• In the case of Amalgamated Investments v Texas Commerce Bank [1982] Q.B. 84, it was held that where parties in the course of dealing have acted upon an agreed assumption that a particular state of facts is true, both parties are regarded as estopped from questioning the truth of the assumed state of facts.

Facts of the Case

  • In 1969, C’s subsidiary borrowed money to develop an office building from D, which made the loan through their own subsidiary.
  • On 15th September, C executed a guarantee to secure all money owned by their own subsidiary to D. Despite the assumption of both parties, C did not guarantee the loans made by D’s subsidiary.
  • On 3rd May 1975, C’s subsidiary defaulted and was ordered to be wound up. D sued C for the money owed.
  • C claimed that their guarantee did not cover any money owed by C’s subsidiary to D’s subsidiary, by whom the actual loan was made.
  • D argued that they were protected by estoppel of convention-since both parties acted as though C had guaranteed the loan made by D’s subsidiary, they could not question the actual state of facts to escape liability.
  • The judge held that although D could not rely directly upon C’s guarantee, C were estopped from contending that it did not cover the loan. C appealed.

Issues

  • Was C estopped since both parties had assumed and acted as though C had guaranteed the loan made out by D’s subsidiary?

Held by the Court of Appeal (Civil Division)

  • Finding for D, that on the facts C’s guarantee did cover the loan made by D’s subsidiary. Since the parties had acted upon the agreed assumption that C was liable for the loan, they were estopped by convention from denying their liability.

Lord Denning M.R.

  • Where parties are under a common mistake regarding the meaning or effect of a contract, that common mistake replaces the original terms of the contract on a conventional basis. From that point, the parties are to be treated as bound to that mistake, even if one party is not responsible for the mistake occurring.
  • The evidence overwhelmingly shows that when the loan was advanced to C’s subsidiary, all the parties thought that it was secured-not only by the mortgage of the building-but also by C’s guarantee.
  • In pursuing that belief, D embarked on a course of conduct-rearranging their portfolio of investments-releasing properties and monies to C-which they would not have done except on that assumed basis.
  • Now assuming that this belief was mistaken, a question arises about the law of estoppel. The mistake by D was self-induced. They had overlooked the wording of the guarantee. They thought it applied to monies owing to their subsidiary as well as monies owing to themselves equally.
  • This mistake was not induced by C. Nor did C do anything to contribute or reinforce it, except that they did not contradict it. But then how could C be expected to contradict it, when they were under the same mistake?
  • It would be clearly inequitable to allow C, in knowledge of the mistake, to take advantage of it if they had previously allowed the course of dealings to go ahead without bringing the matter to the attention of D. The fact that C was under the same mistake does not change that exploiting that mistake now would be inequitable.
  • “The doctrine of estoppel is one of the most flexible and useful in the armoury of the law. …It has evolved during the last 150 years in a sequence of separate developments…All these can now be seen to merge into one general principle shorn of limitations. When the parties to a transaction proceed on the basis of an underlying assumption-either of fact or of law-whether due to misrepresentation or mistake makes no difference-on which they have conducted the dealings between them-neither of them will be allowed to go back on that assumption when it would be unfair or unjust to allow him to do so. If one of them does seek to go back on it, the courts will give the other such remedy as the equity of the case demands” [122B].