Promissory estoppel

Definition

The doctrine of promissory estoppel (also referred to as detrimental reliance) prevents one party from withdrawing a promise made to a second party if the latter has reasonably relied on that promise and acted upon it to its detriment.

Overview

In the United States, promissory estoppel is generally an alternative to consideration as a basis for enforcing a promise. The American Law Institute in 1932 included the principle of estoppel into Restatement of Contracts §90, stating:

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A promise which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise.

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Restatement (Second) of Contracts removed the requirement that the detriment be "substantial."

The distinction between promissory estoppel and equitable estoppel should be noted:

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Equitable estoppel is distinct from promissory estoppel. Promissory estoppel involves a clear and definite promise, while equitable estoppel involves only representations and inducements. The representations at issue in promissory estoppel go to future intent, while equitable estoppel involves statement of past or present fact. It is also said that equitable estoppel lies in tort, while promissory estoppel lies in contract. The major distinction between equitable estoppel and promissory estoppel is that the former is available only as a defense, while promissory estoppel can be used as the basis of a cause of action for damages.

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Suppose that B goes to a store and sees a sign that the price of a radio is $10. B tells the shopkeeper that he will get the money and come back later that day to purchase it; there is no discussion of price. The shopkeeper says that when B returns, he will be happy to deal with B as he deals with all his customers but that, if he sells all the radios (he has three), he will not be able to help B. Hearing this, B goes and sells his watch for $10 (it was really worth $15, but since B wanted the money right away, he chose not to wait for the best price). When B returns, the sign says $11, and the owner tells B that he has raised the price. In Equity, can you argue that the shopkeeper is estopped by conduct? B relied upon the implied representation that a radio would be sold for $10 when he returned with the money; B has sold his watch at a price lower than the market price, and thus he has acted to his detriment. (Note that if B's watch was worth $10, and he received a fair price, there would be no detriment.) But the problem is that the shopkeeper did not guarantee to hold one of the radios against the possibility of B's return nor did they agree a fixed price. The shopkeeper's conscience might have been affected if he had known that B was going home to collect the money and would definitely return to buy one of the three radios. Indeed, in some common law jurisdictions, a promise by the shopkeeper to hold a specific radio would create a binding contract, even if B had to go for the money. A promise to pay the owner in the future is good consideration if it is made in exchange for a promise to sell a specific radio (one from three is probably sufficiently specific): one promise in exchange for a second promise creates equal value. So the shopkeeper's actual words and knowledge are critical to deciding whether either a contract or an estoppel arises.

One contentious point during the drafting of the Restatement was how to calculate the amount of damages flowing from a promissory estoppel. During the deliberations, the following example was considered: a young man's uncle promises to give him $1,000 to buy a car. The young man buys a car for $500, but the uncle refuses to pay any money. One view was that the young man should be entitled to $1,000 (the amount promised), but many believed that the young man should only be entitled to $500 (the amount he actually lost). The language eventually adopted for the Second Restatement reads — "The remedy granted for breach may be limited as justice requires." — a formula which leaves quantification to the discretion of the court.