What is Promissory Estoppel
WHAT IS PROMISSORY ESTOPPEL: A COMPLETE GUIDE TO INVOKE THE DOCTRINE
What happens when somebody makes you a promise but doesn’t keep it?
You take the promise in good faith, start to rely on it and can even take action based on the promise- only to find the person who made the promise doesn’t come through.
What can you do in such cases?
Generally, you consider it a lost cause and move on with life adopting caution so that you don’t make the same mistake again.
That could make you think that promises are meant to be broken, right?
You might be unaware, but the law enables you to sue the promisor for your damages even when there is no signed contract.
It’s made possible by something known as promissory estoppel.
A legally enforceable contract consists of three elements; namely, intention, agreement and consideration.
The element to be discussed in this particular question is the element of the agreement.
A contract is between two parties. In other words, it is consensual.
Hence it is material for the parties to be in agreement.
The element of the agreement, therefore, requires what is known as the ‘meeting of minds’, wherein both parties understand the essential terms of the contract in the same way.
The agreement is composed of two components – offer and acceptance.
An offer is a statement that signifies that the offeror is willing to contract.
Acceptance, on the other hand, is a reply to the offer, through actions or words, that assents to the terms of the offer.
There are two requirements that a statement must fulfill to qualify as an offer.
One, the offer must be sufficiently complete.
The essential terms of the proposed contract must be made clear, i.e. what is being offered, for how much is it being offered, and any other detail that might be relevant to the case in hand.
Two, the statement must be promissory.
This means that the wording of the offeror must be such that it reflects the willingness of the offeror to undertake liability, or to give or do the concerned thing.
In Harvey v Facey  AC 552 this very issue of what constitutes an offer was raised. Harvey sent Facey a telegram worded as follows:
“Will you sell us Bumper Hall Pen? Telegraph lowest cash price – answer paid.”
In reply to this, Facey sent,
“Lowest price for Bumper Hall Pen 900 pounds.”
After this, Harvey again telegrammed Facey, saying that he was ready to purchase the pen at the price quoted by Facey.
However, Facey refused to sell, and Harvey moved Court.
It was held that ‘Lowest price for Bumper Hall Pen 900 pounds’ could not be held as an offer. It was only information provided, not a promise made.
In general, an acceptance is complete when communication about it reaches the offeror.
However, there is one exception to this rule.
This exception is called the ‘postal acceptance rule’. This applies to cases where the parties have decided the method of acceptance via post.
The general rule states that for acceptance to be complete it is necessary for the communication to reach the offeror, but in this case, acceptance is complete when and where, the letter of acceptance is posted.
However, the postal acceptance rule is inapplicable to modern instant methods of communication including facsimile, telex, email etc.
In Entores Ltd v. Miles Far East Corporation  EWCA Civ 3, Entores, a London-based trading company, wishing to purchase copper cathodes, sent an offer by telex to a Dutch company.
The Dutch company also sent its acceptance by telex, but the contract was not fulfilled.
Entores could only bring an action in the UK if it could be proven that the contract was formed in the UK, i.e. within the jurisdiction and not in Amsterdam.
It was held that the postal rule would not apply to instantaneous communication. Hence the contract was only formed when and where the telex was received, i.e. London.
WHAT IS PROMISSORY ESTOPPEL?
Promissory estoppel is a legal principle which makes promises enforceable by law even when the promise lacks a formal consideration.
The principle is applicable when a promisee relies on the promise made by the promisor and encounters a subsequent detriment as a result of the promise.
Promissory estoppel prevents a promisor from arguing that his promise cannot be legally enforced or upheld. Let’s take an example to make the concept clear-
Imagine that you are the principal of a school.
A person from an education technology company approaches you to discuss the implementation of digital learning in your campus.
The person shows you how the students can benefit from using tablets, videos, internet and other resources to enhance their learning and understanding.
You are certainly excited by the idea and start to plan for the program.
You place the order for tablets and even apply for internet connection and other requirements to implement the program.
Next, you contact the parents and tell them all about the new development who also like the idea.
But without any notice, the education technology company retracts their promise.
You end up thinking that there is no way to recover the expenses you made for the program and are also concerned about facing embarrassment in front of the parents.
Now, there is no way you can save yourself from the embarrassment from the parents, but the principle of promissory estoppel can help you to recover the financial losses.
Promissory estoppel can enable you to recover damages if the damages occur as a part of the promise made by the promisor.
Another implication is you must have taken some action based on the promise even when there is no written contract.
Most countries in the world have adopted some form of promissory estoppel though the name and conditions may vary.
The legal principle aims to protect promises from detriments which result from the withdrawal or retracement of a promise by the promisor.
FEW WORDS ON ESTOPPEL
Estoppel is also a legal principle which prevents a person from alleging facts that don’t match with his former claims or actions.
Estoppel can prevent unfair treatment of a person based on the inconsistency of another person’s actions or words.
In simple terms, estoppel prevents a person from making contradictory claims which don’t match with their previous actions or claims.
You can find different types of estoppels in law such as equitable estoppel, collateral estoppel and promissory estoppel- all of which can be upheld as legal defense tools when someone goes against their former claims or actions.
A BRIEF OVERVIEW OF PROMISSORY ESTOPPEL
Promissory estoppel was included under the purview of American contract law back in 1932.
You can trace the roots of promissory estoppel in equity and is applicable in all states of America.
Any party can take help of the legal principle when some prerequisites are met, and they feel the promise has wronged them.
Promissory estoppel is discretionary just like all other equitable principles.
That means there is a stark difference with absolute legal rights such as the right to detriments for breach of contract.
Promissory estoppel can only be used when the court decides that the wrongdoing can be resolved only by enforcement of the promise.
Like we already discussed, promissory estoppel doesn’t require a written contract.
So, you can invoke the estoppel to recover your losses, but it depends on the court whether your estoppel will stand or not.
Under the contract law, a person making a promise or agreement is liable to receive consideration.
Legal consideration is considered a valuable asset which two parties exchange when they come into a contract by making a promise or agreement.
To legally enforce a contract, you need some considerations which can be a sum of money or the promise to withhold some action.
A court might choose to enforce a promise even in the absence of any consideration if the promisee relied on the promise and the act led to detrimental consequences for the promisee.
WHEN CAN YOU USE PROMISSORY ESTOPPEL?
According to the law, the principle of promissory estoppel is only applicable when a party uses his words or actions to create an unequivocal promise to another person who can create legal relationships or impact a legal relationship to develop in the future.
The promisor knows that the other party is likely to act on the promise which makes it binding and prevents them from going back upon it.
To invoke the principle of promissory estoppel, the promisee doesn’t necessarily need any detriment, but only needs to act in reliance to the promise.
The court will determine whether the promisee had to alter his position based on the promise in judging the validity of the case.
So, when can you exactly use promissory estoppel?
A few factors must be present in order for you to be able to invoke promissory estoppel. Here are some of the factors you need to use the legal principle:
1. The Presence of a Promisor
It’s a no brainer that you need to have a promisor to take help of promissory estoppel. The promisor should have made a promise using his words or actions which results in the promisee taking action or altering his position.
A promisor can be an individual person, a corporation, business or other forms of entity.
At rare occasions, the state can also be considered to be a promisor when all other requirements are met (we will discuss the implications of the state as a promisor in a short while).
For example, an employer who promises to pay a certain sum to an employee for his service is the promisor.
2. A Promisee Who Relies on the Promise
The second prerequisite you need to invoke promissory estoppel is the presence of a promisee. The promisee can be a person or an organization who takes the promise to be binding and takes action based on it.
The promisee is also the entity to suffer the negative consequences of breaking the promise which may or may not result in a detriment.
For example, the employee is the promisee who started his job on the basis of compensation promised by the employer.
3. The Promise or Representation
You cannot invoke promissory estoppel unless there is a promise involved. It may be in oral or written form and forms the basis of the whole argument once the case is raised in the court.
Here, the promise made by the employer to pay a sum to the employee is the representation.
4. Legal Relationship between Promisor and Promisee
You can establish a legal relationship between two parties by creating a contract. In the case of promissory estoppel, a legal relationship must be perceived by the court between the parties even in the absence of a written contract.
For this reason, even pre-contractual negotiations are included under the scope of promissory estoppels.
In case of our example, the court will accept a legal relationship between the employer and employee because they are tied in a professional relationship based on the promise.
CAN YOU INVOKE PROMISSORY ESTOPPEL AGAINST THE STATE?
Governments also make promises which could lead the citizens to alter their course of action.
But there is a lot of dispute associated with whether you can raise a case of promissory estoppel against the state.
Some lawyers agree that a person or entity can use the promissory estoppel against the state when all other prerequisites are met.
But it is also taken for granted that the doctrine should not be used lightly against the government.
You cannot hold the state liable for promissory estoppels in the same manner as an individual or corporation.
The state may not be able to assert its powers if the same conditions applied to it as individuals or corporations.
So, you will not be able to apply the principle of promissory estoppel generally against a state in its sovereign, public or governmental capacity.
Let us take an example to assist our explanation.
The government makes an announcement that it is going to offer tax reliefs to entrepreneurs if they open a production plant in a chosen area of the country.
An entrepreneur relies on the announcement and builds a factory in the chosen area to take advantage of the tax relief.
But the government retraces its step on the promise after the factory is opened.
Now, it is clear that the entrepreneur acted on the promise of the government and opened the factory which signifies taking action. He may also have invested money to create the factory.
But he will not be able to bring a case of promissory estoppel against the state because the contracts which you need to implicate the state have a specialized form.
You can only invoke promissory estoppel against the government when there is direct injustice involved, or the estoppel is required to prevent cases of fraud.
HOW DOES THE COURT JUDGE CASES OF PROMISSORY ESTOPPELS?
You will need to meet the above prerequisites we discussed to raise a case of promissory estoppel in the court.
The court will then try to determine if the case qualifies under promissory estoppel by judging the presence of a few elements which include-
- The promise made by the promisor is significant enough to make the promisee to act
- The promisee acted or relied on the promise
- The promisee experienced a detriment when the promise was not fulfilled
- Justice can be served only if the promise is fulfilled
1. The Promise is Significant Enough to Make the Promisee Act
The court will take into account all the circumstances and try to find out if the promise was significant enough to make the promisee act.
In other words, the court will try to determine if the promisor was able to foresee that the promisee would rely or act on the promise.
The court will try to assess the situation using various evidences, such as communication between the two parties.
In Double AA Builders v. Grand State Construction, the general contractor Double AA Builders was collecting bids for parts of work for a larger project.
Double AA Builders made it clear to all the subcontractors that their bids would contribute towards the completion of the overall project.
Grand State Construction, a subcontractor, sent a bid for $ $115,000 and mentioned that their price is applicable for 30 days.
The communication was conducted over fax though Grand State Construction didn’t sign the document.
Double AA builders depended on Grand State Construction’s bid to set their price for the bigger project and also ended the bidding process.
But Grand State Construction didn’t keep their promise and backed out within 30 days. As a result, Double AA builders had to find another subcontractor and paid them $130,000 to carry out the work.
Double AA builders filed a case of promissory estoppel, and the court ruled in their favor.
The court maintained that Grand State Construction should have been able to foresee that Double AA builders would depend on their bid in preparing their overall price and ruled that the bid provided by the subcontractor was more than just intent to work.
2. The Promisee Relied on the Promise
The plaintiff will have to prove to the court that they relied on the promise and altered their position based on the promise.
You will have to establish a direct cause and effect relationship between your action and the promise of the promisor.
Quake Construction v. American Airlines case shows that proving a direct cause-effect relationship can help in invoking promissory estoppel.
American Airlines made an oral promise to subcontractor Quake Construction that it was awarding them a project to carry out the expansion of its facility at Chicago’s O’Hare Airport.
Quake Construction relied on the promise and made investments in recruiting a project manager, expanding into bigger office space and also hired other subcontractors to help them in the airport expansion project.
But American Airlines backed up from their promise which led Quake Construction to file a case of promissory estoppel against the company.
The court ruled that Quake Construction had relied on the oral promise and took action to expand office space and hire other subcontractors and employees.
A direct cause and effect relationship was established, as Quake Construction wouldn’t have taken all the actions in the absence of the promise. As a result, the case was awarded to Quake Construction.
3. The Presence of Detriment as a Consequence of the Promise
You don’t always need the presence of a detriment to invoke promissory estoppel, but it can undoubtedly strengthen the case in favor of the plaintiff.
You will certainly benefit if you can prove to the court that you have suffered a detriment such as a financial loss.
Detriments are not always financial in nature and can be anything that puts you in a worse position for relying on the promise.
In Double AA Builders v. Grand State Construction, Double AA Builders suffered a direct detriment by relying on Grand State Construction’s bid.
They had to pay $130,000 to another subcontractor for doing the job while the original bid was for $ $115,000.
That means Double AA Builders suffered a detriment of $15,000 ($130,000 – $ $115,000).
In the case of Quake Construction v. American Airlines, the detriment was not purely financial.
They had expanded their office space and hired other employees who became useless as the promise was not fulfilled. As a result, they were put in a worse position which qualified as a detriment.
4. Justice can be Served Only if the Promise is Fulfilled
The court will decide whether the fulfilment of the promise can prevent injustice. Injustice is a legal term which denotes unfair results. If you are liable to face injustice if the promise is not fulfilled, then the court will try to provide justice by awarding your damages.
The damages awarded by the court will be limited to reliance damages, which mean you will only get the amount of detriment directly related to the reliance on the promise.
You should not expect the court to award you expectation damages which include the full value of agreements.
In promissory estoppel cases, the court will award you only the damages which it deems necessary to avoid injustice.
For example, let’s say you contact a plumber to work at your house but don’t provide any binding contract.
The plumber buys pipes, taps and other accessories required for the work. But on the day of the job, you back out and cancel your promise.
The plumber will be able to invoke promissory estoppel and get paid for the detriment which includes the costs of pipes, taps and other accessories.
He will not get the full amount promised for the job, but only as much as required to cover for his actual expenses.
Promissory estoppel can be a lifesaver when you don’t have a written contract, and the promisor doesn’t fulfill his promise.
You will need to prove that you have faced negative consequences or detriments to win the case in your favour.
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