What is Detrimental Reliance?
Detrimental reliance is a contract law doctrine that originated to enforce the promises made by one and to stop the unfairness of allowing them to be broken by another.
Under the doctrine, once it has been decided a contract is implied in fact, it then follows that an unenforceable promise was made, to which some reliance did or could have been premised.
As such, the entire purpose of the doctrine is premised upon the principal of fair play between parties. For without such reliance, there really is no reason to apply the constructive nature of an implied in fact contract, simply to let a party get away with not following through on a promise.
However, contrary to popular belief, detrimental reliance only serves as a vehicle for enforcing certain types of contracts, not all of them.
The types of contracts that can be enforced are of course those that are implied in fact , meaning no words or writings are required to have actually exchanged hands, or necessarily even be physically spoken.
Because of this, there is a limited scope of application for the detrimental reliance doctrine. In other words, simply stating "Preston will be paid $100 to rake leaves, because he is employed by Defendants, and he has done it before," does not imply a contract, and thus is not the type of contract that can be enforced under the doctrine.
Finally, detrimental reliance is sometimes referred to just as reliance, which can cause confusion as it is also commonly used as a separate, entire cause of action in California law. The difference, however, is detrimental reliance is more akin to an intent-specific cause of action that works to enforce an implied-in-fact contract, while reliance is a specific tort that is related to breach of fiduciary duty.
The Legal Elements of Detrimental Reliance
The party claiming detrimental reliance must satisfy all of the following elements:
Promise: Inherent to this type of claim is a promise made. The plaintiff usually can establish that the defendant made an unambiguous promise to do something that was reasonably clear under the circumstances. A mere expression of future intent or a statement of intention to do something in the future does not create a binding contract. The promise must be such that the person to whom it is made can justifiably interpret it as a promise and that the promisor’s intent would reasonably be understood by a third party to intend to be bound thereby.
Reliance: The promisor’s promise must induce the claimant to take action or forebear from taking some action. The claimant must have done so in reliance on the promise and the promise must be one that a reasonable person would foresee as likely to induce the claimant to do so. The reliance must be reasonable and the reliance must be induced by the promise itself, rather than other factors, including the promisee’s own violation of public policy. The reliance must have occurred before the claimant "repudiates" or otherwise withdraws from performance on the promise. Ordinarily, the reliance must be "reasonable" in the sense that it must be expected or foreseeable by the promisor.
Detriment: Claimant must have to suffer some type of detriment as a result of the reliance on the promise. The detriment must be actual, not a speculative or possible detriment.
The Importance of Promissory Estoppel
Promissory estoppel is a legal doctrine that expresses the principle that a promise may grant rise to an enforceable obligation, even in the absence of a traditional quid pro quo exchange. In the most basic sense, it is an exception to the general requisites of a bargained-for exchange for a contract to be enforceable, based on reliance by the promisee on a promise made to them. The elements of the doctrine are: (i) a clear and definite promise (ii) made with intent to induce reliance by the promisee; and (iii) actual and foreseeable loss or harm suffered by the promisee in reliance on the promise. This doctrine thus incorporates the concept of detrimental reliance in a reliance-based claim. The concept of reliance is not absolutely reactive, but can also be a proactive promise to do something in the future in the absence of a legitimate agreement. A clear promise, not in a procedurally or substantively unconscionable manner, with specific terms for the giving up of an interest or the performance of an act to benefit a promisor if the promises in turn benefit a promise is ripe for a finding of promissory estoppel and where such reliance is reasonable under the circumstances, usually by way of contractual provisions including a statute of frauds, a finding of a binding contract could be made.
Examples from Real Life
Detrimental reliance occurs in real life far more often than it makes its way into the court system. Companies rely on the promises that their suppliers make to them, but almost never take either party to court over those promises. Most "determinative" reliance involves informal conversations, and even when a formal deal is struck (say, in a very large contract), those deals have a way of changing as new information comes in. Realistically, most business operations are carried out on the basis of changing circumstances and informal promises. Determining how to apply a doctrine like "determinative reliance" requires some form of hindsight, and that’s what courts do when a case comes to them. In Wetherbee v Gary, 11 So . 110 , 111 (Fla. 1892), the court described "determinative reliance" in this way: "The term ‘detriment’ means loss or injury, of some value or worth, which is clear and real, not speculative or imaginary. It must be in the nature of a promise; its value must be something substantial, not merely nominal." This sort of largely visual reasoning is problematic, and unfortunately the application of "determinative reliance" often seems that way as well. The fact is, cases that involve reliance issues are not usually "clean." They have a lot of moving parts to them, and there simply isn’t time to get lawyers to go over each argument with a fine-toothed comb. Sometimes, courts will take the law into their own hands and pass rulings that seem maladroitly applied to the precise situation (such as leaving themselves open to an appeal on a question that the losing party has no intention of pursuing). The outcome can be frustrating, but it’s important to bear in mind that most of the time, reliance cases end up being settled. When they still remain standing, it’s because the parties are intent on making their legal battles public no matter the cost. In Alakasir, Inc. v Cushing, 334 NE 2d 201 (Ill. App. Ct. 1975), the defendant promised their client a 6% discount, but then decided that their discount would actually be 3% (the explicit reason being that a third party pressured them into decreasing their discount). The client ended up suing for the difference. Based on those facts, the court total agreed with the plaintiff. The judge found that the plaintiff had acted reasonably in relying on the 6% discount (particularly since all the defendant wanted to do was make the transaction go as quickly as possible), and that the true reason behind the change of heart was irrelevant. The defendant had actually taken steps to steal the money away from the plaintiff, and that was going to cost them dearly. Courts do not allow people to steal money away from one another, and it’s difficult to imagine a case that would be more damaging to reliability in contracts than one that allowed that sort of thing to go unpunished. When a company files suit for "determinative reliance," they are often doing so because they believe that a case that’s clearly fraudulent will get a warmer reception. And, as that lawsuit shows, sometimes they are right. A somewhat older case that involved "determinative reliance" was Cope v. Overton, 92 Cost 326, 79 P 165 (1905). Over a period of years, Mr. Cope had written multiple letters to a creditor who owed him money, giving him various instructions over the course of his lifetime. Eventually, he went out of business, and the creditor sued. This case was a complex one that seemed to come down to "dominance." Mr. Cope had won the respect and deference of the creditor, which is why his "has no need for the $200" letter was apparently respected. The court wrote that "petitioner did right in relying upon the letters of the deceased containing the instructions [for the distribution of the money]." Perhaps the creditor was not doing anything unique here, but they were willing to do anything to please Mr. Cope, and they got burned for it when he died and the correspondence led them through the litigation process. It’s also worth noting that when a company cuts ties with a client for some reason that involves a threat to the other party’s finances, that will give the other party more cause to argue "reliance" in court (since they will probably lose some tangible amount of money). A good example is in PurePact, Inc. v. iSold It Franchise Sys., Inc., No. 2:06-CV-0068, 2006 U.S. Dist. LEXIS 15024, at *21-22 (E.D. Pa. Mar. 20, 2006), where the plaintiff attempted to use the victimization of a third party (a co-defendant) to demonstrate that the defendant had engaged in reliance. The court determined that "in light of the circumstances surrounding this case, and in the face of a barrage of contradictory facts, the defendant reasonably relied upon the representations that the plaintiff made to them. The defendant will therefore not find redress under a claim of intentional misrepresentation, negligent misrepresentation, or promissory estoppel."
How to Prove Detrimental Reliance
To prove detrimental reliance in court, a party must be able to provide sufficient evidence to convince a jury or judge that they made a reasonable and foreseeable decision based on the false promise and suffered damages as a result of it. The first step in proving detrimental reliance is to show that there was a promise made. This does not have to be written or formal, but it does usually need to be explicit enough that the other party could not have misunderstood what it meant. Once the promise is identified, it’s essential to demonstrate that it was reasonable to rely on it. For example, a promise to do something illegal or immoral would probably not be reasonable.
Next, the claimants must demonstrate that they changed their circumstances based on their reliance on the promise. This can take many different forms, such as traveling, spending money, or missing other opportunities. It is important to keep in mind that it is necessary to show only that the reliance was reasonable—it is not required for the party to act in the way in which any ordinary person would. Finally , the court will need to be convinced that the reliance was actually detrimental. This means that the party carrying the claim must have already incurred damages or must have incurred them soon after as a result of their reliance on the promise. For example, if the promise was to purchase goods, but the other party backed out and left the claimant without anything to sell, they may have the opportunity to claim for lost profit. Or they could claim compensatory damages for a physical injury in a construction setting where they were injured due to their reliance on a promise that the property was safe.
Essentially, the evidence needed to prove detrimental reliance depends on the context of the claim. Having proper representation from a knowledgeable California contract law attorney can help ensure you have all the information you need to support your claim and convince a judge or jury of its legitimacy.
The Difficulty of Proving Detrimental Reliance
When seeking to enforce a claim of detrimental reliance, plaintiffs may face a variety of legal challenges. Scholars have long debated the specific elements of whether to allow the contracting party to be bound, despite the absence of a signed release. To counter defenses, plaintiffs must clearly show that defendants induced or misled them, relied on information provided by the defendants, changed their positions in reliance on the statements, and would therefore incur harm. Some courts, including the governing law in Delaware, require a clear and unambiguous promise, reasonable reliance on that promise, and a change of position by the promisee that is inequitable if not compensated. Those courts that recognize a promissory estoppel exception to the statute of frauds require proof of the usual elements of detrimental reliance, such as a clear promise, reasonable reliance, and harm.
Defendants facing detrimental reliance claims may argue that the plaintiff failed to provide a clear and unambiguous promise, did not rely on the promise, or changed their position in a way that was not inequitable. They may also challenge the interpretation of any statements made by the defendant, arguing that misstatements were not critical to any actions by the plaintiff. In addition, defendants facing a potential claim for detrimental reliance should be prepared to plan their strategy accordingly. Pre-MSA law clearly imposed a certain minimum level of conduct required by contracting parties to draft a legally binding contract. Prior to April 2014, contractual disputes required a thorough analysis of the intent of the parties, where interpretation and construction came into play. This analysis revolved around whether a court should consider extrinsic evidence beyond the four corners of the contract (i.e. a contract dispute involving statements made in the negotiation phase). As discussed in the prior section of this article, under MSA, there is no need for a contract (that was signed under the old law) to contain all necessary terms. And so, the analysis shifts to a question of whether there was a clear, reasonable and induced detrimental reliance by the plaintiff. However, as shown by the example above, there are a multitude of factors that may impact whether to issue a ruling in your favor. Because the landscape has been shifted, and so many rights are now available to parties who may not have gone through a negotiation phase, the courts have more to consider when deciding whether to issue an order under the new law.
Detrimental Reliance’s Impact on Contracts
Courts have indicated that the doctrine of detrimental reliance will affect the obligation to perform in rare circumstances. For example, Courts will only enforce certain types of contracts that are not supported by consideration if their enforcement appears to be the only way to avoid injustice or unfairness to the party claiming reliance.
A classic example of this in the United States, is when a person performs acts in reasonable reliance on promises made by another person (not supported by consideration) to take action or to refrain from taking action in the future, and where the person making the promise (or representation) "reasonably expects to induce action or forbearance on the part of the promise." Such acts in reliance of a promise that would be unjust or otherwise unfair to take back will usually create a ground for relief. However, it is uncertain how far courts will extend this type of relief.
Recommendations for Individuals and Companies
To protect oneself against potentially damaging claims of detrimental reliance, it is important to ensure that material representations upon which one is relying are accurate and kept as part of the records of dealings with others. In the commercial context, accurate records of all material representations to a contracting party at or before the time of entering into a contract should be kept. These records should reflect not only the content of the representations, but any qualifications or limitations imposed by the offering parties. For example, if the representation is that the company is likely to succeed in a particular financial undertaking, the records should include that the representation was accompanied by a statement that the success of the company is uncertain. These records will assist in refuting any detrimental reliance claims in the event the other party attempts to enforce an agreement that should not have been made. If you discover after entering into an agreement that it was based on material mistakes or misleading statements, persons should seek to gather evidence of the representations or circumstances giving rise to the mistaken beliefs as soon as possible. Persons entering into an agreement should adjust their expectations in line with the general terms of the agreement and pursue diligent action to obtain all relevant or promised documents and prepare for future obligations . Despite preparations, the reality of any situation may change. In some situations unforeseen risks or other issues may arise and persons should seek to make every effort to mitigate the losses that arise as a result. Where a detrimental reliance claim may be raised, the once potentially liable person may be able to recover damages under existing contractual or misrepresentation laws. Further, although state courts have not addressed the issue of liability for detrimental reliance in the business context, courts in other states have addressed the question and concluded that there can be liability for detrimental reliance occurring during the negotiation process. Persons dealing with other businesses should be cautious regarding the claims that the other business makes, as well as other persons with whom they are dealing. Careful attention to the representations and conduct of involved persons may help minimize reliance on inaccurate information. Identification of the inaccuracies will enable the entered into agreement to be reexamined and renegotiated prior to causing significant detriment to the other party. Finally, all parties seeking recovery for detrimental reliance should contact a lawyer experienced with business, contract, and tort law.