Contractual Estoppel as a tool for legal certainty in commercial relations
21 February, 2025
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The shipping industry encompasses a diverse range of legal relationships governed by various types of contracts and agreements, from common contracts of carriage to ship repair agreements and beyond. Naturally, when entering into such contracts, parties may encounter — and often do —misunderstandings and disputes that ultimately escalate into arbitration or court proceedings. In many cases, disputes are straightforward, and the liable party can be identified without difficulty. However, there are instances where the parties appear to have reached an agreement on contractual terms, yet each interprets them differently, leaving the question of who is right and who is at fault open to debate.
In such situations, if your contract is governed by English law, it is worth considering the concept of Contractual Estoppel, which may play a crucial role in determining the legal position of the parties.
Estoppel in English law
Thus, there is a doctrine in English law called Estoppel, the term of which means that the party which is estopped “is precluded from asserting that a particular fact or set of facts or set of affairs is so” (Smithkline Beecham plc v Apotex Europe Ltd [2006] EWCA Civ 658.) It should be noted that this legal tool is quite broad and has a large classification.
Estoppel has certain varieties, many of which have common general requirements for their operation, these are that: (1) there was a clear and unequivocal communication from one party to another as to a particular fact or state of affairs, (2) which was made with the intention that the other party rely on that fact or state of affairs and (3) that the other party did in fact rely on that communication to its detriment.
This article will focus specifically on Contractual Estoppel, which is most encountered in shipping practice and is a relatively new addition to the “family” of estoppels in English law.
Contractual Estoppel: Overview and Cases
Contractual Estoppel provides that if the parties have reached an agreement on a certain issue and concluded a relevant Agreement, none of them can subsequently deny the existence of the facts and issues which they have already agreed, at least if it concerns those aspects of their relationship that the agreement was aimed at. That is, the Agreement itself gives rise to Estoppel.
While all other types of Estoppels have, for the most part, the same conditions and criteria, Contractual Estoppel focuses on somewhat different requirements and features. Thus, one of the important points is that in order to establish the fact of the existence of Contractual Estoppel, it is necessary to prove that the interpretation of the provisions of the Contract/Agreement allows us to conclude that a certain disputed provision of such Contract/Agreement was regarded by the parties as “correct”. As a general rule, English judges note that for the emergence of Contractual Estoppel, it is simply necessary to have the Agreement itself, the terms and conditions of which the parties independently and voluntarily accepted and assumed. That is, by concluding such an Agreement or signing the Protocol of Delivery and Acceptance, etc., the parties may bind themselves even with such obligations for which they had no real intention, while mistakenly believing that all the provisions and conditions of the existing Agreement/Act are correct.
To make it a little clearer, we will give the following example.
In this case, a dispute arose regarding the final calculation of ship repair work carried out by the Contractor after discussion with the Customer. The Customer claimed the refund of some funds allegedly prepaid for ship repair, on the basis that the Contractor incorrectly presented the final calculations after contractual negotiations. However, shortly before the dispute arose, the Customer, without any reservations or objections, duly signed the Protocol of Acceptance of the Work Performed and paid the invoices. The Protocol, in turn, stipulated the following: “…the Contractor delivers, and the Customer accepts the performed works on repair…whereas the total cost of the Vessel’s repair comes to …and is due to be paid by the Customer…”.
Thus, the Customer literally “accepted” the work performed in the form in which it was performed and “agreed” to the correctness of the indicated amounts, thereby waiving its right to object or challenge these amounts in the future referring to the doctrine of contractual estoppel.
In a similar leading case, Peekay Intermark Ltd v Australia and New Zealand Banking Group Ltd [2006] EWCA Civ 386., but where the dispute arose in relation to an investment, the Respondent (by analogy to the Contractor in the case above) argued that because the contract included a stipulation to the effect that the Claimant had understood the nature and risks of the investment, the Claimant was estopped seeking to argue that it entered into the contract because it did not understand the nature and risks of the investment. As a result, the court rejected the Claimant’s claim on the basis that the Claimant did not rely on any misrepresentation by the Respondent but, instead, on its own assumption that the formal terms of the contract would correspond with its understanding of the nature of the contract.
Requirements & Limitations
Contractual Estoppel has three key implications:
1. No Requirement for Unconscionability or Reliance
Since it is based on an express agreement within a contract, there is no need to prove that it would be unconscionable for a party to depart from an assumed state of affairs.
2. Focus on Contractual Agreement, Not Fairness
The key issue is whether the contract objectively shows that the parties agreed to treat a statement as true, regardless of its actual truth or whether one party relied on it. The courts recognize that parties can contractually bind themselves to a fictional state of affairs.
3. Subject to Contractual Limitations
Since contractual estoppel is a product of the parties’ agreement, it is subject to the same limitations as the contract itself. If the contract can be set aside or rectified due to mistake, misrepresentation, or fraud, the estoppel may also be invalidated.
In essence, contractual estoppel enforces agreed-upon contractual terms without requiring proof of reliance, but it remains subject to the enforceability of the underlying contract.
Conclusion
Contractual estoppel is an effective legal mechanism that ensures the enforcement of contractual obligations and protects parties from attempts to challenge agreed terms. Its significance is particularly evident in the shipping industry, where parties often engage in complex contractual arrangements requiring clear and unambiguous interpretation.
Unlike traditional estoppel doctrines, contractual estoppel does not require proof of unconscionability or actual reliance on a representation made by the other party. Instead, it is based solely on the parties’ express agreement as recorded in the contract. However, this mechanism is not absolute: if the contract itself is set aside due to fraud, mistake, or misrepresentation, the estoppel will also cease to have effect.
Thus, contractual estoppel serves as a crucial tool for legal certainty in commercial relationships. However, its application requires a careful examination of both the contractual language and the circumstances surrounding its formation.
