Promissory Estoppel as a Substitute for Consideration




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Promissory Estoppel

The legal doctrine of promissory estoppel is applied in all American states and finds its roots in equity.[1] In contract law, promissory estoppel is an exception to the requirement of consideration for a contract to be enforceable. Even in the absence of bargained-for exchange, a promise is enforceable if the following three elements are satisfied:

1)    The promisor should reasonably expect to induce action or forbearance from the promisee;

2)    Such action or forbearance is in fact induced; and

3)    Injustice can be avoided only by enforcement of the promise.[2]

We’ll address each of these elements, the purposes of promissory estoppel, and how it’s used to prevent injustice.  

Purpose of Promissory Estoppel

Promissory estoppel was formally “ushered” onto the stage of American contract law in 1932 in the First Restatement of Contracts.[3] At the time, the development of such a legal principle was viewed as a major departure from classical contract law. Now, it is reserved for the limited class of cases where it would be unconscionable or unfair to deny the promise upon which the plaintiff has relied.[4]

Element 1: The promissor should have reasonably expected to induce action or forbearance from the promisee.[5]

Courts look at all the circumstances to determine whether the promisor should have foreseen that the promisee would rely on the promise. This may include looking at the communications between the two parties to establish their states of mind. For example, if the promisee told the promissor that he wanted to purchase a car but was $2,000 short of being able to make a down payment, and the promissor then promised him $2,000, the promissor should reasonably expect the promisee to make the down payment in reliance of the promise. This reliance is reasonably foreseeable.

In Double AA Builders v. Grand State Construction, an Arizona case, a general contractor solicited bids from subcontractors for various portions of work on a larger project.[6] The general contractor made the various bidders aware that their bids were for work on a larger overall project. A subcontractor faxed a written but unsigned bid in the amount of $115,000 for the work requested. The bid also stated, “Our price is good for 30 days.” The general contractor relied upon the subcontractor’s bid to prepare its overall price for the construction project and stopped taking other bids. Within 30 days, the subcontractor backed out of the bid though. The general contractor had to find a replacement subcontractor and paid the replacement company over $130,000 to complete the same work. The contractor sued the subcontractor to enforce the original promise. 

The court ruled in favor of the general contractor and reasoned that the subcontractor should have reasonably expected the general contractor to use the subcontractor’s $115,000 bid to prepare his overall price for the entire construction project. By including detailed information in his bid, including the job name, scope of the work that would be provided, the price for services, and payment terms, it was foreseeable that the general contractor would rely on that bid to use in its own bid for the overall project if the quote was lowest. This specified information was more than just an expression of intent or desire to perform the work.

Element 2: Did the promise induce such action or forbearance?

Second, a plaintiff will have to show that there was a direct cause-effect relationship between the promisor’s promise and the promisee’s action.

Quake Construction v. American Airlines, also involved a subcontractor dispute about work on a construction project, but this time it was the subcontractor who sued.[7] The plaintiff, the subcontractor, alleged that it relied on an oral promise from an airline that it was awarded a project to complete the expansion of the airline’s facilities at O’Hare Airport in Chicago.

Promissory estoppel was applied and the airline’s promise was enforceable even though it was unsupported by consideration. The subcontractor had expanded its office space, hired a project manager, and secured other subcontractors for the facility expansion project all because of the oral promise. A direct cause and effect relationship existed because the subcontractor would have no reason for taking all these actions in the absence of such a promise.

Element 3: Can injustice be avoided by enforcement of the promise?

Courts interpret the term “injustice” to mean an unfair result. If an unfair result would otherwise occur, a promise will be enforced by awarding damages to a harmed party. Damages, however, are limited to reliance damages, which means the amount of harm suffered because of the reliance on the promise.  While courts generally prefer to award expectation damages, which means the full promised value of the agreement, these are not necessarily available in promissory estoppel cases. The court will award only those damages necessary to avoid injustice.

For example, assume that a homeowner tells an interior designer that he will hire the designer to remodel the home’s living room and two bathrooms, but no binding contract is agreed to. The interior designer spends money to purchase new wallpaper, new paint and tools necessary for the remodeling. The day before the project begins, the homeowner backs out and says he no longer needs the interior designer’s services. This is a classic example of where promissory estoppel may be applied. Although there was no binding agreement between the parties, the designer detrimentally relied on the homeowner’s promise.

What will a court award if the interior designer is successful in a lawsuit against the homeowner? Most likely, it will only award reliance damages, or the costs spent “in reliance” of the contract performance, which is what is necessary to avoid injustice. As such, the interior designer can recover the costs spent on wallpaper, paint, and tools, but not the full amount that he would have earned had the project been completed.

Promissory estoppel plays an important role in American contract law to hold parties accountable and ensure equity, even in the absence of consideration. It is a critical tool that courts can use to avoid injustice when the general contract law rules would cause unfair results.



Footnotes

[1] Eric Mills Holmes, “The Four Phases of Promissory Estoppel”, 20 Seattle U. L. Rev. 45, (1996).

[2] Eric Alden, “Rethinking Promissory Estoppel”, 16 Nev. L.J. 659, (2016).

[3] Section 90, Restatement of the Law of Contracts (Am. Law Inst. 1932).

[4] Meadow Ridge Capital, LLC v. Levi, 29 Misc. 3d 1224(A), (2010).

[5] Benjamin Boyer, “Promissory Estoppel: Requirements and Limitations of the Doctrine”, 98 U. Pa. L. Rev. 459, (1950).

[6] Double AA Builders, Ltd. v. Grand State Constr. L.L.C., 210 Ariz. 503, (2005).

[7] Quake Constr., Inc. v. American Airlines, Inc., 141 Ill. 2d 281, (1990).