PROMISSORY ESTOPPEL: REVOLUTION AND COUNTERREVOLUTION

January 7, 2002

By Steven P. Garmisa
Hoey Farina & Downes
sgarmisa@felahfd.com

A contract law counterrevolution, launched in 1997 with empirical studies attacking the doctrine of promissory estoppel, is under heavy fire from a new report.

The revolution was proclaimed in Grant Gilmore's 1974 book "The Death of Contract." Promissory estoppel, Gilmore declared, was revolutionizing contract law. According to the counterrevolutionaries, though, promissory estoppel claims are usually rejected by courts. They argue promissory estoppel is dead dogma.

The new study, by Professor Juliet P. Kostritsky, of Case Western Reserve University Law School, says the counterrevolution has failed. The data, when properly interpreted, call for a "more nuanced analysis" of promissory estoppel, Kostritsky says.

Kostritsky's counter to the counterrevolution ("The Rise and Fall of Promissory Estoppel or is Promissory Estoppel Really as Unsuccessful as Scholars Say It Is: A New Look at the Data") is available online through the Social Science Research Network.

Gilmore's book heralded the death of the bargain theory of contract, Kostritsky explains. Bargain theory, according to Professors Charles J. Goetz and Robert E. Scott, "is classically simple: bargained-for promises are presumptively enforceable; non-reciprocal promises are presumptively unenforceable."

Under Gilmore's account, the central role of a bargained for exchange of promises in 19th century contract law was the product of Christopher Langdell's casebook, Samuel Williston's treatise and Oliver Wendell Holmes' lectures on the common law. Holmes, Kostritsky says, was accused of having launched his own revolution, by portraying "the requirement of quid pro quo as a long- established tradition despite only scant support in the common law for that theory."

Arthur Corbin's treatise challenged the establishment view of consideration, proving that a bargained for exchange of promises wasn't always required to make a promise enforceable. Based on Corbin's work (and second thoughts by Williston), the first Restatement of Contracts (1932) included section 90.

As revised in the Second Restatement, section 90(1) reads: "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 may be limited as justice requires."

Gilmore argued that promissory estoppel meant the demise of consideration as a central feature of contract law. He saw promissory estoppel as a revolutionary development akin to a tort remedy.
The 1997 counterrevolution was based on a comparison of statistics showing (1) the overall win rates for contract cases, and (2) the percentage of wins on the merits in promissory estoppel cases. Because of the relatively low rate for wins on the merits in promissory estoppel cases, the 1997 studies concluded promissory estoppel is a defunct doctrine.

Using five years of published state court promissory estoppel cases (1990 through 1994), Kostritsky takes a second look at the data. But her analysis differs from the 1997 studies in two significant respects.

First, the 1997 studies counted as "wins" for promissory estoppel only cases in which the plaintiff prevailed on the merits. The prior studies ignored published decisions where the promissory estoppel plaintiffs prevailed on a motion to dismiss, or succeeded in defeating a motion for summary judgment.

Since the purpose of the empirical studies is to determine whether courts are generally hostile to promissory estoppel as a legal theory, Kostritsky says, you shouldn't just count as "wins" cases where the plaintiffs prevailed on the merits at trial. So Kostritsky's study counts (as a promissory estoppel wins) cases where the plaintiff prevailed on a motion to dismiss, or succeeded in defeating a motion for summary judgment.

Second, Kostritsky points out that a number of claims fail based on reasons completely unrelated to any judicial hostility to the doctrine of promissory estoppel. Promissory estoppel claims can fail because of "fatal procedural errors," such as blowing the statute of limitations; preemption; illegality; and bad behavior by the plaintiffs. Some plaintiffs lose because the reliance came before the promise.

Kostritsky counted nine categories of cases where promissory estoppel claims failed for reasons completely unrelated to any hostility to the doctrine itself. Rather than undermining the doctrine of promissory estoppel, these cases merely prove that plaintiffs' lawyers regularly file hopeless claims. Cases in these nine categories should be deleted from the statistics, Kostritsky argues, to accurately determine whether there is some general judicial hostility against the doctrine.

Calculating win rates with these changes, Kostritsky found that promissory estoppel claims prevail in a substantial percentage of cases. According to Kostritsky's statistics, promissory estoppel plaintiffs win in 45 percent of the cases (using the broadened definition of "win," and deleting losses based on the nine categories of irrelevant factors).
The statistics show that courts are, consciously or unconsciously, taking efficiency and social welfare considerations into account when deciding which promissory estoppel claims should win, Kostritsky says.

Promissory estoppel claims generally fail, for example, when the alleged reliance came before the promise. And promissory estoppel claimants have a substantial chance of prevailing when the defendant has engaged in "opportunistic behavior." An example of opportunistic behavior is when a defendant strings the plaintiff along (inducing the plaintiff to start performing, with the promise that a contract will be forthcoming), only to turn around and contract with another vendor.

In these situations, Kostritsky says, efficiency and general social welfare considerations call for the results generally provided by the courts. If reliance that came before the alleged promise could result in a successful promissory estoppel claim, potential defendants would have to waste a substantial amount of resources trying to insulate themselves from possible promissory estoppel claims.

On the other hand, it often makes sense (and is generally beneficial to society) to have a vendor begin to provide performance while the precise terms of a contract are hammered out. If promisors could walk away from a deal with no liability after stringing a vendor along into starting expensive performance, opportunistic behavior would be rewarded. And the economy would generally suffer as promisees would have to insist on a fully negotiated and signed contract before starting performance.

While section 90 hasn't killed off contracts based on consideration, Kostritsky concludes promissory estoppel continues to play an important role in contract law. 

Down with the counterrevolution!

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