Understanding Estoppel: What It Is and How It Works in Contract Law

Contracts and Agreements
Western Australia
2 minute read

Perhaps the best way to explain estoppel is to give an example.

Imagine that:

  • Sue offers to supply goods to Bill for a particular price;
  • Bill doesn’t accept the offer, but encourages Sue to believe that he will enter a contract on those terms;
  • Sue relies on Bill’s statements (about entering into a contract) to spend substantial money on production facilities, in anticipation of a contract being entered into;
  • Bill eventually refuses to enter into a contract with Sue, and says that he’ll obtain the goods elsewhere.

In this case Sue cannot argue that any contract has been breached, because no contract has been entered into.

However the doctrine of estoppel will ‘stop’ Bill from contending that the contract should not be enforced.

The Court will hold Bill to the terms of the contract, even though it was not entered into.

In this example, for estoppel to apply the following requirements must be satisfied:

  1. A representation has been made by Bill (ie by stating that a contract will be entered into)
  2. The representation is relied on by Sue (ie by spending money on production facilities)
  3. Sue will suffer detriment if the representation is not adhered to (ie if the contract is not enforced).

The purpose of estoppel is to prevent detriment by compelling a party to adhere to an assumption or expectation which he has encouraged the other party to adopt.

In this case estoppel will prevent detriment to Sue by compelling Bill to adhere to an assumption or expectation which he has encouraged Sue to adopt, namely that Bill would enter into a contract on particular terms.

Estoppel often operates to prevent a party from relying on its strict legal rights, particularly in relation to representations concerning contractual and property rights and interests.

Please contact me if you require legal advice on whether an estoppel may apply to your case.