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Estoppel by convention: a shield or a sword?

Earlier this year, Akenhead J handed down judgment in Mears Ltd v Shoreline Housing Partnership Ltd, the last in a trilogy of cases of the same name dealing with, among other things, the nature and scope of estoppel by convention.

The case makes essential reading for the construction practitioner, not least because of its discussion of the familiar, but thorny, principle that an estoppel by convention cannot found an independent cause of action. In other words, it is to be used “as a shield and not as a sword”.

Mears v Shoreline

Shoreline, a social landlord, invited Mears, a contractor, to tender for on-going maintenance and repair works to Shoreline’s substantial property portfolio. During the course of negotiations, the parties agreed that Mears would be paid in accordance with prices set out in a schedule of rates, notwithstanding that the draft contract (an NEC3 Term Service Contract conditions incorporating Option C) contained a different, less generous, payment mechanism. Mears carried out work and was paid in accordance with the schedule of rates for six months before the contract, which had retrospective effect, was signed.

Shoreline subsequently sought to rely on the contractual payment mechanism. It alleged that Mears had been overpaid for the work done in the first six months, and made a deduction of some £300,000 from its payments to Mears under the contract. Mears commenced proceedings seeking payment of the sum deducted. There followed Shoreline’s unsuccessful application for summary judgment, alternatively strike out, which was, in turn, unsuccessfully appealed.

Decision and discussion

After reviewing the authorities, Akenhead J concluded (at paragraph 49) that:

  • An estoppel by convention can arise where “the parties to a contract act on an assumed state of facts or law”.
  • The assumption must be shared, or at least “made by one party and acquiesced in by the other”, and must be communicated between the parties in question.
  • The party claiming the benefit of the convention must have relied on the common assumption, albeit that almost invariably both parties will have relied or acted on it or been influenced by it.
  • A key element of estoppel by convention is “unconscionability or unjustness on the part of the person said to be estopped to assert the true legal or factual position”.
  • Estoppel by convention is to be used as a shield and not as a sword.
  • The estoppel can come to end and will not apply to future dealings, once the common assumption is revealed to be erroneous.

Applying these principles, Akenhead J held that Shoreline was estopped from making and retaining the deduction of £300,000, and gave judgment for Mears. In so deciding, he made a number of observations that are worthy of note.

A shield not a sword

Akenhead J held that, while an estoppel by convention cannot be used as a sword (rather than as a shield), analysis is required to determine whether it is being used as a sword. In particular:

  • No presumption is raised by the fact that the party claiming the estoppel is the claimant rather than the defendant, or vice versa.
  • A party cannot found a cause of action on an estoppel, but:

“…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”.

Interestingly, Akenhead J rejected Shoreline’s submission that, by claiming the sum deducted, Mears was effectively seeking to subvert the doctrine of consideration and use estoppel as a sword not a shield. His reasoning on the point was as follows:

“The reality is that the estoppel is properly on the facts being relied upon to show that the deduction of some £300,000 by Shoreline was not conscionable or just by reason of the convention between the parties. If that is right, Shoreline is estopped from asserting that it was entitled to make the deduction and, once it is so estopped, the amount deducted should be repaid because there is no remaining good ground to justify its retention.”

At first blush, this explanation appears unconvincing because it proceeds on the (incorrect) footing that it is for Shoreline to justify its retention of the deducted sums, rather than for Mears to make out its claim to them. No cause of action entitling Mears to payment of the deducted sum (other than estoppel) was identified. The reference to Mears being “repaid” is also surprising, as Mears did not make any payment to Shoreline that was capable of being repaid.

However, the principled basis for Akenhead J’s decision may be that Mears’ claim was treated as being for sums due pursuant to the contract in respect of work done after the first six months, and that Shoreline, by way of defence to the claim, sought to set-off the sums it had overpaid for work done during the first six months but was estopped from doing so. (This appears to have been Gloster LJ’s view on the appeal of Shoreline’s strike out application.)

Detrimental reliance

Akenhead J also gave useful guidance as to the extent to which “detrimental reliance” is required in order to establish an estoppel by convention:

“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.”

He concluded:

“In my view, it is enough that the party claiming benefit of the convention has been materially influenced by the convention.”

On the facts, Mears clearly acted to its detriment by carrying out six months’ worth of work in reliance on the parties’ agreement to use the prices set out in the schedule of rates. However, the limits of the (potentially very expansive) “materially influenced” formulation that Akenhead J articulated will no doubt be tested by hopeful claimants in future cases.

Trust and partnership

In addition to its claims based on estoppel, Mears sought to rely on a separate cause of action arising out of the trust and partnering language used in the NEC3 conditions. It argued that there was an implied term that Shoreline would not take advantage of Mears’ failure to adhere to the contractual payment mechanism without warning.

Unsurprisingly, Akenhead J rejected this argument:

“I am… not satisfied that there would be any such implied term or that the obligation to act in a spirit of mutual trust and cooperation or even in a ‘partnering way’ would prevent either party from relying on the express terms of the contract freely entered into by either party.”

This confirms that, whatever the effect of the trust and partnership language used in NEC3 (and, by extension, other contracts) may be, it will not override or displace the effect of other express terms the parties agree.

Conclusion

Overall, while Mears v Shoreline provides useful general guidance on the nature and scope of estoppel by convention, the decision also introduces new scope for argument in relation to both the:

  • Operation and effect of the rule that an estoppel is to be used as a shield and not a sword.
  • Extent to which it is necessary to show reliance on the parties’ common assumption in order to establish an estoppel by convention.
Keating Chambers Harry Smith

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