Estoppel by convention

In Amalgamated Investment & Property Co Ltd (In Liquidation) v Texas Commercial Bank Ltd ([1982] Q.B. 84) T (a bank) agreed to lend money to ANPP ( a subsidiary of A). In the end, the loan was provided through P (T’s subsidiary). This was part of a much broader set of arrangements under which T provided finance to A secured by mortgages over properties owned by A.  A gave a guarantee to secure all monies it owed to T. The parties both believed that the guarantee extended to cover the loan by P to ANPP (ie from the bank’s subsidiary to the guarantor’s subsidiary) though on a strict interpretation of the guarantee it arguably did not cover the indebtedness to P. T and A conducted their negotiations for the overall financing of A from time to time on the basis that the guarantee covered the loan by P to ANPP.

A went into liquidation and the question was whether the cash realised from the sale of A’s assets had to be applied partly to pay off the indebtedness to P. The English Court of Appeal found in favour of T on the basis of estoppel by convention.

Lord Denning M.R. put it this way:

‘So I come to this conclusion: when the parties to a contract are both under a common mistake as to the meaning or effect of it – and thereafter embark on a course of dealing on the footing of that mistake – thereby replacing the original terms of the contract by a conventional basis on which they both conduct their affairs, then the original contract is replaced by the conventional basis. Either party can sue or be sued upon it just as if it had been expressly agreed between them.’ (at 121 – 122).

Brandon L.J. adopted the definition of estoppel by convention in Spencer Bower and Turner, Estoppel by Representation, 3rd ed (1977):

‘This form of estoppel is founded, not on a representation of fact made by a representor and believed by a representee, but on an agreed statement of facts the truth of which has been assumed, by the convention of the parties, as the basis of a transaction into which they are about to enter. When the parties have acted in the transaction on the agreed assumption that a given statement of facts is to be assumed between them as true, then as regards that transaction each will be estopped as against the other from questioning the truth of the statement of facts so assumed.’

Lord Denning would have been prepared to reach the same conclusion by lifting the corporate veil and looking at all of the dealings (including the guarantees) as if they had all been only between A and T. Brandon L.J. would have been prepared to construe the guarantee so as to extend to the repayment of the loan to P.

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