at [44]). In particular, Longmore LJ cautioned that if the effect of the estoppel might be to extinguish, rather than merely suspend the creditor’s right, ‘it is perhaps all the more important that agreements which are said to forgo a creditor’s rights on a permanent basis should not be too benevolently construed’ (at [48]).

Note, however, that the Court of Appeal in MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2016] EWCA Civ 553 appeared to reject the view expressed by Arden LJ in Collier v Wright that the effect of promissory estoppel in a part-payment case is to extinguish the creditor’s strict right to payment of the balance. According to the Court of Appeal in the MWB case, which included Arden LJ, that right may be extinguished or may be merely suspended, depending on all the circumstances of the particular case. In particular, Kitchin LJ held that whether or not the effect of the estoppel would be to extinguish or merely suspend the creditor’s right to the balance of the debt would depend on all the circumstances of the case. Arden LJ agreed with this while seeing no inconsistency with her approach in Collier.

In summary, it seems that Arden LJ goes too far in her judgment in Collier v Wright. It may, in a particular case, be inequitable for a creditor to renege on his promise to accept part payment in satisfaction of the entire debt. But it is not clear why it would always be so.

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