Extent of applicability of promissory estoppel against State

Understanding promissory estoppel

The doctrine of promissory estoppel is evolved by equity to avoid injustice and to mitigate the rigor of the strict law. The doctrine is neither in the dominion of contract nor in the domain of estoppel[1]. It is based on the principle that an unconscionable departure by one party from the subject matter of an assumption which may be of fact or law, present or future, and which has been adopted by the other party as the basis of some course of conduct, act or omission, should not be allowed to pass muster.[2]

Some four decades ago, legendary Justice P.N. Bhagwati speaking for the Division Bench of Supreme Court,[3] expressed the doctrine of promissory estoppel in the following words:

“The true principle of promissory estoppel, therefore seems to be that where one party has by his words or conduct made to the other a clear and unequivocal promise which is intended to create legal relations or affect a legal relationship to arise in the future, knowing or intending that it would be acted upon by the other party to whom the promise is made and it is in fact so acted upon by the other party, the promise would be binding on the party making it and he would not be entitled to go back upon it, if it would be inequitable to allow him to do so having regard to the dealings which have taken place between the parties, and this would be so irrespective whether there is any pre-existing relationship between the parties or not.”

Ingredients to attract promissory estoppel

The above passage culls out following ingredients to attract promissory estoppel:

i)  the party against whom the promissory estoppel is invoked has by words or conduct;

ii) made to the party invoking promissory estoppel;

iii) a clear and unequivocal promise;

iv) such promise is intended to create legal relations or affect a legal relationship to arise in the future;

v) party making the promise knows or intends that the promise would be acted upon by the other party;

vi) The promise is in fact acted upon by the other party.

Promissory estoppel against State

The administrative law in India i.e. the body of law that governs the activities of administrative agencies of State, recognizes the doctrine of promissory estoppel. The Supreme Court in Motilal Padampat [4] considered the question as to how far and to what extent is the State bound by the doctrine of promissory estoppel.

In said case, the appellant, a private party, based on a categorical assurance from the State that it would be exempt from payment of Sales Tax for a period of three years from the date of commencement of production, had set up its factory to manufacture Vanaspati and had commenced production. The appellant challenged the action of State in seeking to withdraw the exemption so granted. The court on a detailed analysis of precedents on the point held the doctrine of promissory estoppel to be applicable against State.  It held that when State made a representation / assurance to the appellant knowing or intending that it would be acted upon by the appellant and the appellant relying on the said representation of the State borrowed monies, purchased Plant and Machinery and set up a factory, the doctrine of promissory estoppel applied and the State was bound to carry out the representation and exempt the appellant from Sales Tax for three years.  The court held that the doctrine is applicable against the State and its application could not be defeated by invoking defence of executive necessity.

Circumstances when State can avoid promissory estoppel

The Supreme Court[5] emphasized that since the doctrine of promissory estoppel is an equitable doctrine, it must yield when equity so requires. The promise against State would not be enforced and the equity in favor of promise would not arise, if it is demonstrated by the State that having regard to the facts as they have transpired, it would be inequitable or the public interest would be prejudiced, to hold the State to the promise made by it[6]. 

However, to avoid application of promissory estoppel, burden requiring a highly rigorous standard of proof would be upon State to show that the public interest in the State acting otherwise than in accordance with the promise is so overwhelming that it would be inequitable to hold the State bound by the promise. The Court would not act on the mere ipse dixit of the State. It would not be enough for the State just to say that public interest requires that the State should not be compelled to carry out the promise or that the public interest would suffer if the State were required to honor it.

The State will have to disclose the facts and circumstances on account of which it claims to be exempt from the liability. Mere claim of change of policy would not suffice, and State would have to demonstrate with adequate material what precisely is the changed policy and also its reason and justification to enable to judge which way the public interest lies and what the equity of the case demands.

Other aspects of the doctrine

The Supreme Court[7] also stressed the following aspects of the doctrine of promissory estoppel:

i) A party who acts in reliance on a promise made by the other alters his position is entitled to enforce the promise against such party, even though there was no consideration for the promise or the promise is not in the form of formal contract.

ii) The doctrine not only affords a defence but afford a cause of action. Promissory estoppel is thus not merely a shield but a sword too.   

iii) In order to apply the doctrine, pre-existing relationship between the parties is not essential.

iv) To attract promissory estoppel, it is not necessary that the promisee acting in reliance of the promise, should suffer any detriment (injustice) and it is sufficient that the promisee altered his position[8].

v) Promissory estoppel cannot be invoked to compel the State or even a private party to do an act prohibited by law.

vi) There can also be no promissory estoppel against the exercise of legislative power. The Legislature can never be precluded from exercising its legislative function by resort to the doctrine of promissory estoppel.

A three-judge Bench[9] of the Supreme Court later affirmed the ratio in Motilal Padampat.

Recently, a three-judge bench took a view that promissory estoppel can only be invoked by a person who has changed his position to his detriment on the basis of the promise held out to him[10]. The view seems to conflict with the position in Motilal Padampat which had been approved earlier by a three-judge bench[11] that to attract promissory estoppel, it is not necessary that the promisee acting in reliance of the promise, should have suffered any detriment

Invocation of promissory estoppel requires specific pleadings to the effect that pursuant to the representation which contained a promise, the person aggrieved altered the position and, therefore, it would be inequitable to permit the State to resile from its promise[12]. In the absence of any plea of promissory estoppel, the relief based on the doctrine may not be granted.

Conclusion

The equitable doctrine of promissory estoppel can indeed be invoked against State by pleading essential foundation and State would be bound by assurances made by it based on which the promisee alters his position. The State can avoid the promise only by demonstrating prejudice to public interest or that giving effect to promise would entail an action prohibited by law. Also, there can be no promissory estoppel against the exercise of legislative power