Prof. Avv. Bruno Tassone
Docente di Principles of Civil Law
LUISS Guido Carli
Prof. Avv. Bruno Tassone
Docente di Principles of Civil Law
LUISS Guido Carli
One of the major differences between Contract Law in Common Law and Civil Law countries lies in the discipline of pre-contractual liability.
Indeed, Common Law systems are said to provide a very limited protection, if any, to parties who commit to negotiations (on the other hand, even in Civil Law countries the said type of liability is a relatively recent invention).
Then, it becomes clear the importance of consideration and to ascertain whether a contract is made: before a binding agreement is reached, the parties are in principle free to withdraw from negotiations at their will.
The bias against pre-contractual liability are grounded on several reasons, which are:
The idea that the market is a “pitiless arena” in which the parties are bound only by the contracts they make (“laissaiz faire”);
The negative incentives given to the parties;
Other concerns related to the indifference of the legal system for the outcome of negotiations, the difficulty to ascertain when the duty to behave according to good faith arises and the related costs in the administration of justice.
While English Law is still fairly strict, U.S. law has been evolving so as to ensure the parties some protection, though not through a general rule but rather in specific situations (and sometimes reverting to tort law).
The basic idea is that a party should be prevented from opportunistic behaviors which harm a counterpart who relied on the promise.
The main doctrine through which this result is achieved is the so-called “promissory estoppel”, expressed by the quoted § 90 of the Restatement Second on Contracts.
As already seen, pursuant to the first Paragraph of Section 90 of the Restatement 2nd on Contracts “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires”.
Case 1: A, knowing that B is going to college, promises B that A will give him $5,000 on completion of his course. B goes to college, and borrows and spends more than $5,000 for college expenses. When he has nearly completed his course, A notifies him of an intention to revoke the promise.
Under the promissory estoppel doctrine, A's promise is binding and B is entitled to payment without regard to whether his performance was “bargained for”.
Promissory Estoppel belongs to the broader category of “estoppels” and mainly developed in the jurisdiction of equity.
Its first purpose was to bar a party to deny a fact she did declare and it was essentially a procedural tool, expressing the ban of “venire contra factum proprium”.
Later on the doctrine was used as an objection aimed at preventing a party to act and exercise rights inconsistently with a promise on which the counterpart relied, especially in the field of proprietary estoppels (real estate).
Case 2: in 1937, High Trees House Ltd. leased a block of flats in London for a rate £2500/year from Central London Property Trust Ltd.
Due to the market conditions during the beginning of Word War II, occupancy rates were drastically lower than normal.
In January 1940, to ameliorate the situation the parties made an agreement in writing to reduce the rent by half, without stipulating the period for which the reduced rental was to apply.
Thanks to the reduction of the rent, over the next five years the flats began to fill again and by 1945 they were back at full occupancy.
Then, Central London sued for payment of the full rental costs from June 1945 onwards.
Based on previous judgments, Lord Denning held that the full rent was payable from the time that the flats became fully occupied.
However - he continued - if Central London had tried to claim the rent from 1940 onwards, she would not have been able to recover it.
Apart from cases concerning proprietary estoppels (such as the said High Trees), at the beginning of the past century several judges and scholars tended to apply the doctrine only to gratuitous promises and outside commercial settings.
Nevertheless, these restrictions were then abandoned (together with the feeling that its contradiction to the consideration doctrine was excessive).
While in English law promissory estoppel is considered “a shield and not a sword”, in the U.S. it started to be used non only as a defense, but also as a cause of action (being it initially admitted only for proprietary estoppels).
Case 3: In Hoffman v. Red Owl Stores (1965) the plaintiff owned a bakery, seeking to obtain a supermarket franchise.
The defendant assured Hoffman that his $18,000 savings were sufficient and advised him to acquire and operate a small store to gain experience.
Three months later Red Owl advised him to sell the store assuring that he would be given a larger one. Hoffman was reluctant to miss the summer tourist season, but sold the store on Red Owl’s assurances.
A few months later Red Owl told Hoffman “everything is ready to go”. Therefore, to raise the rest of his financial contribution, Hoffman sold the bakery for $10,000 and took a job on the night shift at a local bakery.
Red Owl informed Hoffman that he would have to give a greater amount and so permitted Hoffman’s father in law to contribute $13,000 and become a partner in the store.
Hoffman was then told that he would have to sign an agreement that the $13,000 was either a gift or a loan subordinate to all general creditors: Negotiations terminated and Hoffman sued Red Owl.
Which difference there is between Red Owl and High Trees?
The promise is not carried out within an already existing relationship (as often happens in proprietary estoppels).
Promisory Estoppel is used to sue and to claim damages, not simply to resist to an action.
The doctrine of promissory estoppel is nowadays quite flexible: The promisor is affected only by reliance which he does or should foresee and enforcement must be necessary to avoid injustice.
Satisfaction of the latter requirement may depend on:
the reasonableness of the promisee’s reliance;
the formality and wording with which the promise is made; and
the extent to which policies such as the enforcement of bargains and the prevention of unjust enrichment are relevant in the single case passed on by the court.
In particular, a promissory estoppel action demands a promise involving the manifestation of an intention to act or refrain from acting in a specified way.
The promise must be clear, unambiguous and sufficiently specific so that the court can understand the obligation assumed and enforce the promise according to its terms (even though judges do not seek all the elements required for a contractual offer).
For example, a statement of future intent is not an unequivocal promise sufficient to invoke the doctrine.
Similarly, a cause of action does not lie where an alleged oral promise is conditional.
In some jurisdictions a party bears the burden of establishing the following elements:
a promise reasonably expected to induce action or forbearance (with the above characteristics);
such promise did in fact induce such action or forbearance;
the party suffered detriment as a result.
Additional elements may be required, such as:
foreseeability by the promisor that the promisee would rely on the promise; as well as
reasonable reliance by the promisee of a definite and substantial nature.
Case 4: In East Providence Credit Union v. Geremia (1968), the defendants took out a loan secured by their car, promising to insure it.
When their payments were late, they received notice from the creditor that if the insurance did not get paid, he would pay the premiums and apply them toward the balance of the loan (getting interests on the related amounts).
The defendants did not pay the premiums and neither did the plaintiff. The car got destroyed in an accident, but it was not insured because nobody made the insurance payments.
The plaintiffs sued for the balance of the loan, as – being a collateral – the car was lost and should have been insured at all times during the life of the loan.
The defendants counterclaimed alleging they were relying on the plaintiffs to pay the premiums.
The Court affirmed (though using the doctrine of consideration, while the long reasoning over promissory estoppel was left to an obiter dictum).
Few commentators argued that probably the promise did not bring about any change in the position of the promisees – which would have not paid the premiums anyhow - and that there was not reliance.
Part of most recent scholarship grounds the doctrine more on the “power relationship” created by the promise and on the need to foster economic activities (protecting promises themselves), than on the reliance principle: the idea is that “trust is socially beneficial and essential to the formation of valuable economic institutions”.
In this regard, the rationale of promissory estoppel gets closer to the exceptions to the requirement of consideration (already discussed and to other ones), such as irrevocable offers, promises to guarantee a debt and options.
Pursuant to § 2-205 U.C.C. “An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance that it will be held open is not revocable, for lack of consideration, during the time stated or if no time is stated for a reasonable time, but in no event may such period of irrevocability exceed three months”.
Pursuant to § 87 (1) (a) of Rest. 2nd “An offer is binding as an option contract if it is in writing and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms within a reasonable time”.
Pursuant to § 88 (1) (a) “A promise to be surety for the performance of a contractual obligation, made to the obligee, is binding if the promise is in writing and signed by the promisor and recites a purported consideration”.
Consideration & promissory estoppel are useful to draw some comparative considerations.
Both in Civil Law and Common Law countries the law is “suspicious” about gratuitous promises and tries to protect the promisor requiring either a specific form (donation), either a “cause suffisante” (typicality of contracts) or a consideration (sinallagma).
In Civil Law countries the principle is especially true for some kind of transactions (transfer of immovable goods), while in Common Law ones concerns all promises.
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