The general position is that parties are free to enter into a contract on the basis that certain facts are treated as correct, even though the parties know it is untrue. A party will later be estopped from denying or disputing the existence of the fact as stated in the contract.

In Prime Sight Ltd v Lavarello (the official trustee of Benjamin Marrache a bankrupt), a deed of assignment for an apartment was entered into in return for payment of £499,950 by Prime Sight Ltd to Mr Marrache. The deed provided that receipt and payment of that sum was acknowledged. Both parties, however, knew that the purchase price was never paid. Mr Marrache was subsequently adjudicated bankrupt, and the Official Trustee asserted that Prime Sight Ltd was indebted to Mr Marrache for the unpaid purchase price. 

The Privy Council outlined the development of contractual estoppel, stating that, under contract law, parties are generally free to enter into contracts on whatever terms they choose (with certain exceptions in relation to fraud, illegality, mistake and misrepresentation, or when the Court refuses to enforce a contract on grounds of public policy). It held that there is nothing inherently contrary to public policy in parties agreeing to contract on the basis that certain facts are to be treated as established for the purpose of the particular transaction, despite the parties knowing otherwise. The Privy Council held that the Official Trustee of Mr Marrache's estate was therefore estopped by the terms of the deed from asserting that the purchase price had not been paid.

See Court decision here.