Estoppel by failing to enforce the rules

Where the proprietor of a virtual community generally fails to enforce the rules, could it be estopped from doing so in any particular instance?

Despite a clear contractual right to terminate, a provider may be estopped from terminating in circumstances where it would be unconscionable to do so.1) In order to prevent the provider from terminating, a participant would have to show that the provider had represented that it would not terminate, that the participant relied on that representation to his or her detriment, and that it would be unjust or inequitable for the provider to terminate in those circumstances.

The representation that the provider would not rely on the right to terminate does not need to be explicit, but it must be unequivocal.2) The representation does not need to be made to a particular person, but can be made to a class of people.3) Where breaches of a particular rule are widespread, a long-standing failure to enforce the rule could conceivably be construed as a representation that the provider will not enforce the rule in future. However, such non-enforcement could also be construed as not making any representation as to the future.4) The requirement that the representation be unambiguous does not mean that “it cannot possibly be open to different constructions, but that it must be such as will be reasonably understood in a particular sense by the person to whom it is addressed.”5) Whether a representation has been made is a question of fact, and its existence “must be decided on ordinary common law principles of construction and of what is reasonable, without fine distinctions or technicalities.”6) In practice, while possible, it may be quite difficult for a participant to establish that the provider represented that it would not enforce a rule in future or against any particular person.

If a representation can be shown, the participant must also be able to show that he or she reasonably relied on that representation. While showing reliance may be straightforward – in that the participant would not have engaged in conduct that technically broke the rules if he or she did not believe that the rule would not be enforced – showing that the reliance was reasonable may be more difficult. In Galaxidis v Galaxidis, Tobias JA (with whom the other members of the NSW Court of Appeal agreed) held that

the representation is sufficiently clear and unambiguous if it is reasonable for the representee to have interpreted the representation in a particular way being a meaning which it is clearly capable of bearing and upon which it is reasonable for the representee to rely.7)

Brennan J, in Walton Stores v Maher, held that it was “essential to the existence of an equity created by estoppel that the party who induces the adoption of the assumption or expectation knows or intends that the party who adopts it will act or abstain from acting in reliance on the assumption or expectation”.8) Again, whether it is reasonable for a participant to rely on a representation that the provider will not enforce a strict contractual right will depend on the circumstances.

It may be difficult to establish in many cases, but it would certainly be open for a judge to find that a platform owner is estopped from terminating a particular participant's access to the virtual community where it takes no action against others who have habitually broken the same rule. If an estoppel can be established, it is important to consider that estoppel does require that that the representation or promise be fulfilled, but instead only provides a remedy for the detriment suffered as a result of reliance upon the representation.9) For this reason, an estoppel, unlike an election, is not permanent – if the detriment to the relying party can be cured, the provider will once again be entitled to exercise its rights. For practical purposes, this means that given sufficient warning, a provider may be able to begin to enforce rules which it had largely ignored in the past.

There is a lot of flexibility in the doctrine of estoppel, and a significant normative question arises as to whether it ought to apply in any given case.10) In the most extreme cases, it will almost certainly be effective as a brake on the ability of platform owners to rely on strict contractual rights which it has encouraged participants to believe would not be enforced. Its application in other circumstances, however, will depend in a large part on the discretion of the court as to how the alleged representation is interpreted and how reasonable the court believes the reliance on that representation to be. Like the other ways in which strict contractual rights can be read down, I believe that these considerations will depend particularly on the importance which the court attaches to the interests of the participant at issue.

1)
See cases:Commonwealth v Verwayen (1990) 170 CLR 394; Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387.
2)
See Legione v Hateley (1982) 152 CLR 406, 438-40 (Mason J and Deane J); 453-455 (Brennan J), 422 (Gibbs CJ and Murphy J, dissenting).
3)
See Commonwealth v Clark [1994] 2 VR 333, 362.
4)
See, for example, Olga Investments Pty Ltd v Citipower Ltd [1998] 3 VR 485, 499 , where the Victorian Supreme Court of Appeal (Charles JA, Ormiston JA and Callaway JA agreeing) held that the failure to issue a bill for electricity supplied for a twelve year period did not give rise to a representation that no bills would be issued.
5)
Low v Bouverie [1891] 3 Ch 82, 106.
6)
Canada & Dominion Sugar Co Ltd v Canadian National (West Indies) Steamships Ltd [1947] AC 46, 55.
7)
Galaxidis v Galaxidis [2004] NSWCA 111, [55] (Tobias JA, Giles JA and Hodgson JA agreeing).
8)
Walton Stores (Interstate) Ltd v Maher (1987) 164 CLR 387, 423.
9)
Commonwealth v Verwayen (1990) 170 CLR 394.
10)
Robertson A, “Reasonable Reliance in Estoppel by Conduct” (2000) 23 UNSWLJ 87; see also M Pratt, “Defeating Reasonable Reliance” (2000) 18 University of Tasmania Law Review 181.