The rule of ‘estoppel by convention’ is increasingly significant in disputes about payment or payless notices. So, what is it and what do the courts say about it?

Ian Yule

‘You can’t now just turn round and say that!” is a phrase that colloquially, and very approximately, expresses many instances of the legal doctrine known as “estoppel”.

So says Keating on Construction Contracts, a leading construction law textbook. The phrase neatly sums up the spirit of the rule: if one party has, by its conduct, led the other to believe that a certain way of doing things is acceptable, it may not later be able to turn round and argue that that other party did not act as the contract required.

The rule, particularly in the variant known as “estoppel by convention” is becoming increasingly significant in battles about payment notices or payless notices. A contractor may argue, for example, that its application for payment operates as a payee’s payment notice (therefore triggering an obligation on the employer to respond) even if it was out of step with the dates provided by the contract for such applications. What have the courts had to say about this?

Estoppel must be used as a ‘shield, not a sword’ – as a defence to an allegation being made, not the foundation for a claim

In one case (Leeds City Council vs Waco UK Ltd [2015]) the contractor’s applications were consistently a few days later than the dates stipulated in the contract. This was so for most out of the 11 pre-practical completion applications, the delay usually being about three days.

There was no express agreement to vary the contract, said the judge, but there was a course of conduct – or a “convention” (hence the phrase) – by which the employer’s agent acting on behalf of the employer agreed to accept late applications. The employer’s agent even sent an email saying he was willing to deal with applications made “on/after” the relevant contractual dates.

All this meant that the employer could not now take a point on applications that were late by a few days. In this case, the estoppel did not help the contractor. He wanted to rely on an application that, the judge held, was either premature or extremely late, and therefore outside the concession given.

Similarly, in Jawaby Property Investment Ltd vs The Interiors Group Ltd & Anor [2016] the contractor’s document did not describe itself as an application and did not actually state the net sum it alleged was due. Nevertheless, the judge held that the employer had treated previous documents in similar form as valid applications. Again, an estoppel arose. And, again, the contractor won the battle but not the war. The particular application that it relied on was held to be materially different to the ones that the employer had previously let through.

So what is required to get an argument for estoppel up and running?

An employer might argue, for example, that the contractor has acted badly by trying to manoeuvre him into missing dates for service of notices

First, it must be used as a “shield, not a sword” – in other words, as a defence to an allegation being made, not as the foundation for a claim. Second, there must be a “common assumption” that is shared by both parties as to some facts or law.

In another recent case, Kersfield Developments (Bridge Road) Ltd vs Bray and Slaughter Ltd [2017], the mere fact that the employer had paid against non-compliant applications did not mean that there was a common assumption that the contract formalities were being waived.

Third, there must be some reliance on that common assumption by the party raising the estoppel, such that it has acted to its detriment. In the cases above, that requirement was satisfied by the contractor believing that it did not matter if its applications were late or not in the proper form, and so continuing to put them in on that basis.

Finally, a party must show that it would be “unconscionable” to allow the other party to go back on the common assumption.

That last requirement may prove a fertile ground for disputes in future. In an appropriate case, an employer might argue, for example, that the contractor has acted badly by trying to manoeuvre him into missing dates for service of notices. Or it might point to some underhand behaviour by the contractor.

Even evidence of previous instances of the contractor demanding that the employer follow the letter of the contract, while claiming freedom not to do so itself, might suffice. In these cases, a court could say that it would not be unconscionable to allow the employer to rely on the strict contract terms.

Estoppel is what is known as an equitable remedy. In other words, the courts may not be inclined to help you if you have behaved badly.

Ian Yule is a construction and engineering partner in Shoosmiths