The Bargain Theory of Contract : Reliance

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  1. Definitions
    1. Equitable Estoppel is strictly, an estoppel which arises out of a person’s statement of fact, or out of his silence, acts, or omissions, rather than from a deed or record or written contract. Equitable estoppel is available when one party knowingly misrepresents material facts that are then predictably relied upon by the other. The misrepresenting party is “estopped” from asserting facts that contradict its misrepresentations.
    2. Promissory Estoppel – an equitable doctrine declaring that “a promise which the promisor should reasonably expect [will] 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. Restatement 2d §90.
  2. Holmes on Reliance
    1. “It would cut up the doctrine of consideration by the roots, if a promisee could make a gratuitous promise binding by subsequently acting in reliance on it.”
    2. Some have argued that this prophecy has come true.
  3. The Emergence of Promissory Estoppel
    1. Promissory estoppel is used offensively. It’s a manner in which the plaintiff asserts a cause of action for getting a promise enforced. It is the somewhat “disfavored” way of enforcing promises. The courts like to try other things first, such as consideration.         
    2. Promissory Estoppel requires all of:
      1. A Promise
      2. Foreseeable reliance
      3. Actual reliance
      4. Injustice absent enforcement
    3. Possible Applications
      1. Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the promisee relies on the gift to his detriment.
        1. Intra-family promises: The doctrine may be applied where the promise is made by one member of a family to another. (Example: Mother promises to pay for Son’s college education, and Son quits his job. Probably the court will award just the damages Son suffers from losing the job, not the full cost of a college education.)
      2. Charitable subscriptions: A written promise to make a charitable contribution will generally be binding without consideration, under the P.E. doctrine. Here, the doctrine is watered down: usually the charity does not need to show detrimental reliance. (But oral promises to make charitable contributions usually will not be enforceable unless the charity relies on the promise to its detriment.)
      3. Gratuitous bailments and agencies: If a person promises to take care of another’s property (a “gratuitous bailment”) or promises to carry out an act as another person’s agent (gratuitous agency), the promisor may be held liable under P.E. if he does not perform at all. (However, courts are hesitant to apply P.E. to promises to procure insurance for another.) 
    4. Quasi-contract – One party has something they were not entitled to in the first place, and in good conscience he should either return it or pay its value (doctor charging for reviving a person who passes out on the floor). The law implies a contract where no contract existed previously and dispenses relief according to that implied contract. The contract implied-in-law is a legal fiction imposed by the court to remedy injustice.
    5. Note: Damages are limited to the reliance interest.
  4. Ricketts v. Scothorn
    1. Facts: Δ is the executor. Testator promised to pay Π $2000 on demand so she wouldn’t have to work.
    2. Issue: There was no consideration, but Π relied on the money and quit her job.
    3. Rule: ORDINARILY, such promises are not enforceable even when put in the form of a promissory note.
    4. Exception: There are a class of cases where the note in suit is given as a gift or donation, but a decision is rendered FOR the promisee on the ground that an expenditure of money or assumption of some liability on the part of the promisee/donee, on the faith of the promisor’s promise, constitutes a valuable and sufficient consideration.
      1. In such instances, the D should be precluded (estopped) from denying consideration
    5. Result: The court stressed that girl relied on Grandpa “to her detriment” and it appears this is where the “injustice absent enforcement” kicks in.Because it would be grossly inequitable to permit Δ to resist payment, Π should receive the payment.
    6. Notes: While the court tries to fit this case to Equitable Estoppel, they actually created Promissory Estoppel because Δ had misrepresented no facts.
    7. Restatement §90 was borne in part from this case.
  5. Cohen v. Cowles Media Co.
    1. Facts: Π gave facts pertinent to a story to Δ when assured that Δ would not share Π’s identity. Δ then printed Π’s name in the paper, and Π was fired from his office.
    2. Held: Court held the promise must be enforced to prevent injustice:
      1. In view of the D’s agreement that honoring promises of confidentiality is important, and absent the showing of any compelling need in this case to break that promise, the resultant harm to Cohen requires a remedy to avoid injustice.
  6. Midwest Energy, Inc. v. Orion Food Systems, Inc.
    1. Facts: Π was building a gas station/convenience store with hopes to provide Δ’s product. Δ required that certain mods be done to the design before they could provide their product. Π redesigned and constructed as Δ required. Δ then never agreed to the deal. Trial court granted summary judgment for Δ.
    2. Promissory Estoppel Analysis:
      1. Promise: Trier of fact could find Ries promised P that a franchise conforming to the specs provided to P in March 1996 would be issued as soon as P was ready to operate, and that P could prepare based on those stmts.
      2. Foreseeable reliance: Trier of fact could find that b/w April and Sept. of 1996, P & D wanted to do business together. Ries was D’s authorized liaison with P & had every reason to believe that P would want to comply with his directions, otherwise fearing the offer of a franchise would be withdrawn.
      3. Actual reliance: Record shows that P relied on Ries’s promises by (1) making changes in P’s plans for the fast food area and (2) forbearing attempts to interest other possible franchisors in its new facility. This proves reliance and a basis for damages.
        1. Orion argues (1) Midwest had no right to rely on anything Ries said as binding on Orion and (2) the language in the circular given to P on Ries’s first visit, that expressly cautioned against taking any further action until Midwest had been notified in writing that its application had been approved.
          1. Court notes, though, that the promises upon which P relies came after the delivery of the circular, at a time when D (via Ries) was encouraging and in fact assisting P with making active preparations to undertake the franchise (Prof. notes this as being important to the Court).
    3. Result: While the contract was not enforceable, there was a promise, foreseeable reliance, reliance in fact, and injustice absent enforcement, so the judgment was overturned.
    4. Notes:
      1. A party to unsuccessful negotiations may recover for losses reasonably and foreseeably sustained by him as a result of the other party’s negligence or lack of good faith during the bargaining process.
      2. Alternate: recovery may be based on the duty to bargain in good faith.
      3. Typical context is an unsuccessful contract negotiation involving franchises or government contracts. Both have a great inequality in bargaining power.