Use of Promissory Estoppel in Business Contracts - Essay Example

? Use of Promissory Estoppel in Business Contracts by This essay discusses the concept of promissory Estoppel. It discusses the section 90 and 139 of Restatement of Contracts which form the basis of the concept of Promissory Estoppel. It also discusses the evolution of Promissory Estoppel with judicial interpretations of the concept. Contents Contents 3 Introduction 4 Bargain Theory of Consideration 5 Restatement of contracts - Section 90 & section 139 6 Promise vs. Reliance 7 Criteria for establishing Promissory Estoppel 10 Judicial Interpretation of Section 90 10 Promise to Negotiate rather than perform 11 Lack of Injury due to Reliance 12 Unconscionable circumstances against Statue of Fraud Requirements 13 Conclusion 13 References 14 Introduction Promissory Estoppels is a way to enforce a contract without any consideration (Farber & Matheson, 1985). A normal contract consists of three main components – an offer being made, the offer being accepted and a consideration being given for the offer (Klass, 2010). As an example let us suppose that company A signs a contract with company B to supply 50 tons of rice per month for $50/ton for 5 years. However if the grain prices fall during the contract period and B wants to renegotiate the price to $40/ton then under the normal contract law this can be done in 2 ways – either by giving a consideration such as agreeing to pay for the transportation costs or agreeing to buy more quantity and by annulling the contract and signing a new contract with new terms. However Promissory Estoppels provides an alternate way of doing it without any consideration or annulment. Promissory Estoppels comes into effect when one of the parties has made a promise, the other party has relied on it substantially and when not enforcing a promise will lead to gross injustice to one of the parties. Thus the three main concepts of Promissory Estoppel are a clear and definite promise, substantial reliance on that promise and miscarriage of justice if promise is broken. The origin of the modern concept of Promissory Estoppels can be found in the case of Central London Property Trust Ltd vs. High Tree House Ltd (Farber & Matheson, 1985). The case was regarding raising the rent of a group of flats after the end of the Second World War. The landlord had made a promise that he would take reduced rent from the tenants during the course of the war. However when the war ended in 1945, he wanted the original rent to be restores. In this case the Judge Denning laid down the principals of promissory estoppels by saying that a promise which is intended to be binding is binding as far as it terms apply correctly. This paper discusses the concept of promissory estoppels as applied in USA; the cases of business contracts where relief can be accepted under promissory estoppels and where the claim for relief is likely to be rejected by courts. Bargain Theory of Consideration A contract is a binding agreement between two parties and is the basis for any business transaction between the two parties. Contracts are the heart and soul of all businesses. Some of the contracts are written whereas other may be simply oral or trust based. Before the concept of promissory estoppels was discovered, contracts were based solely on the bargain theory of consideration (Feinman, 1984).According to this theory; a promise is enforceable only if it is supported by a consideration which has been sought for or bargained for by the promisor in exchange for the promise made by him. The Bargain theory also requires mutual consent of the offer which means that a clear offer must be made and accepted by the other party for a contract to be enforceable. In the case of New Zealand Shipping co. Ltd vs. AM Satterthwaite & co Ltd; Lord Wilberforce has clearly stated that offer, acceptance and consideration are requirements for a contract to be valid. These three factors must also be accompanied with no mistake, misrepresentation and duress which can affect the validity of the contract (E-lawresources.co.uk, 2013).Mistake means a commitment made in ignorance, misrepresentation is false projections of facts by one of the parties concerned and duress refers to not being in a correct state of mind when the contract was being signed. These three factors are acknowledged worldwide as the criteria for declaring contracts null and void. Section 75 of the Restatement of Contracts is based on the bargain theory and lays down the criteria for a contract to be signed between the two parties (Feinman, 1984). Restatement of contracts - Section 90 & section 139 Promissory Estoppels came to be recognised as legitimate contractual obligations after the formation of section 90 of the First Restatement of Contracts (Feinman, 1992). Although the word Promissory estoppels was never used in section 90 , it set forth the following elements of a valid claim – a promise being made , a reasonably reliance in the foreseeable future on the promise , a clear inducement of the reliance by the promise and the risk of gross miscarriage of justice if the promise is not enforced (Klass, 2010). This section has been frequently referred to by judges when deciding the cases of promissory Estoppel. However as section 90 was very brief and not well explained, it led to a misgiving that section 90 can only be applied in the case of private and not business or commercial contracts. There was a hesitation among the judges and lawyers to apply the contents of section 90 to business and commercial contracts. However all confusions regarding promissory estoppels were removed with the second restatement of contracts. Section 90 was modified and four new things were added to it. The first new thing was that judges were given freedom to give expectancy relief in cases of promissory estoppels as they deemed fit to serve the cause of justice. This gave substantial discretion the judge which was earlier missing. The second amendment removed the need for reliance to be definite and substantial. This was a revolutionary amendment. It removed the focus from reliance and laid it squarely on the promise made. Earlier Promissory Estoppel was usually not awarded if substantial amount of reliance could not be proved in the case. Thirdly, it was made amply clear that promissory estoppels would also apply to business contracts by giving various cases and examples and lastly even third parties who acted on the basis of a promise were made eligible for receiving compensation in case a promise was not fulfilled (Gilmore & Collins, 1995). For e.g. let us suppose Ford Motors has entered in a contract with a company “M “ which manufactures plastic parts to supply a fixed number of parts every year. Now as Ford was about to get a big contract from government’s defence department , it made a promise to ‘ M’ that it will now buy 20% more plastic parts every year. ‘M’ purchases molten plastic from company ‘N’. On the basis of promise from Ford Motors, M asked N to procure 20 % more molten plastic. Now in this case the promise made by Ford has not only affected by M but also N which is a third party in this case. According to the amendments made in section 90, even N will have a choice to demand compensation if Ford backtracks on its promise on which M & N had relied upon. Apart from section 90, section 139 was also added which said that a relied upon promise needs to be fulfilled even if it fails the requirement of statute of fraud. Statute of frauds requires that contracts which take more than a year to mature such as sale of lands, contract for services and contracts for purchase of goods greater than $500 should be put in writing. Thus section 139 has in one single stroke has made the statue of frauds as irrelevant in breach of contracts case (Gilmore & Collins, 1995) .Defendants can no longer take shelter under the statue of frauds for not fulfilling their promises. Promise vs. Reliance When Section 90 was first incorporated into Restatement of contracts, Professor Gilmore had predicted that it would engulf and make redundant section 75. Section 75 dealt with the old fashioned contracts in which a promise was made in return for a consideration. Professor Gilmore was the first of many “death of contract” scholars. These scholars predicted that contract as we know it would be eliminated from statutory books and its place will be taken by promissory Estoppel (Gilmore & Collins, 1995). There has always been a debate as to which is more important – reliance or the promise. This can be explained with a simple example. Suppose Tom’s father had made a promise of $1000 to him and Tom on the basis of this promise purchased a car worth $500. So if Tom’s father now refuses to pay; how much amount does a court ask him to cough up? This question is at the heart of the promise vs. reliance debate. If reliance is to be given more prominence than Tom relied on the promise and invested $500 but if promise is to be given more prominence than the father owes $1000 to Tom. Professor Gilmore says that the normative principle underlying promissory Estoppel is reliance and not the promise. He also says that promissory Estoppel is more like a tort where litigants should be paid damages and not the entire amount of the contract (Jimenez, 2010). Thus according to Professor Gilmore, Tom will get only $500. The observations made by Professor Gilmore had substantial effect on professors, lawyers and judges in cases related to promissory Estoppel. However a research by Professor Farber and Matheson on the bases of case law has refuted this theory put forward by Professor Gilmore. They claim that what Professor Gilmore has said is not what is actually done by judges in court cases. Judges do not only use section 90 to compensate promisees for the losses suffered by them in reliance of the promise but they make the promisor compensate for the whole promise made (Jimenez, 2010). Thus in the example we have considered, a judge is more likely to give Tom a compensation of $1000 rather than the $500 damage he has suffered. However the observations made by Farber and Matheson were from 1971 to 1985. The Restatement (second) of contracts was signed in 1981. Significant changes to section 90 were made in 1981 which might have changed the opinion of judges thus making the observation by Farber and Matheson irrelevant. Jimenez made a study of the cases from 1992 to 2007 in order to find out the causes for the rejection of relief under promissory Estoppel and see whether promise or reliance was given more importance in the cases. He found that judges gave almost equal importance to both promise and reliance. 39 % of cases were rejected due to promise being defective and 49 % cases were rejected as the reliance was defective and not substantial (Jimenez, 2010). Thus judges have not rejected promise as an important basis. They consider it as the first check point for promissory Estoppel cases. Although modification of section 90 has made it clear that the reliance may not be substantial but case law point to something else. Judges are still very strict regarding the reliance being substantive. The important point to note here is that 17% of the cases were rejected relief due to statue of frauds requirements which means that relief was denied if the contract was not in writing (Jimenez, 2010). Thus the initial assumption that section 90 would render the statue of frauds as irrelevant was flawed. It is still being given a lot of importance in case laws by judges. On the basis of these observations, it can be clearly said that reliance and promise are the two most important pillars of Promissory Estoppel. In order to give relief, judges will have a look at both of them and need to be satisfied that both the pillars are intact before giving relief. This puts an end to the debates about the death of contracts and the replacement of contracts by torts. Even after the emergence of Estoppel, contracts are holding on their own and are increasingly become important. Criteria for establishing Promissory Estoppel On the basis of section 90 of the Restatement (second) of contracts and the various case laws, we can say that 6 criteria are necessary in order to establish Promissory Estoppel in the cases of commercial contracts. There must be a pre-existing relationship between the two parties. This relationship need not be in the form of a binding contract but must be something which gives rise to a liability on one of the parties. The promise made must be clear and definite. There must be a definite and substantive reliance on the promise made. There must be a miscarriage of justice if the promisor goes back on him promise. Promissory Estoppel should be used as a shield not as a sword. This means that promissory Estoppel can be used only to defend an action not as the base for stating a fresh claim. Judicial Interpretation of Section 90 In this section we will discuss some important court cases regarding promissory Estoppel and the new dimensions added to section 90 due to the judicial interpretations. Promise to Negotiate rather than perform Lack of a clear and definite promise is the first check which judges use in order to decide the cases of Promissory Estoppel. They frequently rule that no promise was made and hence the person is not liable. However one important and interesting criterion which has been established in case laws is that the promise was a promise to negotiate rather than a promise to perform; thus negating Promissory Estoppel (Pham, 1994). This criteria was first established in” Messina vs. Biderman” case (Pham, 1994) in which the promisees were given exclusive right to negotiate with the city to purchase business property. However the city did not give the alleged property to the promisees. The judge ruled that the promise given was not a promise of allocating property but the promise was regarding negotiating a property deal. The city had full right to allocate the property to someone else after the promisees were given the first right of negotiation. Similarly in the “Tribune Printing co. Vs Ninth Avenue Realty Inc. “ ; the court ruled that the promise was about renegotiation of the rent deal ; the deal cannot be said to have finalised on the basis of that promise (Pham, 1994). Section 90 only mentions that there needs to be a promise but case laws have redefined this into a substantial and clear promise. If the promise is ambiguous, the courts are likely to reject the claims for Promissory Estoppel. This means that the importance of a well defined promise remains in the case of business contracts. The courts did not give relief even if a substantial reliance was made on the promise if the promise was vague and ambiguous to begin with. Lack of Injury due to Reliance Promissory Estoppel requires a promise to be made and a reliance on that promise according to section 90.However courts have added another dimension to the reliance concept: Injury due to the reliance. Courts usually reject cases of promissory Estoppel if there was no injury inflicted due to the reliance. Thus even if the plaintiff proves that there was a promise and a substantial reliance on that promise ; the case can still be rejected if no injury was sustained due to the reliance (Knapp, 1998). An important case in this regards is the Ripple’s of “Clearview Inc vs. Le Havre Associates” (Knapp, 1998). In this case the plaintiff claimed that he was made a promise that he will be given 18 months notice to vacate the premises of the defendant if he was able to maintain the premises well. In this case both the promises as well as substantial reliance were established. However the judge rejected the claim of promissory Estoppel by saying that no injury was caused to the plaintiff due to the reliance. He stated that the plaintiff had engaged in the upkeep and maintenance of the premises because of the catering business and not because of the promise made. The judge came to the conclusion that such upkeep would have been done even in the absence of the promise and thus cannot be said to be the reason of the injury by the plaintiff. The expenditure incurred by him was due to the business and not due to the promise made by the defendant. Although Section 90 does not state that any injury needs to be caused due to reliance; it mentions that only reliance on the promise is required but judges have categorically stated that reliance without an injury is meaningless. If no injury was caused, then there have been no ill effects or injustice of the promise not being upheld. Unconscionable circumstances against Statue of Fraud Requirements Section 139 clearly says that statue of frauds requirements need not be fulfilled for a relied upon promise. However judges in courts have not been so lenient and have required that unconscionable circumstances need to exist before they will wave off the statue of fraud requirements (Pham, 1994). An important case in this regard is the Munoz vs. Kaiser Steel Corp. In this case the plaintiff had relied on the oral promise made by defendant that he will be given 3 years of employment. On the basis of this promise he had relocated to a new place. Thus in this case a promise has been made, there is a substantial reliance on the promise and an injury in the form of relocation expenses has been made. The only thing missing is that the statues of fraud requirements were not fulfilled which are as it is not necessary under Section 139. However the court ruled against providing any relief by saying that the plaintiff had no prior job which he had to leave and his relocation expenses were quite less. Thus these were not unconscionable circumstances to allow the waiver of statue of fraud requirements and hence Promissory Estoppel was denied. Thus it is clear that courts are extremely reluctant to waive off statue of fraud requirements even though section 139 allows it (Pham, 1994). Conclusion Promissory Estoppels are great ways to avoid injustices in the cases were normal considerations cannot be provided. However Promissory Estoppel has been full of contradictions since they were first mentioned in Section 90 of Restatement of Contracts. They have invoked varied emotions such as they marked the death of contracts or that contract cases will now be decided simply as torts. Promissory Estoppel is still a work in progress. Although Section 90 and 139 which are the basis of promissory Estoppel are brief but the various court cases and judgements have given new meanings to these two sections. This essay has tried to explain the concept of promissory Estoppel, why is it needed, the requirements under section 90 and 139; the fight between reliance and promise and the new meaning given to section 90 due to some important judicial pronouncements. References E-lawresources.co.uk (n.d.) New Zealand Shipping v Satterthwaite. [online] Available at: http://www.e-lawresources.co.uk/New-Zealand-Shipping-v-Satterthwaite.php [Accessed: 10 May 2013]. Farber, D. and Matheson, J. (1985) Beyond Promissory Estoppel : Contract Law and the "Invisible Handshake". The University of Chicago Law Review, 52 p.903 - 947. Feinman, J. (1984) Promissory Estoppel and Judicial Method. Harvard Law Review, 97 (3), p.678 - 718. Available at: http://www.jstor.org/stable/1340893 [Accessed: 10th May 2013]. Feinman, J. (1992) The Last Promissory Estoppel. Fordham Law Review, 61 (2), p.303 - 3016. Available at: http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=3011&context=flr [Accessed: 10th May 2013]. Gilmore, G. and Collins, R. (1995) The death of contract. 2nd ed. Ohio: Ohio State University Press. Jimenez, M. (2010) The Many faces of Promissory Estoppel : An Empirical Analysis under the Restatement (second) of Contracts. UCLA Law Review, 669 p.669 - 724. Available at: http://ssrn.com/abstract=1373861 [Accessed: 10th May 2013]. Klass, G. (2010) Contract law in the USA. Bedfordshire: Kluwer Law International. Knapp, C. (1998) Rescuing Reliance: The Perils of Promissory Estoppel. [report] California: Hastings College of Law. Pham, P. (1994) The Waning of Promissory Estoppel. Cornell Law Review, 79 p.1263 - 1290. Available at: http://www.lawschool.cornell.edu/research/cornell-law-review/upload/pham.pdf [Accessed: 11th May 2013]. Read More