promissory estoppel
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This article has been written by Priyanka Dhage.

“The Rise of the Doctrine of Equity and Estoppel”

For a law to be administered in such a way so as to ensure justice, it is very important for that law to be inclusive and not exclusive. Inclusivity comes into picture when the law seeks to protect the underlying rights of the individual and not exclude him on the basis of rigid interpretation of law. One such legal doctrine that revolves around this concept is the principle of “equity”. Derived from the Roman term ‘aequitas’ – equity deals with determining what is right and fair and levels down arbitrary preferences to ensure equal justice. 

English law was governed by the ‘Commune Ley’ (Common law) before the introduction of the principle of equity. Blackstone defined Common Law as the “municipal law of England or the rule of civil conduct prescribed to the inhabitants of the kingdom.”[1] The King’s Chancellors held great power to administer law and prevent injustices in the courts of Chancery but this application of common law was gradually seeming to be applied unfairly and rigidly. It suffered through certain deficiencies while providing remedies which consequently paved way for decisions being given in good conscience in a mitigating fashion and hence, leading to the rise of the Principles of Equity. Though equity faced conflicts in its earlier stages in the English courts, it eventually found a major role to play in the Law of Contracts. It finds a place in concepts such as unjust enrichment, restitution and promissory estoppel.

Promissory estoppel has widely been considered as one of the most remarkable developments in the law of contracts. Promissory estoppel is also called as the concept that ensures “enforcement of unbar gained-for promises that induce reliance”[2]. Promises and agreements under the law of contracts have largely been governed based on the presence of considerations given for them but, what is to be noticed is that there are certain moral rules too that govern agreements and promises. Under this doctrine, a promise becomes irrevocable when the promisee acts on it which leads to a change in his position irreversibly. The rationality behind this doctrine is that nobody should suffer to their detriment for acting on a promise made in good faith and receiving no consideration for it. It seeks to enable recovery of an injured party due to detrimental reliance on a promise.             

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The Emergence of Promissory Estoppel in English law

 In order to trace the evolution of the Doctrine of Promissory Estoppel, one must look at some landmark English decisions which shaped its existence from being a doctrine of ‘raising equity’ to that of ‘estoppel’. Its known origin  dates back to 1877 in the case of Hughes v. Metropolitan Railway Company[3]  where the lessor of the premises (Thomas Hughes) gave six months to the lessee to perform certain repair work on the premises but the lessor began certain sale negotiations with the lessee within this period which did not work out and broke off. On completion of the six months’ time period, the lessor said that the lease was forfeited and tried to evict the company. The House of Lords in this case said that the lessees were made to falsely believe that the contract was intact due to the negotiations being made and hence they cannot back down from their agreement saying it has forfeited. Lord Cairns delivered the leading judgement where he spoke about this equitable doctrine of Promissory Estoppel and said that – “if parties who have entered into definite and distinct terms involving certain legal results—certain penalties or legal forfeiture—afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.”[4]

This case remained unremarkable and the principle was used infrequently applied until it was ‘unearthed’ by the remarkable jurist Lord Denning, in the case of Central London Property Trust Ltd. v. High Trees House[5] where it was acknowledged and restated by him in 1946. High Trees House Ltd. leased a block of flats from Central London Property Trust Ltd. and the agreed rent was 2,500 pounds per year. Due to adverse war conditions in 1940, the rent amount was halved following a fall in demand and this half amount was paid until 1945. In 1945, when the demand rose again, the tenants asked for the originally agreed amount thus backing off from their promise. Here, the question that arose was whether such a promise that was intended to create a legal obligation be avoided after a change in the promise’s initial position? Denning J in his landmark judgement said estoppel would apply when- “a promise was made which was intended to create legal relations and which, to the knowledge of the person making the promise, was going to be acted on by the person to whom it was made and which was in fact so acted on. A party would not be allowed in equity to go back on such a promise.”[6] This judgement of Denning J by its obiter dictum had become the new established doctrine of ‘promissory or equitable estoppel’ which looked at the law of contracts from the viewpoint of equity and justice giving it a new vision altogether.

Evolution of Promissory Estoppel in India with respect to State Liability

Today, in a democracy as large as India, any promise that the government makes to its citizens, especially of contractual nature matters a lot in the eyes of law. The Indian judiciary has done a gradual but overwhelming job when it comes to making the state accountable towards its promise and abide by it in matters pertaining to Contracts. There are certain essential criterions which must first be fulfilled for a promise to be made binding on the government such as- 

  • The promise was intended to create legal obligations,
  • The promise was made by the State within the ambit of law, and
  • The contracting party has done or omitted from doing an act in furtherance of the promise.

Since the essence of the doctrine of Promissory Estoppel lies in ‘equity’, equity must be delivered irrespective of the party being a private individual or government body and this notion has been recognized by the Indian courts to a great extent. But, even though this has been recognised by the Indian courts, there is little difficulty in determining the exact limitations and scope of the application of this doctrine which can be noticed by looking at a number of cases in the past century.

One of the earliest citing of this doctrine in the Indian law would be in the case of Ganges Manufacturing Co. v. Sourjmull[7] where in it was held by the Calcutta High court that estoppel does not only limit to the law of evidence but a party can also be estopped from doing certain acts or relying on some arguments. ‘Promissory Estoppel’ as a  term was first used by the Supreme court in the case of Collector of Bombay v. Bombay Municipal Corporation[8]

When it came to the post-constitution period, it was the case of  Union of India v. Anglo Afghan Agencies[9] which applied the doctrine of Promissory Estoppel against the government. In the aforementioned case, certain concessions were announced by the government for import of raw materials in order to encourage the production and export of woollen garments from India to Afghanistan. The government later said that only partial concessions would be allowed and not full concessions to which the court said that the government was estopped to its promise and cannot take it back arbitrarily. According to Justice Bhagwati in the Anglo-Afghan case, “the doctrine of promissory estoppel found its most eloquent exposition[10]. Although these developments took place with respect to application of this doctrine against the state, there was a lack of uniformity in the rulings rendered by the Supreme Court as well as the High Courts. Applying the doctrine against the Government authorities when an individual or private party had suffered to their detriment due to a promise made by the authorities remained a matter of concern in the Judiciary. For instance, in the case of State of Kerala v. Gwalior Rayon Silk Mfg. (Wvg.[11]) the Supreme Court did not find it valid to apply the equitable doctrine against the state, the rationale being that estoppel cannot be exercised against the government’s power to legislate. Also in the case of C. Sankaranarayanan v. State of Kerala[12], where the contention was with respect to the government’s power to make rules regarding the services of teachers in aided schools, the court did not allow estoppel stating that constitutional power(here under article 309) cannot be curtailed by any agreement whatsoever. This further gives us an insight into how estoppel wasn’t applied when constitutional powers of the government could be jeopardized.

In 1979  the case of M.P. Sugar Mills Ltd. v. State of Uttar Pradesh[13] came out as a trendsetting case in the doctrine of Promissory Estoppel. It was called as the “sheet anchor of the doctrine of promissory estoppel[14]. In this case, the Chief Secretary of the government had given a categorical affirmation to new industrial units for total exemption of sales tax for 3 years for setting themselves up. the appellant subsequently set up a hydrogenation unit for their sugar mills by taking a huge loan. The government then changed their policy saying that the exemption would be rendered at different rates in the period of 3 years. The contention raised by the appellant was they incurred a huge loan on the affirmation given by the government thus changing their position in furtherance of the governments promise. The Supreme court in its ground breaking and justifiable decision held that the government was liable to exempt them from tax for 3 years thus giving the doctrine of estoppel a whole new direction.    It was observed by Justice Bhagwati that there should be no distinction between a governmental and sovereign function and also business or trading activity when it comes to the application of the doctrine of promissory estoppel. 

Post this judgement, the establishment of this new doctrine was welcomed widely in the judiciary in various cases. For example, in Bhim Singh v. State of Haryana[15] the government had offered certain incentives to their employees for joining a new department to which they later denied. The Supreme Court held that the employees were entitled to the incentives if they had acted on the reliance of the government.                                    

“Analysing the other side of the coin: Executive necessity”

In cases of contracts entered into with government bodies, one very important aspect that the courts have repeatedly laid emphasis on in their judgements is the doctrine of ‘executive necessity’. One of the drawbacks that hampers the utility of the doctrine of Promissory Estoppel is that it cannot operate against the state’s exercise of its executive functions. A very conflicting decision which contradicts that of the M.P Sugar Mills case was given in Shri Bakul Oil Industries v State of Gujarat[16] which had similar facts. In this case the Gujarat government partially exempted certain categories of sales and purchases from the sales or purchase taxes by issuing a notice under the Gujarat Sales Tax Act, 1969 for furtherance of industries in rural areas. The appellants set up a plant for crushing of groundnut seeds for manufacturing oil, later claiming exemption as they satisfied all the criterions required. The government instead of granting the exemption rejected their application and made amends to the notification issues earlier saying that this industry was already well established in the respective area. The doctrine of promissory estoppel was not allowed in this case and they weren’t stopped from amending the notice previously issued. Here we see a clear divergence in the opinions in both the similar cases. The Bakul case shows how sudden policy changes can act to the detriment of parties who acted in furtherance of such policies earlier. The decision issued in the M.P. Sugar Mills case can be seen to be closer to the principles of equity and thus complying with it.  The Bakul case shows how executive necessity is being used as a defence against the application of the doctrine of promissory estoppel rousingly. It is well agreed that the government is justified in exercising its powers but what should also be taken into consideration is the kind of effect any such policy change or exercise brings in on the parties who have acted on such promises.           

However, in the case of Union of India vs. Godfrey Phillips India Limited[17] a bench of three judges along with Justice Bhagwati delivered a judgment which held the government liable under promissory estoppel and reiterated the judgement given in M.P Sugar mills case and established it as the correct law under the doctrine of promissory estoppel thus overruling the previous conflicting judgements delivered.

 Though the Supreme Court has played a significant role in the application of this doctrine, there is a sort of restrictiveness that is evident in its overall application. But looking at the bright side, the Indian judiciary can be appreciated for having given certain wonderful judgements (for example- M.P. Sugar Mills Ltd. v. State of Uttar Pradesh) which have clearly held the government liable for its breach of promises thus establishing a sense of justice and fair play at large leading to protection of the citizens by the law in the coming years.

Endnotes

[1]  Blackstone: Commentaries on English Law, 4th edition, Eastern Book Company.

[2] Jay. M. Feinman, “Promissory Estoppel and Judicial Method”, 97 Harv. L. Rev. 678

[3]   (1877) 2 A.C. 439.

[4] Supra note 3.

[5] Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130.

[6] Supra note 6

[7] (1880) I.L.R. 5 Cal.670.

[8] (1952) S.C.R. 43.

[9] A.I.R 1968 S.C 718.

[10] M.P. Sugar Mills Ltd. V. State of Uttar Pradesh, 1979 SCR (2) 641

[11] (1973) 2 SCC 713

[12] (1971) 2 SCC 361.

[13] Supra note 10

[14] R.K. Deka v. Union of India, A.I.R. 1984 Del.

[15] A.I.R. 1980 S.C. 768

[16] A.I.R. 1987 S.C. 142

[17] A.I.R. 1986 S.C. 806


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