Promissory Estoppel

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Guest Post by Santa Clara Law 1L and Colleague: Phil Fox 

An easy way to remember what promissory estoppel is could be to look at the first word and remember “promise.” Simply and quickly put, promissory estoppel is justified reliance on a promise. Broken down:

  • Justified: a reasonable person would do the same based on the surrounding circumstances
  • Reliance: the person takes the promisor at the word (trust…go figure) and relies on the idea that they will follow through as promised
  • On a promise: whatever it is that the promisor said they would do, it was enough for the person to act (or forbear)

And for reference:

Promisor: giver of the promise

Promisee: one who has been given the promise

The main idea behind promissory estoppel is to “make the promisee whole again”

Quick example (with reasonable person):

Tom says to John “Hey, park over on that street because it’s closer to my house so I don’t have to walk. If you get a ticket, I will pay it.”

Next day: John gets a ticket. Tom says “That sucks, you’re on your own.”

When John passes up the option to park where he chooses (forbearance), he is doing so with justified reliance that Tom will pay the ticket if he gets one. With the lens of promissory estoppel, the law seeks to make John whole again by enforcing their agreement to have Tom pay John for the ticket.

Quick example (with unreasonable person):

Bob says to Joe (both broke law students), “I’ll give you a $100 million if you get cold-called today in class and don’t screw it up.” Joe does well. Bob laughs and says it was a joke. Joe sues. Court then laughs at Joe and says HE’S a joke.

*if it looks and sounds ridiculous/unrealistic, chances are it won’t qualify as “reasonable” under what the average Joe would think (different Joe).

Why do we care about enforcing promises?

  • For promisor: we want to hold them accountable to stand behind their promises. In other words, you can’t just run around promising people things that they end up acting on (to their detriment) and then take no accountability.
    • At the same time, the promisee has to sufficiently prove that they reasonably relied on a legitimate promise. Promisors are protected too by this doctrine so that promisees don’t go to court every 15 minutes saying someone promised something they didn’t, just to squeeze something out of them.
  • For promisee: protect them in the event that they get screwed over for reasonably relying on a promise. Particularly in pre-contractual negotiations, the goal is to ensure that people feel protected so as to continue with actual contracts in the free market.
    • In a lot of businesses, it’s hard to get “in the room” unless you jump through a few hoops. Promissory estoppel helps to protect that process within reason.

Pre-contractual Example: A contractor says to a designer “I’ll use you for the job if you print your renderings on the hi-res printers (high cost) today.” Designer who has justified reason to spend the high amount prints. Contractor says, “Sorry I changed my mind I want something different.”

As we learned in Hoffman v. Red Owl Stores (leading case for pre-contractual reliance):

  • When one party relies, the other is immediately in a stronger bargaining position
  • Efficiency concern: without some legal protection, the relying party will be reluctant to make a pre-contractual investment

NOTE: Promissory estoppel is not a substitute for consideration. The point is that it makes sure that everyone will play nice in the sandbox.
Jess’s Comment: To clarify, person A and person B cannot form a contract on promissory estoppel alone (however, a promise for a promise is a valid type of consideration) and justify it as consideration (the contract will be unenforceable/illusory). HOWEVER, as we see in Wheeler v. White, if the court determines that a contract is unenforceable due to lack of consideration, it’s important to note that they will often substitute promissory estoppel as “consideration” in order to enforce reliance (but not expectancy because there was no real contract). The reason for this edge case is simply to keep jerks like White from making shallow promises, screwing over the victim that relied on said shallow promise, and then getting away with it in court because the “contract” was illusory. The Wheeler court sets the precedent (and warning) that under the theory of promissory estoppel, even if your promise is bullshit, it has the potential to screw the person who relied on it and you will be liable for said reliance damages if proven. So if you’re someone who goes around making empty promises to everyone you meet, maybe knock it off.

Supreme Court: The reason for the doctrine is to avoid an unjust result, and its reason defines its limits.

Official Definition:

  • Promissory Estoppel (Restatement (Second) of Contracts 1981):
    • (1) a promise which the promisor should reasonable expect to induce action or forbearance on the apart of the promisee or a third person which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.
    • (2) a charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the promise induced action or forbearance.

English translation of (1): when a promisor makes a promise, he is smart enough to know that by doing that he is going to cause the promisee to do something/not do something as a result, and more than that – it actually happens. Injustice/unfairness of the results can be avoided if the promisor lives up to their end of the deal.

So going back to our example of Tom and John with the official definition in-line:

  • a promise: “Park over there. If something goes wrong I’ll pay the ticket.”
  • which the promisor should reasonable expect to induce action or forbearance on the apart of the promisee or a third person: (Tom’s internal monologue: “after saying that he has nothing to lose, chances are he will listen and park closer”)
  • which does induce such action or forbearance: John parks closer to Tom’s house
  • is binding if injustice can be avoided only by enforcement of the promise: John gets a ticket but if Tom were to pay for it, no harm done.
  • The remedy granted for breach may be limited as justice requires: This should just be reliance – so Tom should only have to pay for the ticket as promised, not a new car for John.

So how about those damages?

That’s why we are going to court right? Good news and bad news.

Good news: a reasonably proven case of promissory estoppel should result in reliance damages (making the party whole, giving them what they would have had if everything worked out like they thought)

Bad news: reliance damages only under doctrine of promissory estoppel.

Expectancy damages are not awarded because you didn’t bargain for it.

Remember: the point is to make things fair and equal. Nobody should get an edge one way (making bs promises) or another (bs accusations of promises).

How do you determine promissory estoppel? Ask these questions:

  • Was the promise one which the promisor should reasonably expect to cause action or forbearance of a definite and substantial character by the promisee? (question of fact)
  • Did the promise perform such action or forbearance? (question of fact)
  • Can injustice be avoided only by enforcement of the promise? (policy decision)

 Requirements for Promissory Estoppel:

  1. Detriment suffered in reliance must be substantial in an economic sense
  2. Substantial loss to promisee in relying must have been foreseeable by the promisor
  3. Promisee must have acted reasonable in justifiable reliance on the promise as made

If you’re the promisor, how do you protect yourself?

  • Employ a conditional or indefinite promise
  • Attach a termination date
  • Revoke and promptly communicate this to the promisee, which can affect the foreseeability and reasonableness of reliance

 A quick note on equitable estoppel:

 Wait what?

Equitable Estoppel: promisee acts based on false facts (false representation), intention that innocent party acts

  • Equitable Defenses: fraud, mistake, estoppel, unclean hands, laches (unreasonable delay in making an assertion or claim), and unconscionability.

Official Definition of Equitable Estoppel Doctrine (1886):

  1. Must be conduct amounting to a presentation or concealment of material facts
  2. Facts must be known to party estopped at the time of said conduct, or reasonable circumstances of knowledge given
  3. Truth of facts must be unknown to other party claiming benefit of estoppel at time of conduct, and time when it was acted upon him
  4. Conduct must be done with intent or expectation it will be acted on other party (or probable)
  5. Conduct must be relied upon by the other party, and in relying must be led to act upon it
  6. Must in fact act upon it in a manner as to change his position for the worse

So…what’s the difference?

With promissory estoppel, there’s no intent to mislead.

Promissory Estoppel: promisor makes promise which they should reasonably expect to induce action or forbearance which does induce such action by the promisee or a 3rd person

Equitable Estoppel: promisor makes “promise based on false representation (lies)” which they intend action or forbearance which does induce such action by the promisee or a 3rd person

—————————————————————————————————————————————–

Jess’s Comments: I like to always think in terms of attack vectors when we complete a unit. So far, we’ve learned about the four types of consideration, one of which must be bargained for to form a valid contract. We’ve also covered mutuality and lack thereof and its importance in forming a valid contract. So at this point in our 1L careers, if a client comes to us looking to get out of a bonehead contract, our first point of attack is:

Tell them we’ve only been in law school for 3 weeks and they should maybe get a real attorney

BUT IF WE’RE THE ONLY OPTION:

Do we have a valid contract: Bargain for consideration?
Do we have mutuality: can the contract be enforced? Is the contract illusory?

We’re almost out of the woods…

Did our client make any crappy promises in which the other party relied to their detriment?

Do they owe reliance damages?

And was the other party’s action reasonable and justifiable?

Can we prove their actions have nothing to do with our client’s promise?

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