Synopsis: This essay examines the rule knows as The Rule in Pinnel’s Case and how it impacted upon the doctrine of consideration. It also examines the problems arising from the Rule in Pinnel’s Case, the subsequent exceptions that were developed to circumvent the rule and in detail the most important exception of them; Promissory estoppel and how it solved the problem’s arising from the Rule. The distinction between traditional estoppel and this new type of estoppel ‘Promissory Estoppel’ are also examined and how Promissory estoppel has been accepted in Australia.
A contract is an agreement that the law will enforce, a promise (or set of promises) that the courts will enforce, a legally enforceable contract . Many problems arise that require the examination of whether a contract exists. To resolve this, a useful formula is Offer + Acceptance = Agreement, and Agreement + Intention + Consideration = Contract. Consideration is defined by Sir Frederick Pollock as ‘ an act or forbearance of the one party, or the promise thereof, which is the price for which the promise of the other is bought, and the promise thus given for value is enforceable’.
The process outlined forms the vast majority of contracts. An offer is made by party A to party B; that offer (or some negotiated variation of it) is accepted by party B. Therefore an agreement exists. All of those components are necessary for a contract to exist. The type of contract that will be examined in this essay is one that is made between a Creditor (the party that lends out the money to the Debtor) and a Debtor (the party who borrows the money from the Creditor) It will also be examined how The Rule in Pinnel’s Case was an unfair rule and how the problem arising from the Rule in Pinnel’s Case was solved.
The Rule in Pinnel’s Case states that payment of less than you owe will not totally discharge your debt obligation, this is because the creditor’s promise (not to sue for the balance) is a promise made without consideration (coming from the promisee / debtor) and is therefore not enforceable by the debtor. This rule was formulated in Pinnel’s case (1602) 77 ER 237:
There, the court took the view that the payment of a lesser sum on the due date in satisfaction of a greater amount was no satisfaction of the whole. The court did, however, say that ‘the gift of a horse, hawk or robe, etc in satisfaction is good. For it shall be intended that a horse, hawk, or robe, etc might be more beneficial to the plaintiff than the money in respect of some circumstance, or otherwise the plaintiff would not have accepted it in satisfaction of the debt’ The court also made it clear that the payment and acceptance of a lesser amount on a day prior to that specified in the original agreement would constitute valid consideration as the debtor’s early repayment is something more that required by the original agreement. (Vermeesch, RB & Lindgren, KE 2005)
The rule is also sometimes referred to as The Rule in Foakes vs. Beer (1884) 9 App Cas 605:
Beer had obtained judgement against Foakes for a debt and costs. Foakes agreed to settle the debt by paying 500 pounds down and 150 pounds per half- year until the total was paid; Beer agreed not to take further action on the judgement. Foakes eventually paid the amount of the debt and the costs and Beer then sought to recover interest on the judgement debt of 360 pounds that had accrued by statute. It was held that Beer could so recover because the payment of the smaller sum (i.e. debt and costs but not the interest) was not consideration for the promise to take no further action on the judgement. (Latimer, P, 2004)
The rule in Pinnel’s case has been criticised for years. It enabled the creditor to go back on his promise and still claim the balance. In Couldery vs. Bartrum (1881) 19 Ch D 394 at 399, for example, Jessel MR said:
… according to English common law, a creditor might accept anything in satisfaction of his debt except a less amount of money. He might take a horse, a canary… and that was accord and satisfactions but by a most extraordinary peculiarity of the English common law, he could not take 19 shillings and sixpence in the pound. (Vermeesch, RB & Lindgren, KE 2005)
The Rule in Pinnel’s case, although much criticised by judges, since it enable the creditor to go back on his promise to discharge the debt and still claim the balance. This unpopularity gave way to a number of exceptions to the rule being developed and were allowed as exceptions by the courts. These were as stated by Latimer, P (2004):
Where the creditor agrees to accept a smaller sum together with something different in kind (a chattel), the debt is discharged.
Payment of a smaller amount before the debt is due gives the debtor a legally enforceable discharge, provided it is at the creditor’s request.
Payment of a smaller sum at a different place or in different currency can operate as a legally enforceable discharge if at the request of the creditor.
Any other act that the debtor is not bound by the contract to perform may result in a legally enforceable discharge.
If there would be fraud on a third party.
The defence of promissory estoppel.
A deed of release can release a debtor.
Composition with creditors (Bankruptcy act), or settlement of a bona fide legal claim.
Traditional estoppel, applied only to representation of existing fact, and did not extend to representations of future intentions. (Parker, D & Box, G 2005) If party A said to party B, that “party C is my agent”, that would be a representation of existing fact, and party A would be estopped from going back on because of traditional estoppel. If party A said to party B, that “I am going to appoint party C as my agent” that would be a representation of future intention and would not be covered under the traditional form of estoppel. The traditional doctrine of estoppel, limited as it was to representations of existing fact, was extended to apply to representations (or promises) future intention by the comments of Denning J in Central London Property Trust Ltd v High Trees House Ltd (1947) KB 130.
Because of this extension of the doctrine to apply to promises of future intention or future conduct, it is called “promissory estoppel” It follows that, if Foakes v Beer came before the court for determination after 1947, Mrs. Beer would have been estopped from claiming the interest by the operation of the doctrine of promissory estoppel. Therefore, the comments of Denning J effectively overcame the rule in Pinnel’s case. Though it is essential to the operation of promissory estoppel that the promisee must act on the promise made to him or her by the other party. This is basic, since, if the promisee does not act upon the promise, no resulting harm can occur. (Parker, D & Box, G 2005)
The inconvenience caused by the Rule in Pinnel’s case, that part payment of a debt is not consideration for a promise to forgo residue thereof, prompted the development in England of the doctrine of promissory estoppel. Promissory estoppel prevents a person from going back upon a promise not to enforce strict (contractual) rights where the promisee has acted in reliance on that promise in such a way as to suffer some detriment if the promisor were permitted to go back on the promise (Latimer, P 2004) This occurred in Central London Property Trust Ltd v High Trees House Ltd (1947) KB 130:
In 1937 Central London Property Trust let a block of flats in London to High Trees House for 99 years at 2500 pounds p.a. When war broke out it became difficult to fill all the flats and Central London Property Trust agreed to reduce the rent to 1250 pounds in January 1940 for the duration of the war. The reduced rent was paid until 1945 but by the beginning of that year the building was fully let. Central London Property Trust successfully claimed rent at the full, originally agreed rate for the last two quarters of 1945. Denning J went on to say, however, that had Central London Property Trust sued for the full rent between 1940 and 1945, they would have failed.
They would have been estopped from asserting their strict legal right to full payment by their promise to accept the lesser sum. He commented that where parties enter into an arrangement with the intention to be legally bound and in accordance with such arrangement one part makes a promise to the other which he knows will be acted on, and which is in fact acted on, the court will treat the promise as binding. It will not allow him to break it even though the promise may not be supported by consideration in the strict sense (Miles, C & Dowler, W 2005)
Though Denning J’s comments on estoppel in Central London Property Trust v High Trees House Ltd were clearly obiter dictum, they were important because other judges saw these comments of Denning J as providing a much needed solution to the problem of the Rule in Pinnel’s Case. If a creditor is estopped from resiling from promises of future intention, he cannot promise that he will not sue the debtor for the balance of a debt, and later change his mind, since this new, promissory estoppel will prevent him from doing so. For this reason, promissory estoppel will prevent him from doing so. For this reason, promissory estoppel found acceptance among the judiciary and the concept was widely applied by the courts, despite its “obiter dicta” status. (Parker, D & Box, G 2005)
The doctrine of promissory estoppel received the approval of the High court of Australia in a pre-existing contractual statement. For example in Legione v Hateley (1983) 152 CLR 406:
A contract for the sale of land between the parties contained a clause requiring completion by a certain date. The purchaser was in financial difficulties and requested an extension of time. A secretary employed by the seller’s solicitor’s said that she thought that the extension of time would be granted but that she would have to get instructions. Soon afterwards the sellers terminated the contract because the purchaser had not completed it by the due date. That purchaser disputed the rescission, arguing that the sellers were prevented on relying on the time clause.
The purchaser sought specific performance of the contract and argued that the sellers were estopped from going back on the statement made by the secretary. The high court held that promissory estoppel was a part of Australian law and laid down the guidelines for its use. For promissory estoppel to apply, two rules had to be followed: 1. There must be a clear, unequivocal, precise and unambiguous promise. 2. As a consequence of acting on that promise the other party will be placed in a position of material disadvantage if the person making the promise departs from it.
The court decided on the facts made by the statement made by the solicitor’s secretary was not an unambiguous promise as required by the first rule. There was no positive promise that the date of settlement would be extended. Therefore the statement by the secretary did not raise an estoppel on favour of the plaintiff.
The high court has examined and extended the principles of promissory estoppel. (Miles, C & Dowler, W 2005) The later case of Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 raised several significant points regarding promissory estoppel in Australia:
– Estoppel can now be used in circumstances where there is no pre- existing legal relationship between the parties. Promises made in a situation where there may not be a contract can still be enforced in equity.
– Silence will support estoppel if it would be inequitable thereafter to assert a legal relationship different from the one which, to the knowledge of the silent party, the other party assumed or expected.
– Estoppel can also be used as a sword, i.e. To commence a legal action and not merely to defend one (a shield) (Miles, C & Dowler, W 2005)
The Rule in Pinnel’s case was an unpopular rule that stated that payment of less than is owed will not totally discharge one’s obligation. The rule, although correct, was much criticised by judges, and therefore a number of exceptions to the rule were developed and were allowed as exemptions by the courts.
The most important exception that was developed was of promissory estoppel that made one accountable for their promises as well as for factual statements as it expanded traditional estoppel to apply to representations of future intention as well as factual statements. The doctrine of promissory estoppel has also been accepted as valid in the Australian legal system as shown in the examples of cases before the High Court of Australia. The doctrine of promissory estoppel has effectively solved the problems arising from the Rule in Pinnel’s Case.
Graw, S, 2005, An introduction to the law of contract, 5th edn, Thomson Lawbook Co, Pyrmont, NSW.
Latimer, P, 2004, Australian business law, 23rd edn, CCH Australia, North Ryde, NSW.
Miles, C & Dowler, W 2005, A guide to business law, 16th edn, Thomson Lawbook Co, Pyrmont, NSW
Parker, D & Box, G 2005, Business Law for Business Students, Thomson Lawbook Co, Pyrmont, NSW.
Vermeesch, RB & Lindgren, KE 2005, Business law of Australia, 11th edn, LexisNexis Butterworths, NSW.