Introduction:
The concept of “equity” was developed close to a thousand years ago in the English system of law as England created two separate sets of courts: the common law courts, bound by precedent, and the courts of equity, in which the King’s concept of "justice" and "right" would be utilized to achieve appropriate results. In reality, the courts of equity were tools of a monarchy seeking to impose its will without relying on the centuries-old precedents that often hindered its goals.
But this ancient historical ploy resulted in a two-court system which still echoes today in the United States system of law. Certain legal actions are considered “equitable” actions where the criteria are "what is fair and right" rather than other criteria. Probate courts are courts of equity, and so are courts in which injunctions are sought. While differing in various jurisdictions, the essential core of equity is to do what is “equitable” or “right,” regardless of precedent and the requirements often seen in common law.
Certain aspects of the equitable concept apply to contractual disputes. A party may be “estopped,” that is prohibited from taking a position that the court would consider unjust or unfair. This article shall discuss the concept of equitable estoppel in contract causes of action in the United States.
The Basic Law:
Equitable estoppel is a doctrine in contract law that prevents parties from denying the truth of a statement or situation they misled another party to believe. It provides that parties are held accountable for representations they made and actions they took that reasonably allowed the other side to believe were valid. In the context of contractual obligations, equitable estoppel promotes justice and fairness by preventing misleading representations or actions.
The party seeking to rely on equitable estoppel has the burden of proving reasonable reliance on a clear and unequivocal representation, leading to a detrimental change in their position. By understanding the elements and implications of equitable estoppel, parties can better navigate contractual disputes and uncover the intricacies of this doctrine. All the criteria below must be met.
Representation of Facts
To establish a claim of equitable estoppel, a party must demonstrate that the opposing party made a representation of facts that was known to be false or made with reckless disregard for the truth. Fact statements, whether express or implied, must be proven to have been made by the opposing party. Furthermore, these fact statements must be shown to be misleading declarations, intentionally or recklessly made to induce reliance by the claimant.
The representation must be clear, unequivocal, and unambiguous, leaving no room for doubt or interpretation. The party alleging equitable estoppel must also demonstrate that the opposing party had knowledge of the falsity or uncertainty of the facts represented. The representation must be more than a mere expression of opinion or a statement of future intention; it must be a statement of existing fact, which the opposing party knew to be false or made with reckless disregard for the truth.
Reliance on Assurance
Upon receiving the assurance, the claimant must have reasonably relied on the representation of facts, acting in good faith and to their detriment. This reliance is a vital element of equitable estoppel, as it demonstrates the claimant's trust in the assurance and their subsequent actions based on that trust. The assurance principle requires that the party providing the assurance must have intended for the claimant to rely on it and that the claimant's reliance was reasonable in the circumstances.
The assurance doctrine further clarifies that the claimant's reliance must be demonstrated through their actions, which must be more than mere acquiescence. The claimant's reliance must be substantial and significant, such that they have altered their position in a material way.
This can include incurring expenses, entering into contracts, or making any important decisions based on the assurance. The court will assess the reasonableness of the claimant's reliance, taking into account the circumstances of the case and the assurance provided.
Detrimental Change Position
One aspect of equitable estoppel is that the claimant must have undergone a detrimental change in their position as a direct result of their reliance on the assurance. This detrimental change can take various forms, such as the incurrence of expenditure, the surrender of a valuable right, or the alteration of their business arrangements. The key consideration is that the claimant must have acted to their detriment in some manner, thereby suffering a tangible loss or disadvantage.
Promissory Estoppel as Opposed to Equitable Estoppel:
What distinguishes equitable estoppel from promissory estoppel is the nature of the assurance or promise that gives rise to the estoppel, with equitable estoppel involving a representation of fact and promissory estoppel a promise or commitment. Equitable estoppel arises when a party makes a representation of fact, that the other party relies on to their detriment. In contrast, promissory estoppel involves a promise or commitment that induces reliance. The key difference lies in the type of assurance given, with equitable estoppel focusing on statements of fact and promissory estoppel focusing on promises or commitments. This distinction has significant implications for the application of estoppel in contractual disputes, as it affects the type of relief available, and the burden of proof required.
The principle of promissory estoppel is rooted in the notion that a promise made with the intention of inducing reliance is enforceable, even in the absence of consideration, as a means of preventing injustice. This concept is distinct from equitable estoppel, which focuses on the prevention of fraud and deceit. Promissory estoppel, on the other hand, is concerned with the enforcement of promises that have been made with the intention of inducing reliance.
The criterion for Promissory Estoppel is as follows:
The promise must be clear and unambiguous.
The promisor must have intended to induce reliance.
The promisee must have reasonably relied on the promise.
Injustice would result if the promise were not enforced.
The doctrine of promissory estoppel is grounded in the principle that reliance implies obligation, thereby distinguishing it from equitable estoppel, which is primarily concerned with preventing fraud and deceit. This fundamental difference lies in the nature of the obligation arising from the promise. In promissory estoppel, the promisor is held to a moral obligation to fulfill their promise, as the promisee has reasonably relied on it to their detriment. This moral obligation gives rise to a legal duty, which the court will enforce to prevent injustice.
In contrast, equitable estoppel is primarily concerned with preventing fraud and deceit, rather than enforcing a moral obligation. The focus is on the promisor's conduct, which is deemed unconscionable, rather than the promisee's reliance.
The obligation arising from equitable estoppel is consequently more akin to a legal duty to act in good faith, rather than a moral obligation to fulfill a promise. This distinction highlights the unique characteristics of promissory estoppel, which is centered on the principle of reliance implies obligation, giving rise to a legal duty to fulfill the promise.
Equitable estoppel serves as a shield, protecting a party who has relied on another's misrepresentation of facts. On the other hand, promissory estoppel, as explained by the Cornell Law School's Legal Information Institute, is akin to a sword, allowing a party to enforce a promise that led to their detrimental reliance, even in the absence of a formal contract.
Examples:
Assume that I advised you that a job awaited you in London, but you would have to move there within a month. You advised me that it would require you to sell your home without maximizing its value since it would be a hurried sale. I tell you the job is waiting for you and would not be if you did not move as quickly as I said.
You move, selling your house tens of thousands below market value, and upon your arrival in London, I advise you that a better candidate had just arrived the previous day so regrettably the job would not be available.
You would have an excellent claim for receiving damages due to my failure to comply with the offer. While I did not receive any consideration from you, you reasonably relied on my promise of the job, I knew or should have known you would, and I knew or should have known that the job might go to someone else.
But let us assume that I told you that we were still taking applications from other applicants and that while moving fast was the only way you could have the job, it just might not be there once you arrived. Your claim would be a difficult one to make since I did not make the existence of the job certain in my discussions with you.
Assume that I knew a home I was selling you had termites but did not disclose that to you and made sure there was no evidence of termites by cleaning up the attic. Then we signed a contract in which I inserted the clause, “Buyer purchases the home AS IS with no warranty as to its condition” and we signed the contract. Before you sign you tell me that if I knew of any problems, I should tell you. I shrug and say houses can have problems but none that I noticed are that serious. You purchase the house and face fifty thousand dollars in termite damages. You would have a good case for equitable estoppel in seeking damages against me. (California also has disclosure statutes as to real estate sales which are ignored here.)
But assume when you ask if there are termites, I say there could be, it’s up to you to check since I am selling AS IS and I make no warranty as to termites. You go ahead and close anyway. It is likely your claim would fail since I did not misstate the facts.
Conclusion:
While estoppel is available to protect victims of misrepresentation, it is always better to draft an agreement that provides contractual protections in the body of the agreement. In the examples above, the victim should have insisted upon a writing stating that a job would be given to the potential employee if he arrived in London by X date or that, in the second example, there were no termites on the property. Placing those protections in the contract eliminates the danger of relying on a judge to conclude that you were a victim: it provides protections in the contract itself that give you safety regardless of the vagaries of what the judge considers fair.
That said, the role of estoppel is to do justice, and that doctrine should give pause to any persons who would otherwise try to take advantage of the trust. It allows a judge to do “what is right and fair” and is one of those holdovers from 12th-century England that makes the American system of law that much better.