Estoppel by convention: the dangers of neglecting to check the legal and factual position before acting in business

27th November 2015

registered design rights

The case of Dixon and another v Blindley Health Investments Ltd [2015] has reiterated the need to check the legal position on a particular matter properly and thoroughly, as well as any historic documents or agreements between the parties.

 

The recent case of Dixon and another v Blindley Health Investments Ltd focused on proposed share transfers within a private company that were initially approved by the board of directors, and then subsequently refused when forgotten letters containing pre-emption rights (the right of the existing shareholders to be offered the chance to buy shares in the company before others) were found. This led to a finding that the remaining shareholders were estopped by convention from relying on these letters.

‘Estoppel by convention’ can arise when all parties to a matter base their actions or decisions on a mutually accepted assumption of law or fact, regardless of whether this interpretation is correct. If it would be unethical to allow one or all of the parties for whatever reason to attempt to go back on the decisions or agreements made due to the mutual misunderstanding, the courts can prevent this. In the majority of cases this comes about due to the collective mistake of the parties, as this likewise results in the parties acting in a certain way based on the incorrect assumption.
Years later, several shareholders were looking to sell their shares to another company, due to disagreements amongst them. The board of directors approved the sale. A month later, the forgotten pre-emption letters were then found, and the directors then exercised their right to refuse to register the shares.
The court eventually found that it was unethical to allow the existing shareholders (who were also directors) to rely on the pre-emption letters as all parties had been conducting themselves for a number of years on the assumption that no such right existed. Furthermore, the existing shareholders seeking to prevent the share transfer had themselves previously benefitted from this assumption in an earlier share transfer. Therefore, it would be wrong for them to be able to enforce their right against the departing shareholders.

In summary, this case raises a crucial reminder for all companies: a failure to check the true legal or factual position can result in detriment to the company or individual shareholders, as rights they should have been able to rely on are lost to them due to their mistake. Whilst the courts would most likely have upheld the pre-emption rights if one party was aware of the correct position and was attempting to disadvantage another party by utilising this error, they will not allow the parties to set aside their mistake if it was mutually accepted with no deliberate malice.

If you wish to discuss any of the issues raised in this article or would like assistance with updating your terms of business please contact Chris Wills, Director, on 01872 226992 or chris@murrellassociates.co.uk or Melanie Brown, author of the article.

The information provided in this article is for general information purposes only and does not constitute legal or other professional advice and cannot be relied upon as such. Any law quoted in this article is correct as at 27 November 2015. Appropriate legal advice should be sought for specific circumstances before any action is taken. Copyright © Murrell Associates Limited, November 2015.