What is ‘estoppel by convention’?
Estoppel by convention is a form of equitable remedy that acts to bind parties to a shared understanding of the terms and facts of a contract.
What does this mean?
Where two parties negotiate or operate a contract based on a shared assumption or mutual understanding of an effect (or interpretation) of that contract, they are bound by that belief, assumption or understanding if:
- (i) they both knew the other operated under the same; and
- (ii) they both regulated their subsequent dealings on the same.
The Court of Appeal has now extended estoppel by convention to assumptions caused by forgetfulness.
The recent case of Dixon and another v Blindley Heath Investments Ltd  EWCA Civ 1023, concerned a dispute over a shareholder agreement. Previously, the shareholders had agreed pre-emption rights covering the transfer of their shares. When a subsequent transfer occurred, it appears the parties simply forgot about the pre-emption rights and the parties acted without reference to them. However, when a further subsequent transfer was attempted, the pre-emption rights were rediscovered and the existing shareholders attempted to enforce them. The Court of Appeal has now agreed that the shareholders are estopped by convention from relying on the pre-emption rights due to their previous behaviour.
This decision has now confirmed that estoppel by convention can be based on forgetfulness as well as a mistake.