CONTRACTS II: SPRING 2009 PROFESSOR FITZGERALD
I. Introduction to Promissory Estoppel
A. Definition: The doctrine that provides that if a party changes his or her position substantially either by acting or forbearing from acting in reliance upon a gratuitous promise, then that party can enforce the promise although the essential elements of a contract are not present.
· Essential Function: To provide relief for justifiable reliance on a promise given without consideration
B. Generally: In cases where there appears to a lack of a bargained for exchange (those lacking consideration), even though the court may try to stretch the concept of bargained for exchange to accommodate such cases, sometimes the facts are such that no manipulation of the consideration doctrine could produce a realistic argument that consideration was given for a promise.
· To resolve the above issue, the court could simply use non-enforcement of the promise as an appropriate consequence, but this can be unfair when the promisee has already incurred loss as a result of relying justifiably on the promise
· The alternative to non-enforcement is Promissory Estoppel
C. Brief Overview of Elements: Including the two main elements of (1) a promise being made and (2) a detrimental reliance on that promise, certain elements must be established to invoke promissory estoppel:
· (1) A promisor (one who makes a promise) makes a gratuitous promise that he should reasonably have expected to induce action or forbearance of a definite and substantial character on the part of the promisee (one to whom a promise has been made)
· (2) The promisee justifiably relies on the promise.
· (3) A substantial detriment (that is, an economic loss) ensues to the promisee from action or forbearance. Injustice can be avoided only by enforcing the promise.
D. Independent Basis for Relief or Substitute for Consideration: While some argue that PE is growing in importance and that it may one day eclipse consideration as the ground for contractual liability, it remains an “ancillary basis for relief”
· Substitute for Consideration: Because it allows for the enforcement of a promise without consideration, PE is sometimes called a “substitute for consideration”
1. Those who argue this point take the view that if the elements of PE are satisfied, then the promise must be treated as a contractual undertaking.
2. The Restatement Second appears to favor this approach as indicated in §90 Promise Reasonably Inducing Action or Forbearance
Ø “(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted may be limited as justice requires.”
· Independent Basis for Relief: This view holds that PE does not result in the enforcement of the promise as a contract but is an alternative and independent basis for enforcing the promises-a separate theory of obligation, based not on bargain but accountability for conduct that induces reliance
1. This conception of PE emphasizes its affinity to tort and sees it more as a redress for injury suffered in reliance rather than as a consensual relationship
· Best Approach: It is more coherent to conceive of PE as a basis for relief related to a contract, yet at the same time separate and distinct from a contract
E. Difference in Remedial Interest, Contract v. PE: If PE creates contractual liability the normal relief PE should be the “full” enforcement of the promise and its only appropriate to limit relief under special circumstances.
· Conversely, if one focuses on the protection of reliance, the remedy should usually be confined to “reimbursement of actual loss”, with fuller enforcement reserved for when justice demands
· Damages if Treated as a Contract: Damages would look toward the future and try to place the promisee in the position they would have been in had the contract been honored. They aim at giving the promisee the benefit of the bargain by awarding the money equivalent to what the promisee would have gained as a result of the contract
· Damages if Treated as Independent Basis: Tort-like damages would be employed, which look only toward the past and merely try to restore the status quo by reimbursement of expenses and losses.
F. Equitable Estoppel: A type of estoppel that bars a person from adopting a position in court that contradicts his or her past statements or actions when that contradictory stance would be unfair to another person who relied on the original position.
1. EX: if a landlord agrees to allow a tenant to pay the rent ten days late for six months, it would be unfair to allow the landlord to bring a court action in the fourth month to evict the tenant for being a week late with the rent. The landlord would be estopped from asserting his right to evict the tenant for late payment of rent.
· Basic Purpose: To “preclude” (estopp) a person from asserting a right when, by “deliberate words or conduct”, he or she has “mislead” the other party into the justifiable belief that the right does not exist or would be asserted.
1. Involves a balancing of equities b/w the parties and a comparative evaluation of the fault and responsibility of each of the parties
G. Range of PE (Gifts and Commercial Transactions): When PE was first developed it was primarily used to validate gratuitous promises such as family gifts and charitable donations. It has now expanded to be invoked as a basis for enforcing commercial promises, mainly in the following three situations:
· (1) When a promise made for good consideration is not enforceable because of “non-compliance with legal formality” such as the statute of frauds.
1. In this scenario, PE may permit the enforcement of the informal promise when fairness demands that the promisor not be allowed to escape liability
· (2) PE may be used to hold a party to a promise “made during negotiations” for an abortive contract. Generally, statements made during pre-final-draft negotiations are not intended to bind until a final agreement is reached.
1. Sometimes, however, a pre-contractual statement might be intended as a binding commitment, justifying reliance and attaching liability if not honored
· (3) PE may afford relief for reliance on a promise that falls short of becoming a contractual promise because of some defect or omission in the agreement formed by the parties.
· Overall View: The role of PE goes beyond the enforcement of gift promises and covers a variety of promises that do not qualify as contractual, either because they lack consideration or because of some other deficie
promise or a bogus claim of promise.
1. The court should weigh the lack or presence of formality and the apparent deliberateness of the commitment in deciding whether the equities favor enforcement, and if so, to what extent
III.Remedies When Promissory Estoppel is Applied
A. Purpose of Remedies: Judicial remedies serve to protect one or more of the following interests of a promisee:
· (1) The promisee’s “expectation interest,” which is his interest in having the benefit of the bargain by being put in as good a position as he would have been had the contract been performed,
· (2) The promisee’s “reliance interest,” which is his interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made,
· (3) The promisee’s “restitution interest,” which is his interest in having restored to him any benefit that he has conferred on the other party.
B. Measure of Damages in General: The injured party has a right to damages based upon his expectation interest as measured by:
· (1) The loss in value to him of the other party’s performance caused by its failure or deficiency
· (2) And any other loss, including incidental or consequential loss, caused by the breach, less
· (3) Any cost or other loss that he has avoided by not having to perform.
C. Damages Based on Reliance Interest: As an alternative to the measure of damages stated in §347 [the expectation measure], the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.
D. Enforcement by Virtue of Action in Reliance: A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action or forbearance is enforceable notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires
E. Requirement that Benefit be Conferred: A party is entitled to restitution…only to the extent that he has conferred a benefit on the other party by way of part performance or reliance.
F. Measure of Restitution Interest: If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be measured by either:
· (a) the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position, or