Privy Council affirms and clarifies doctrine of contractual estoppel.
Almost every legal instrument which has had the fortune (or misfortune) of passing through the hands of lawyers will usually contain statements of fact or intention, usually but not necessarily found in the preliminary recitals, often preceded by the legal mantra “whereas”. They may be concise and succinct (“A is desirous of granting a loan to B on the terms contained herein”) or, in the case of complex commercial agreements, tend to be lengthy and tedious.
Because the law subscribes to the theory of freedom of contract, and seeks to uphold rather than rewrite or destroy bargains freely entered into between contracting parties, there is in principle no limit to what parties to a contract can agree upon and positively assert as a statement of fact or intention in a legal document. This is so even both parties know that such statement of fact or intention is untrue. For example, in sale and purchase transactions where a deposit or advance payment is required to be made upon the execution of the agreement, it is not unusual for the agreement to contain a statement that such payment “is hereby received and acknowledged”, even though the purchaser has not in fact made such payment. Another example would be complex financial instruments involving investments in derivatives or collateral debt obligations. The investor may be completely clueless about the nature and attributes of such securities, yet he must sign a declaration stating that he has entered into such agreements based on his own understanding and assumption of the risks involved and has not relied on any representation made by the bank or financial institution involved.
English law has in recent years recognised what is known as a “contractual estoppel”. Where the parties to a contract have agreed that a certain state of affairs form the basis for, or background to the transaction between them, the contract itself operates to prevent the parties from denying or disputing the existence of the facts and matters as stated in the contract. This development under English law has been noted in the leading text Sinnadurai, Law of Contract (4th Edition) at pages 1335 to 1337. It is a significant development because, as the English experience has demonstrated, a party may even be estopped by the contract from asserting that there has been any misrepresentation or misstatement for which he may claim for financial loss. The sorry investor in the abovementioned example who is illiterate vis-a-vis derivatives or collateral debt obligations will (no doubt unhappily) be deemed to be an expert in such securities by reason of what he has agreed to.
This recent trend in English law appears to have been approved by the Privy Council in the recent decision of Prime Sight Ltd v Lavarello (Gibraltar) [2013] UKPC 22 (09 July 2013), where the Privy Council has affirmed and provided valuable guidance on the doctrine of contractual estoppel.
In that case, a deed of assignment in relation to an apartment was entered into between a lawyer and the appellant for a consideration of £499,950, which according to Clause 1 of the deed, “receipt and payment of which the [appellant] hereby acknowledges”. Both the lawyer and the appellant knew that the said sum of £499,950 was in fact never paid. The lawyer subsequently became a bankrupt, and the respondent trustee sued the appellant for the recovery of £499,950.
The Privy Council held that the respondent was estopped by the contract from recovering the £499,950 from the appellant. Lord Toulson observed at para [47]:-
Parties are ordinarily free to contract on whatever terms they choose and the court’s role is to enforce them. There are exceptions and qualifications [such as fraud, illegality, mistake and misrepresentation], but these too are part of the general law of contract. … Similarly, just as a court may refuse in some circumstances to enforce a contract on grounds of public policy (a topic closely related to illegality), the same will apply to a contractual convention. … In short, contractual estoppels are subject to the same limits as other contractual provisions, but there is nothing inherently contrary to public policy in parties agreeing to contract on the basis that certain facts are to be treated as established for the purposes of their transaction, although they know the facts to be otherwise.
It should be noted however that in Ganam Rajamany v Somoo Sinnah [1984] 2 MLJ 290, the Federal Court held that the although the agreement of sale therein contained an acknowledgment of the receipt of the deposit, it was open to the vendor to prove that no consideration had actually been paid
Be that as it may, the decision of the Privy Council serves as a timely reminder that the parties to an agreement must, with or without the assistance of their legal advisers, carefully assess the risks involved in making statements of fact or intention, whether contained in the recitals or otherwise, which the parties know to be untrue, or have reason to believe or suspect will become untrue. Compromises made by parties who are overly eager to seal the deal and pop the bubbly may come back to haunt them. Truth may be stranger than fiction, but the doctrine of contractual estoppel means that in some cases, the truth is exactly what the parties say it is.