Amanda Eilledge explores the availability of public law defences and promissory estoppel in the context of a contract for the sale of land following the decision in Dudley Muslim Association v Dudley MBC  EWCA Civ 1123.
The central issue in this appeal concerned the circumstances in which a public law defence based on legitimate expectation/abuse of power is an available defence to a claim to enforce a contract. As the contract in question was a contract for the disposition of an interest in land, the Court of Appeal (Lewison, Treacy and Gloster LJJ) also provided useful guidance on the interface between promissory estoppel and section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989.
The Dudley Muslim Association (“the DMA”) wanted to build a new mosque. The local authority, Dudley Metropolitan Borough Council (“the Council”) leased a site to the DMA for a 99 year term at a peppercorn rent commencing 16 May 2003. The site did not have planning permission for the build when the lease was granted and it was anticipated by both parties that planning permission would need to be applied for and that the DMA would need a certain amount of time to build the mosque. The lease included various covenants regarding the building of the mosque which included a long-stop date for the build of 31 December 2008. The lease also contained an option to acquire the freehold which was duly exercised. The transfer also provided that if the development had not been completed by the long-stop date, the DMA must vacate the property and re-transfer it to the Council.
The planning application took a long time. The delay was caused partly, but not solely, by the Council’s request that the application be withdrawn at one point for political reasons and as a result of the Council’s refusal to grant planning permission initially despite the recommendation of their planning officer. There was correspondence between the DMA and the Council over the period which referred to the long-stop date and the possibility that this date would have to be varied.
Eventually, planning was confirmed on 28 July 2009. This, of course, was after the long-stop date had expired. Ultimately the Council asked the DMA to comply with the covenant to re-transfer. The DMA refused and the Council issued proceedings claiming specific performance of the obligation to re-transfer the land. Following some preliminary skirmishes, the DMA defended the case on the basis that, in deciding to exercise the covenant to re-transfer the site, the Council acted unfairly, unreasonably, in breach of the DMA's legitimate expectation and by an abuse of power.
As Lewison LJ (who gave the only judgment) put it at :
“in substance what we are dealing with is the enforcement of a contract willingly made by both parties with the aid of legal advice. The DMA’s defence is that the Council is not entitled to enforce the contract according to its terms.”
The Council applied to strike out the Amended Defence, alternatively for summary judgment in its favour. At first instance Master Marsh gave summary judgment for the Council. The decision was upheld on appeal.
The issue on appeal
At both first instance and on appeal to the deputy judge, it was common ground that if the DMA had a public law defence there was no procedural bar to raising it in the proceedings: Wandsworth LBC v Winder  1 AC 461. This begged the question whether as a matter of principle the public law issues raised by the DMA could be a defence to a claim to enforce a contract.
The Court of Appeal asked the parties to argue this question of principle.
The Court of Appeal upheld the decisions of the courts below. Although the Court held that the defences based on legitimate expectation and abuse of power failed on the facts, it also considered the question of legal principle.
The Court of Appeal decided that as a matter of principle, a contracting party may not rely upon the defences of legitimate expectation or abuse of power where the other contracting party is a public authority, who is seeking to enforce the contract according to its terms, unless the contracting party can allege that the decision to enforce the contract has been taken in bad faith or for an improper motive. In the absence of bad faith or an improper motive, a contracting party can only succeed if he can establish a variation of the contract or a promissory estoppel.
The Court went on to deal with whether there had been a variation or the contract or a promissory estoppel. It decided that the obligation to transfer the land in the event of non-completion by the contractual deadline was a contract for the disposition of an interest in land within the ambit of the section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 (“section 2(1)”). It is well-established that any variation of such a contract must itself comply with section 2(1): McCausland v Duncan Lawrie Ltd  1 WLR 38. That case left open, however, the question of whether an estoppel might outflank the section.
The Court’s view was that there was no room for the doctrine of promissory estoppel if section 2(1) applied. To permit a promissory estoppel in such circumstances “would be effectively to repeal the section by judicial legislation” per Lewison LJ at . It agreed with the judgment of Nugee J in MP Kemp Ltd v Bullen Developments Ltd  EWHC 2009 (Ch) at  in this regard.
The circumstances in which a public law defence may be raised in a contractual dispute where one of the contracting parties is a public authority are now pretty clear. Unless the public authority can be shown to have acted in bad faith or for an improper motive, it is entitled to exercise its rights in accordance with the contract’s terms. Whether it will be possible to establish bad faith or improper motive will of course depend on the facts of each case.
Given the Court of Appeal’s observations on promissory estoppel, clients wishing to extend time in a contract for the sale or other disposition of an interest in land should be advised to enter into a formal variation which complies with section 2(1). A letter from the other contracting party agreeing to extend time is unlikely to be sufficient, unless it specifically states that the party concerned would honour the agreement despite the absence of compliance with section 2(1) or contains an assurance not to rely upon section 2(1): see the House of Lords in Actionstrength v International Glass  2 AC 541 for their suggestions on the appropriate wording in the analogous situation of a party providing an oral promise to pay another’s debt which fails to comply with section 4 of the Statute of Frauds.
Although Lewison LJ was prepared to assume for the sake of argument that proprietary estoppel was capable of outflanking section 2(1): see Yaxley v Gotts  Ch 162 CA, he pointed out that it was doubtful this was still the law in view of the observations of Lord Scott in Cobbe v Yeoman’s Row Management Ltd  UKHL 55  1 WLR 1752 at . Whilst these observations were obiter, Lords Hoffman, Brown and Mance agreed with Lord Scott’s speech.
The current trend of the authorities restricting the circumstances in which the consequences of section 2(1) can be avoided, therefore, seems likely to continue.