Prime Sight Limited (A Company Registered in Gibraltar) v Edgar Charles Lavarello (Official Trustee of Benjamin Marrache a Bankrupt) (Gibraltar)

A written deed may create a contractual estoppel even where both parties knew that a recital was untrue. The question is one of construction: whether the parties mutually adopted the stated fact as the basis of their transaction, or whether the recital was only one party’s statement. If the recital is contractually binding, the parties are ordinarily held to it. The estoppel remains subject to ordinary contractual limits, including fraud, illegality, mistake, misrepresentation and public policy. A court cannot enforce the sale provisions of a deed while deleting its agreed treatment of payment without changing the transaction. Where that estoppel gives a company substantial grounds to dispute the debt relied on in a winding-up petition, the petition cannot succeed on that debt.

Benjamin Marrache assigned an underlease to Prime Sight Limited by deed, reciting that £499,950 had been paid, although no payment was made. After Mr Marrache’s bankruptcy, his Official Trustee presented a winding-up petition for the alleged debt under the Companies Act 1930.

Prescott J rejected the company’s application to strike out the petition and made a winding-up order. The Court of Appeal of Gibraltar permitted the company to raise an estoppel argument but dismissed the appeal. The central issue before the Privy Council was whether the parties’ deliberate agreement to treat the purchase price as paid estopped the Official Trustee from asserting non-payment, so that the alleged debt was genuinely disputed on substantial grounds.

Lord Toulson delivered the judgment of the Board. The appeal was allowed and the winding-up order was set aside.

1. Contractual estoppel. Estoppel by deed overlaps with estoppel by representation and estoppel by convention. Parties may expressly or impliedly agree that a particular state of facts or law is to be treated as true for their transaction, even though both know that it differs from reality. The representee need not have been misled or believed the assumed facts. The principle is consistent with the reasoning in Grundt v Great Boulder Proprietary Gold Mines Limited (1937) 59 CLR 641 and the earlier authorities discussed by the Board.
2. Construction and limits. Whether a recital is mutually binding, or is merely one party’s statement, is a question of construction. The reasoning in Greer v Kettle [1938] AC 156 was not directly applicable because that case did not concern a recital known by both parties to be false. A contractual estoppel remains subject to fraud, illegality, mistake, misrepresentation and public policy. Nothing is inherently contrary to public policy in agreeing to treat known facts as established for a transaction.
3. Effect of the deed. The Official Trustee could not treat the deed as creating a genuine contract of sale while discarding its acknowledgement that the price had been paid. Doing so would materially alter the agreed transaction. Any alleged illegality required properly identified grounds and supporting facts. The material before the Board did not establish such a bar.
4. Winding-up petition. The company therefore had substantial grounds for disputing the alleged debt. The waiver argument was rejected as not fitting naturally with the deed, and the Board found no error in allowing the Official Trustee to pursue the alleged debt while Mrs Marrache’s beneficial claim remained unresolved.

The parties were directed to make submissions on costs within 14 days.

• Privy Council: Allowed the appeal and set aside the winding-up order. [2013] UKPC 22
• Court of Appeal of Gibraltar: Allowed the estoppel point to be raised but dismissed the company’s appeal.
• Supreme Court of Gibraltar: Prescott J dismissed the company’s application to strike out the winding-up petition and made a winding-up order on 13 February 2013.