Estoppel — what role does it play in legal proceedings?

The global processes taking place around the world undoubtedly affect Ukraine as well; these processes influence the development of legal mechanisms and the concept of the state’s legal activities, whilst also stimulating the development of the law and the national legal system.

Thus, an important feature reflecting the changes taking place in Ukrainian law is the increasingly widespread application by courts of various instances of the principle known in the civil law system as the principle of the prohibition of contradictory conduct, which in English common law and in international arbitration practice is better known as the estoppel rule.

It should be noted that, at present, the use of the term ‘estoppel’ still gives rise to a certain degree of misunderstanding, due to its ambiguity and novelty within our country’s legal system.

In view of the above, we consider it necessary to conduct a comparative study of the estoppel principle with other principles known to our legal system, and those having comparatively similar scope of application in civil law, within the scope of this article.

Estoppel is a legal term that imposes certain prohibitions on a person within civil legal relations ‘to deny or assert anything contrary to what has been established as the truth on the basis of the law by court rulings or state bodies, or by the person’s own actions, their acts or statements, whether expressly stated or implied”.

It should be noted that the legal basis for the application and determination of an estoppel situation is, in most cases, a breach by one of the parties of the principle of good faith, the commission of certain acts in circumvention of the provisions of the law, or the obtaining of an advantage by misleading a counterparty or another person, as well as a breach of the balance between private and public interests.

In this regard, the relationship between the estoppel principle and other legal norms and principles is of significant practical importance for distinguishing between them and for the subsequent correct application of the rule when referring to the existence of a particular fact in court proceedings.

It should be noted that the estoppel principle has developed legally through its application by the judiciary, primarily in civil and commercial relations, through the development of the principle of good faith between the parties.

Such application has been carried out by the courts for several years running; in particular, reference may be made to the Ruling of the Lviv Commercial Court of Appeal of 13 June 2017 in Case No. 914/2622/16. As the source of this principle, the court referred to the case law of the European Court of Human Rights (Hochlich v. Ukraine (Application No. 41707/98); ‘Refah Partisi (Welfare Party) of Turkey and Others v. Turkey (Applications Nos. 41340/98, 41342/98, 41344/98).

Furthermore, the Supreme Court of Ukraine, in its ruling of 23 September 2015 in Case No. 914/2846/14, effectively upheld the doctrine of venire contra factum proprium. In support of its argument, the court cited the ruling of the High Commercial Court of Ukraine of 21 April 2015 in Case No. 908/3649/14, where the rule of Part 1 of Article 241 of the Civil Code of Ukraine was applied. The conclusion of a contract of sale on behalf of the defendant by an unauthorised person cannot constitute grounds for declaring it invalid, since legally significant actions were subsequently taken to approve this contract.

In particular, in the separate opinion of two Supreme Court judges dated 22 August 2018 in Case No. 596/2472/16-ц, it is stated that the doctrine of venire contra factum proprium is based on the principle of good faith. The judges also cited the commentary on Article III.–1:103 of the Model Rules of European Private Law (Good faith and fair dealing), which states that ‘conduct contrary to good faith and fair dealing includes, in particular, conduct that is inconsistent with a party’s prior statements or conduct, provided that the other party, acting to its own detriment, reasonably relied on them” (Principles, Definitions and Model Rules of European Private Law. Draft Common Frame of Reference (DCFR).

Subsequently, a similar position was upheld by the High Commercial Court of the Supreme Court in its ruling of 22 November 2018 in case No. 910/19179/17.

At the time, the legal community discussed the application of the venire contra factum proprium doctrine, as set out in the ruling of the Supreme Court, sitting as the Joint Chamber of the Civil Court of Cassation, dated 10 April 2019 in case No. 390/34/17 (proceedings No. 61-22 315svo18) and in the Resolution of the Supreme Court, sitting as a panel of judges of the Cassation Commercial Court, dated 9 April 2019 in case No. 903/394/18.

However, since April 2019, the practice of applying the aforementioned doctrine, and consequently the estoppel principle in its broad sense, by the court of cassation has become increasingly widespread, as evidenced by the practice of the Civil Court of Cassation and the Commercial Court of Cassation within the Supreme Court.

At the same time, in our view, the definition of ‘estoppel’ relates to a wider range of legal doctrines that encompass concepts such as fairness, good faith and consistency of conduct in contractual obligations.

There may be different interpretations of the concept of good faith in civil (commercial) legal relations; primarily, this concerns objective and subjective interpretations. From an objective perspective, good faith constitutes a principle of civil law aimed at establishing equality between the parties in legal relations and achieving the mutual interests of the parties. In turn, the subjective understanding of good faith relates to a person’s awareness of the lawfulness of their actions when exercising their rights and fulfilling the obligations imposed upon them. It is important to note that good faith falls within the category of evaluative concepts that characterise a particular party or are intended to assess their actions (or inaction).

Generally, several criteria are identified, the simultaneous presence of which means that a party is recognised as acting in good faith in the event of a breach of the rights of others:

1) a violation of the rights and interests of other parties to the legal relationship, for which a corresponding sanction is provided;

2) a lack of information (mistake) regarding the circumstances that subsequently lead to the violation of rights;

3) the mistake arises in the absence of fault on the part of the party.

When discussing the estoppel principle, legal experts also draw parallels with another important legal concept that characterises a party’s conduct: abuse of rights.

In this regard, it is necessary to highlight the relationship between good faith and abuse of rights. The principle of good faith is a certain boundary established to protect the rights and interests of others, and cannot in itself give rise to a situation of abuse of rights.

In turn, a finding of abuse of rights is possible only where there is bad faith on the part of the individual, that is, deliberate unlawful conduct with the aim of obtaining a certain benefit.

Thus, good faith must be understood as a system of concepts, established in society and recognised by law, custom or judicial practice, regarding the lawfulness of conduct in the acquisition, exercise and protection of rights, as well as in the fulfilment of obligations.
It is important to note that the requirement of good faith applies both to the person creating a particular impression and to the person who subsequently claims to have suffered losses due to inconsistency in the actions or position of the other party.

At the same time, it cannot be claimed that the principle of good faith and the principle of estoppel are interchangeable or that they relate to one another as part and whole. In this case, good faith serves as the measure of proper and necessary conduct in legal relations between parties within a state governed by the rule of law. In turn, bad faith is perceived as a deviation from the established norm, whereby the principle of estoppel may be applied where proven losses exist.

As noted above, estoppel is based on good faith (Article 3 of the Civil Code of Ukraine) and the prohibition of abuse of rights (Article 13 of the Civil Code of Ukraine). An analysis of judicial practice regarding the application of the provisions of Part 1 of Article 241 of the Civil Code of Ukraine (a transaction entered into in excess of authority is valid if subsequently approved by the person) provides grounds for concluding that the legislator incorporated the principle of the prohibition of contradictory conduct as early as the drafting stage of the Civil Code of Ukraine, which came into force on 1 January 2004.

At the same time, Part 2 of Article 13 of the Civil Code of Ukraine, whilst unambiguously defining actions committed with the intention of causing harm to another person as a form of abuse of rights, simultaneously indicates the existence of other forms of abuse of rights.

In other words, the legislator does not specify other forms of abuse of rights, and it can therefore be assumed that the identification of such other forms will be carried out by the courts directly in the course of their judicial proceedings.

At the same time, in theory, the following non-exhaustive list of cases of abuse of rights can be drawn up:

1) the exercise of civil rights solely for the purpose of causing harm to another person;

2) circumventing the law for an unlawful purpose;

3) other types (forms) of abuse recognised by legislation.

Abuse of rights constitutes conduct involving the use of unlawful means to exercise one’s rights, the result of which is causing harm to another person. The prohibition of abuse of rights in Ukraine is a legal provision that allows it to be applied to an inexhaustible number of situations at the court’s discretion. The close interconnection between the principle of good faith and estoppel is inherent in the very structure of the legal category. It is the task of the courts to correctly apply this mechanism in each specific case, taking into account the conduct of the parties to civil rights, the objectives they pursue, and the existence of harm resulting from such conduct. Based on the above, estoppel can be applied in virtually every branch of law. The significance of estoppel lies in the fact that its application ensures compliance with the principle of good faith and the rule of consistency in the conduct of parties to legal relations.

It can be stated with certainty that the connection between estoppel under the law of equity and the principles of ‘a contract must be performed’ and good faith is inseparable, since compliance with the terms of contracts presupposes the good faith of the parties entering into them, given that the conclusion of a contract is an expression of their will aimed at achieving a specific result.

It should also be noted that Ukrainian legislation does not provide a clear definition of ‘circumvention of the law’, its constituent elements, content, or the limits of its application in the resolution of disputes. Circumvention of the law constitutes a complex legal construct, which involves the bad-faith intent of a party’s actions that formally comply with the law, yet are aimed at:

1) applying the terms most favourable to the party to the legal relationship;

2) causing harm to the rights and legitimate interests of other persons by virtue of the application of such terms. Legal theory defines ‘circumvention of the law’ as a legal transaction which, whilst not unlawful in substance, is aimed at achieving results not permitted by law. Circumvention of the law is a specific manifestation of bad faith on the part of the parties to an obligation, which may form the basis for the creation of an estoppel situation. The legal construct of circumventing the law is difficult to classify due to its outward legality. Circumventing the law, just like estoppel, is based on the principle of good faith.

Despite the common basis of the principles of estoppel and bad faith on the part of a civil rights holder through circumventing the law, there are also a number of differences:

1) Circumvention of the law implies a chosen pattern of behaviour aimed at causing harm to another person, i.e. the presence of intent, and is also characterised by a lack of awareness of certain behaviour that may be deemed inconsistent.

2) A distinctive feature of estoppel is a change in the subject’s behaviour and the obtaining of an advantage by altering one’s position with the aim of causing harm to the other party. The principles of good faith and fairness form the legal foundation upon which both circumvention of the law and the principle of estoppel rest. In both cases, the parties to the legal relationship pursue the goal of obtaining their own benefit by causing harm to the other party.

3) The existence of adverse legal consequences for the party acting in bad faith. In the case of circumvention of the law, the consequences of such transactions are deemed invalid. The consequence in an estoppel situation is the deprivation of a party’s right to challenge legal consequences arising from their own conduct in the form of an admission, refusal or promise. It is also possible to combine a situation of circumvention of the law with estoppel, where a party uses circumvention of the law as a mechanism to conceal their inconsistent behaviour.

The relationship between the estoppel principle and related norms and principles indicates some similarity in their structures, although this principle stands on its own. Inconsistent behaviour is also possible in public-law relationships involving a public authority, giving rise to a situation of estoppel. In such circumstances, the question arises as to the relationship between the principle of balancing public and private interests and the estoppel principle. The balance of public and private interests is one of the elements of the rule of law that must be upheld. The state’s special position in such legal relationships is complicated by the fact that a particular decision may be taken by one public authority but subsequently altered by another. In this case, the question arises as to whether this situation can be regarded as illustrating inconsistent behaviour. In resolving this category of cases, the court’s assessment of the specific situation will be decisive, based on the application of the principle of justice, the relevant substantive rules and generally recognised principles. Thus, the interaction of norms and principles with one another, and the transformation of legal content from one to another, indicate the existence of a specific system of principles that ensure the good faith of the parties in civil legal relations, as well as the fair resolution of potential disputes in the future. Furthermore, the interconnection of the principles under consideration demonstrates the importance of adhering to good faith in the exercise of rights and the fulfilment of obligations, and also allows for an assessment of the legislature’s actions regarding the maximum consolidation of the category of morality within the sources of law. The term ‘estoppel’ is a complex mechanism based on good faith, the assessment of the parties’ mutual expectations and their actual actions, and involves the court’s discretion in resolving the dispute. The principles discussed above are closely interlinked, share a common objective, but may be applied separately from one another in each specific dispute. The systematic application of the above principles increases the likelihood of strengthening the protection of a party acting in good faith.

To summarise the above, it should be noted that the practice of higher courts over the last two years regarding the application of the estoppel principle indicates that this principle applies to the parties’ actions both prior to the conclusion of a transaction and to the relationships arising during the performance of the terms of the transaction; therefore, obtaining qualified legal advice and support as early as the negotiation stage regarding the conclusion of a transaction becomes an urgent necessity, particularly for businesses.