Waiver by estoppel

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The other kind of waiver. The difficult one. Though not half as perilous as your earnest counsel may have you believe.

Waiver by estoppel may arise when a party who is entitled to exercise contractual rights, by its conduct leads the other party to believe it will not, so that the other party relies on that representation to its detriment. It is an outflowering of the great case of Hughes v Metropolitan Railway (1877) 2 App. Cas. 439.

Ingredients

For us to even be in the ballpark, you need:

A relationship: A legal relationship — maybe a contract, maybe something statutory — between the “rightsholder” and the “beneficiary” creating the rights and obligations;

A representation: A clear representation by the rightsholder that it will not strictly enforce its rights — the representation need not be written or explicit, but it must be unequivocal In any case, the point here is to differentiate between someone unambiguously giving the impression that they will not enforce a contractual term — entitling a counterparty to rely on that representation — and a rightsholder simply refraining from enforcing a term of the contract it was entitled to. The latter will not give rise to a waiver. The representation must be some kind of positive act: simply not enforcing a term does not give rise to an estoppel or a waiver:

“It is difficult to imagine how silence and inaction can be anything but equivocal”.

Reliance: The beneficiary must actually rely on the representation to its detriment ...

Inequity: ... so as to make it inequitable for the rightsholder to go back on the representation.

So: a contract, some kind of representation and a reliance on it to the representee’s detriment.

Effect

Unlike waiver by election, generally a waiver by estoppel only suspends the rightsholder’s legal rights and does not permanently extinguish them — unless it would be inequitable to allow the waiver to be withdrawn. So (as per Hughes v Metropolitan Railway (1877) 2 App. Cas. 439, if your tenant is obliged to repair the property within six months of your notice and, having given notice, you then represent you won’t insist on it doing so while you negotiate the potential sale of the property to the tenant, when those negotiations inevitably fall through and you decide you do want your property repaired after all, you can’t insist on the tenant getting everything done in the remaining two weeks of the original notice period. Instead, the six month period is reset from when you give further notice of the repairs.

Codified common sense, really.

Different approaches to evidence of the contract in the UK and US

England and the US have taken different paths when it comes to respecting the sanctity of that four-cornered document representing the contract. Whereas the parol evidence rule gives the written form a kind of “epistemic priority” over any other articulation of the abstract deal in the common law, in the new world greater regard will be had of how the parties behave when performing their contract, and less significance on what at the outset they wrote down.

So whereas in England action to not insist upon strict contractual rights will have scarce effect on those rights (at best a waiver by estoppel might arise, at least until it is withdrawn), in the United States Uniform Commercial Code a “course of dealing” between the parties at variance with the written terms of their bargain will tend to override those written terms. Thus, by not insisting on the strict terms of her deal, an American risks losing that deal, and will be taken by the course of dealing to have agreed something else; whereas an Englishman, by granting such an indulgence, at worst suspends his strict contractual rights but does not lose them.

In this way the parol evidence rule is less persuasive in American jurisprudence than in British.

Waiver chains

You will see deep in the boilerplate confections like this:

“Any waiver of any breach of this agreement shall not be deemed to operate as a waiver of any subsequent breach thereof.”

You know what the JC thinks about contractual denials of things no-one was asserting in the first place: they are a waste of trees. Is this, as it seems, such a waste of trees, or are waivers some kind of magical force-field of contractual energy, that spark and fizz and o’er-leap logical gates, like pole-vaulting crabs — that one waiver could trigger a chain of waivers, snaking into the distance, or mushrooming exponentially into a violent litigatory fireball?

Now, to be sure, it has been a while since the JC sat in a contract law lecture — but, readers, we don’t remember the golden thread of precedent that led down this particular alley. Nor, as far as we know has there been a new one in the intervening decades to justify this boilerplate. We suspect this is paranoid, throwaway verbiage — perhaps prompted by a near miss once, or a bad dream, or one of those psychiatric episodes credit officers are prone to.

The estoppel is specific to the particular circumstance. If you have a recurring right (you know, like to make a margin call), then just because you waived it once — even if you somehow permanently waived it — that doesn’t mean you have waived it for all time. Just because you didn’t enforce this time, that doesn’t mean you are prevented from ever enforcing in the future. This is at least implicit in the following passage from the leading modern case on waiver, Kosmar Villa Holidays plc v Trustees of Syndicate 1243:

Estoppel, however, is a promise, supported not by consideration but by reliance. It is a promise not to rely upon a defence (per Lord Diplock) or a right (per Lord Goff). It requires a representation, in words or conduct, which must be unequivocal and must have been relied upon in circumstances where it would be inequitable for the promise to be withdrawn. The need for such unfairness probably means that the reliance of the representee has to constitute a detriment, but even the detriment has, I would think, to be such as to make it inequitable for the promise to be withdrawn. For these reasons, the estoppel may not be irrevocable, but may be suspensory only. An unequivocal representation without the necessary reliance, and reliance without the necessary unequivocal representation, are each insufficient.

It may be a real fear, but we are not persuaded it would bear real fruit. It makes little sense. After all, on the English law theory of the game, a waiver is an impermanent, for the time being, sort of thing. You can stop a single waiver, as long as you give your counterparty time to get back on her horse and fashion enough of a run-up so she can approach the fence at a reasonable clip.

So, even if one waiver could spark another one — and who knows, there could be events so closely related you trigger them all at once, we suppose — they can be doused easily enough later on. But really, your better bet is not to make contractual relations with the sort of person who would take that kind of point. Our home-baked latin maxim refers: non sis arsholeus nec mercatum cum arsholibus facias.

See also

• Waiver | Waiver by election | Waiver by estoppel
• Course of dealing under the Uniform Commercial Code
• Estoppel
• No waiver boilerplate clause
• Don’t take a piece of paper to a knife fight