Business Law
promissory estoppels in Business contracts
Introduction
Miller (2013, p. 173) stated that the doctrine of promissory estoppel also known as “detrimental reliance”, shall give any person who has reasonably and substantially relied on the promise of another to acquire some measure of recovery. At present time, the doctrine of promissory estoppel has been used in different contexts by the court that allowed the recovery of a promise despite lack consideration on the promissor. The doctrine enabled the court to enforce an unenforceable promise that will prevent the miscarriage of justice to those who suffered losses and damages. In order for the doctrine to exist, there are requisites that should be met: 1.) There must be a clear promise that is certain; 2.) The promisor expected the promisee will depend on such promise; 3.) The promise has reasonable relied on the promise by acting or refraining to do an act; 4.) The promisee suffered from a substantial detriment resulting from a definite reliance; and Fifth, the enforcement was done to avoid injustice to the promisee. This view was supported in the work of Miller (2013).
Discussion
There are some instances that will illustrate the application of the doctrine of promissory estoppel such as gifts or promise to pay, donation to charities and in business transactions to avoid inequity and hardships in other situations. In general, the essential elements of promissory estoppel consist of the following: First, there was a promise that was reasonably made by the promissor, that is expected of him, in order to provoke an action or forbearance; Second, such action or forbearance on the part of the promise, who has justifiably relied on the promise made by the promissor; and Third, the result was an inequity or injustice that can only be remedied by enforcing such promise of the promissor. Miller (2013, p. 173) stated that the remedy that is available to the promisee is generally restricted to only that which is compulsory and necessary in order to avoid injustice.
The case of Devecmon v. Shaw is an illustration that gifts that are relied upon by the promisee are enforceable under the equitable estoppel doctrine. The facts of the case will show that John Semmes Devecmon filed a case against Shaw and the executors of the estate of his deceased uncle, John S. Combs. The trial court rendered a default judgment in favor of the plaintiff, Devecmon and ruled on the matter involving assessment of damages. On his part, Devecmon asked permission from the court to be allowed to introduce as evidence his own testimony and the books of accounts of the deceased uncle. Devecmon was working for his uncle for a long time and that went on a trip to Europe on the basis of the promise made by his uncle, Combs that all his expenses for such trip will be reimbursed as a gift given to Devecmon. As a result, Devecmon filed an appeal on the basis of the court’s denial to admit such evidence. The issue of the case is whether Devecmon’s detrimental reliance on a promise of a gift is enforceable to make the promissor liable to such obligation even if there no consideration given for the promise made.
The Supreme Court held that the detrimental reliance on the part of Devecmon shall be enforced against the estate of Combs. Here, it was clearly shown by evidence that the promise of Combs, as the uncle and also the employer of Devecmon, has made the latter believe that he will be reimbursed with all his expenses as part of a gift. Such evidence shall be held admissible before the court since Devecmon was made to believe that he will spend money on the basis of Combs’ promise of reimbursement. Further, the Supreme Court added that it was immaterial and irrelevant to prove that Devecmon received any benefit after spending money for the trip.
It is noteworthy to mention that the doctrine of promissory estoppel shall require a promise and reasonable reliance on the part Devecmon in such a way that there is an adjustment in such position, wherein a detriment is incurred as a result. The doctrine of promissory estoppel can only be applied as a substitute for legal consideration. Such doctrine is inapplicable when there is an actual consideration that was presented to the promisee.
The case of Salisbury v. Northwestern Bell Telephone Co. will illustrate an instance when donations to charitable institutions are enforceable. In this case, Northwestern sent a letter to Charles City College that stated that there was a promise to donate the amount of $15,000. In order to hold proof of the donation, a pledge card was accomplished which represents the donation made and considered as a normal pledge card. However, such pledge card was left unsigned by Northwestern. Later, Charles City College executed an assignment of the pledge to a one of the suppliers of the university. The supplier accepted the unsigned pledge card that shows the amount of $15,000 as Northwestern’s donation to Charles City College. Years after, the college closed down. Plaintiff, Salisbury is the chairman of the board of trustees of Charles City College and initiated a lawsuit against Northwestern to recover the amount of the pledge. The Court ruled in favor of Charles City College as the promissee and rendered that the pledge enforceable as a matter of public policy. Hence, Northwestern appealed the decision by claiming that the pledge was unenforceable there being no consideration that was offered.
The issue that was raised before the Supreme Court is whether or not a pledge to a charitable institution can be enforceable despite absence of any consideration. The Supreme Court held that a pledge to a charity can be enforceable even if there is no consideration under the doctrine of promissory estoppel. The doctrine shall be applied in the case of a donation to a charitable institution as a matter of public policy. In addition, there is no need to present proof or evidence of any consideration or detrimental reliance. Pursuant to the Restatement of Contracts Section 90, charitable subscriptions remain to be enforceable on the basis of the doctrine of promissory estoppel even if there is no showing of detrimental reliance.
In the case of Hoffman v. Red Owl Stores, Inc. will illustrate an instance when promissory estoppel can be applied in business transactions. Here, the plaintiff, Hoffman was the sole owner and operator of a bakery who filed an application for a supermarket franchise with Red Owl Stores. Red Owl Stores has made an assurance to Hoffman that the amount of $18,000 will cover the franchise amount and was sufficient to enable Hoffman to obtain and operate a petite store just to be able to gain experience. After three months, Hoffman was advised by Red Owl Stores to sell the store after making assurances that Hoffman will receive a bigger store after the sale. Although Hoffman was hesitant to sell the small store for fear of missing the summer tourist season, he still sold the store on the account of the assurance made to him by Red Owl. Months have passed, Red Owl informed Hoffman that everything is set to be accomplished as the store is ready and so is there is a need to produce the money by selling the bakery of Hoffman. Red Owl informed Hoffman to raise his final financial contribution so Hoffman sold the bakery for only $10,000 and accepted the position to work on the night shift at a local bakery. Red Owl asked Hoffman to contribute a bigger amount of money so Hoffman’s father-in-law made a contribution amounting to $13,000 in order to form a partnership of the store. Hoffman was asked by Red Owl to sign an agreement that the amount $13,000 will represent a gift or a loan subordinate in favor of the general creditors of the store. However, the negotiations that ensued thereafter were terminated, prompting Hoffman to file a case against Red Owl for damages, actual losses suffered, loss of profits, and other expenses.
As part of Red Owl’s defense, he alleged that he failed to reach an agreement with Hoffman due to the absence of the essential requisites that are obligatory for the creation of a valid contract. The court ruled in favor of Hoffman by granting him the amount of $16,735 to represent the sale of the store, the amount of $2000 for the sale of his bakery, and the amount of $1250 to represent other expenses. Red Owl filed an appeal to question the ruling of the court. The issues in this case is whether or not under the doctrine of promissory estoppel aside from the lack of consideration is on the basis of the relied upon to constitute a valid cause of action for breach of contract; and to what extent is Hoffman allowed to recover.
The Supreme Court held that under the doctrine of promissory estoppel, there is not requirement that the promise being relied upon should be able to stay a cause of action under a breach of contract, and thus making such claim enforceable. Furthermore, the application of the doctrine of promissory estoppel will entitle the promisee to recover damages in order to prevent injustice and inequities, and not to enforce the promises made by the promissor. Based on this case, the High Court took into account the fact that the parties did not reach an agreement to comply with the essential requisites for the formation of a binding contract.
In the case of Hoffman, the Supreme Court ruled that while a breach of contract action may include loss of profits, it cannot be considered as a breach of contract action. Where damages are awarded in promissory estoppel instead of specifically enforcing the promisor’s promise, the award of damages should be in the opinion of the court are necessary to prevent injustice. The wrong lies in causing the plaintiff to change position to his detriment. It would follow that the damages should not exceed the loss caused by the change of position (Miller, 2013.
While in the case of Alaska Democratic Party v. Rice, the court applied the doctrine of promissory estoppel to recover damages suffered which results to injustice. The plaintiff in this case is Rice, who worked for the Alaska Democratic Party from 1987 until 1991 where she was terminated from her position as executive director. Plaintiff alleged that from the time Greg Wakefield was appointed as chairman of the Party, he offered Rice to fill in the same position as executive director for another two years. Upon acceptance, Rice resigned from her position being a member of the vice-presidential campaign for Gore, and relocated to Alaska. The plaintiff was thereafter informed that she did was not qualified for the position and caused her to file case against Alaska Democratic Party. The lower court ruled in favor of Rice by awarding her cost of damages under the doctrine of promissory estoppel and for the misrepresentation of the party.
As a result, the party appealed the decision and argued that the alleged contract was void under the statute of frauds. The main issue to be resolved in this case is whether the oral employment contract should be removed pursuant to the statute of frauds based on the doctrine of promissory estoppel. The Supreme Court held that an oral contract may be detached from the statute of frauds using the doctrine of promissory estoppel by showing through clear and convincing evidence that the promise of employment was present. The rationale behind this ruling is that a promise is enforceable on the basis of the promissory estoppel doctrine in order to avoid injustice through the enforcement of the promise. Here, the plaintiff Rice was allowed by the court to recover to the extent of damages under the doctrine of promissory estoppel. However, she was not allowed to recover damages on the basis of misrepresentation to the party.
Simply put, the High Court ruled that the doctrine of promissory estoppel was raised to become the substitute for consideration that declared the gratuitous promise valid and enforceable upon the promissor. Well-established is the rule that in order for promissory estoppel to exist, the requirements are: 1.) there is a promise which the promissor is expected to persuade action or forbearance that is definite; 2. that the promise in fact convinced such action or forbearance; and 3.) such injustice can only be avoided through the enforcement of such promise (Miller, 2013, p. 173). When damages are awarded in promissory estoppel, it bears stressing that damages that are to be awarded is a necessity to avoid injustice. The law does not require that justice should award damages be greater than the actual loss sustained by the promise.
Conclusion
Under the doctrine of promissory estoppel, known as “detrimental reliance”, any individual who has reasonably and substantially relied on the promise of another can acquire some measure of recovery (Miller, 2013, p. 173). The doctrine of promissory estoppel can be used in several contexts and permits a party to recover a promise even if the same was made without any consideration. The doctrine states that the court can enforce an unenforceable promise in order to avoid injustice.
The doctrine can only be applied if the following requisites are complied with: First, there must be a clear promise that is certain; Second, the promisor expected the promisee will depend on such promise; Third, the promise has reasonable relied on the promise by acting or refraining to do an act; Fourth, the promisee suffered from a substantial detriment resulting from a definite reliance; and Fifth, the enforcement was done to avoid injustice to the promise (Miller, 2013).
It bears stressing that the doctrine of promissory estoppel can be compared to the doctrine of quasi-contract since in these two instances, the court is acting to promote the interest of equity and justice by enforcing the contractual obligations. The purpose of the enforcement by the court of the contractual obligation of the promisor is to avoid unfairness even there is no contract actually exists. Although in quasi-contracts, there was no promise made, which is not the case for promissory estoppel since a promise was made to which the promisee relied on, but was rendered unenforceable (Miller, 2013, p. 173).
References
Alaska Democratic Party v. Rice, 934 P.2d 1313 (Alaska 1997).
Devecmon v. Shaw, 14 A. 464 (Md. 1888).
Hoffman v. Red Owl Stores, Inc., 26 Wis.2d 683, 133 N.W.2d 267 (1965).
Miller, R.M., 2013. Fundamentals of business law: excerpted cases. Mason, OH: South Western
Cengage.
Salisbury v. Northwestern Bell Telephone Co., 221 N.W.2d 609 (Iowa 1974).
