Breadcrumb

What Is Promissory Estoppel?

Written by

The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedNov 20212 min read

If you enter into a business arrangement without a contract and the other party fails to deliver on their promises, your business could suffer as a consequence. You may, for example, be left in debt. Despite the fact this is clearly unfair, you may feel that because no contract or legal agreement was in place, there’s nothing you can do to seek compensation. But that’s not necessarily true. In some circumstances, the theory of promissory estoppel could allow you to recover some of your losses. Promissory estoppel is designed to prevent people from reneging on a promise even in the absence of a legal agreement or contract.

Promissory estoppel example

Let’s clarify the theory of promissory estoppel by taking a look at a promissory estoppel example:

Suppose you’ve been offered a job in a new town and you’re due to start your new position two weeks from now. You’ve agreed with your prospective employer that you’ll sign the contract once you’ve moved to the new location. Having quit your current position and relocated to the new area to start your new job, the hiring manager calls the whole thing off. You later discover that they’ve hired someone else to fill that position.

In this situation, you could use the principle of promissory estoppel and sue the company that agreed to hire you. By invoking the doctrine of promissory estoppel, you can ensure they can’t walk away without offering you any redress.

Legal requirements for promissory estoppel

There are some requirements that need to be fulfilled in order to claim promissory estoppel damages:

A legal relationship of some sort must be anticipated between the parties. This may be a contractual arrangement where a legal agreement has been entered into or where parties are in the midst of negotiating a contract.
One of the parties must have made a promise to the other. The promisor should have promised in a way that the other party assumes they will follow through with it. And the promise should be reasonable and believable. Traditionally estoppel was only used in respect to a representation about an existing fact, however the doctrine was extended in 1988 to representations about future conduct. In this form of promissory estoppel, the promise is given in circumstances where the other party ‘assumes’ the promise will be performed.
The party receiving the promise must have taken justifiable action on the basis of the promise.
The party relying on the promise must have suffered detriment of some form and be able to prove they are now worse off than they were before the promise was made.
The party reneging on their promise has created inequity between the parties, i.e., it must be shown that the party breaking the promise has created a level of unfairness that can’t go unpunished.

Promissory estoppel expectation damages

The promissory estoppel expectation damages to the party relying on the promise (and subsequently suffer detriment) should be equitable. This means that the court must use its discretion in deciding on the level of promissory estoppel damages required to relieve the detriment. In general, this means that the wronged party is awarded a payout to cover the cost of the promise that has been made. Alternatively, the court may award an amount decreed sufficient to cover the financial losses suffered by the plaintiff.

Theory of promissory estoppel

The theory of promissory estoppel may sound ancient and archaic, but in fact it’s a highly useful modern principle that helps to ensure fairness in business. It’s especially relevant in the fields of building and employment, where negotiations can be prolonged but where action is urgently required. Promissory estoppel is a valuable way of ensuring parties stay protected in the absence of a contract.

We can help

GoCardless helps you automate payment collection, cutting down on the amount of admin your team needs to deal with when chasing invoices. Find out how GoCardless can help you with ad hoc payments or recurring payments.