Limits and remedies: what the promisee gets

Washington, nineteen forty eight. Two men want to sell Emerson radios. The local Emerson distributors know it and encourage it. They tell the men that their application for a dealer franchise has been accepted, that the franchise will be granted, and that they will receive an initial delivery of thirty to forty radios. The men hire salesmen and go out soliciting orders. No radios come. Then word comes that there will be no franchise.
The men sue. The trial judge finds there was no contract, but that the distributors are estopped from denying one by their statements and the men's reliance. He awards fifteen hundred dollars. Eleven hundred and fifty dollars is what the men spent getting ready. Three hundred and fifty dollars is the profit they would have made on the first thirty radios.
So here is the question, and it is a new kind of question. For two lectures we have asked whether a relied on promise is enforced at all. Today we assume it is, and ask what the promisee gets. Both figures? The eleven hundred and fifty only? Think about it before I go on, and notice that the franchise, had it been granted, could have been cancelled at will, so the radios might never have been delivered anyway.
And now the question I keep asking. What exactly did these people promise each other? The distributors promised a franchise and a first shipment. The men promised nothing. That is why there was no contract. And yet they spent money because they were told to expect one. The law has to decide what that money buys them.
Here is the first line for the board. Section ninety ends with a sentence people forget. The remedy granted for breach may be limited as justice requires. Enforcing the promise is the ceiling. A court may award less.
Second line. Two measures. Expectation, which puts the promisee where the promise would have put him, the value of the bargain, including profits. And reliance, which puts him back where he started, the money spent and the position lost on the faith of the promise. In an ordinary contract case the measure is expectation. In a section ninety case, the court chooses.
Third line. The choice turns on how definite the promise was and what the reliance actually cost. A vague assurance and a terminable at will deal point to reliance. A concrete promise of a specific supply, relied on with a specific investment, can justify expectation. And the injustice element is not decoration. It is a limit the court applies, and it can cut recovery down or out.
Now the case. Goodman against Dicker, Court of Appeals for the District of Columbia Circuit, nineteen forty eight. The distributors argued that the franchise, if granted, would have been terminable at will and would have obliged nobody to sell or buy any fixed number of radios, so nothing enforceable was ever promised. The court said those contentions miss the real point of this case.
We are not concerned directly with the terms of the franchise. We are dealing with a promise by appellants that a franchise would be granted and radios supplied, on the faith of which appellees with the knowledge and encouragement of appellants incurred expenses in making preparations to do business. Justice and fair dealing require that one who acts to his detriment on the faith of conduct of the kind revealed here should be protected.
So the distributors were liable. And then the court cut the award. It affirmed the eleven hundred and fifty dollars of expenses. It struck the three hundred and fifty dollars of profit. The true measure of damage is the loss sustained by expenditures made in reliance upon the assurance of a dealer franchise. Reliance, not expectation. That is the first answer.
Here is the second answer, from a court that read Goodman and went the other way. Walters against Marathon Oil, Seventh Circuit, nineteen eighty one. In the winter of nineteen seventy eight a couple in Indianapolis approached Marathon about running a combination food store and service station on a vacant station site. On Marathon's promises and continuing negotiations they bought the station in February and kept improving it. Their proposal went to Marathon's office with a signed three party agreement.
Then the Iranian revolution unsettled oil supplies, and before their proposal was accepted Marathon put a moratorium on new dealerships and refused to sign. The trial court found for the couple on promissory estoppel, and Marathon did not challenge that finding on appeal. It challenged the damages. The court had awarded the profits they would have made on their first year's gasoline, six cents a gallon on three hundred and seventy thousand gallons, twenty two thousand two hundred dollars.
Marathon's argument was Goodman. Reliance, not profits. And on a reliance measure the couple would have got nothing, because the station and its improvements were worth slightly more than they had spent. The Seventh Circuit rejected that. In reliance upon appellant's promise to supply gasoline to them, appellees purchased the station, and invested their funds and their time. It is unreasonable to assume that they did not anticipate a return of profits from this investment.
And the ground for going further than Goodman. Since promissory estoppel is an equitable matter, the trial court has broad power in its choice of a remedy. The lost profits were a direct result of their reliance, the court said, and the amount of the lost profits was ascertained with reasonable certainty, from the station's own history of gallons pumped. Affirmed. Expectation, on a section ninety claim.
Put the two beside each other. In Goodman the promised deal was terminable at will, and the lost profit was a guess about thirty radios. In Walters the promised supply was specific, the allocation was fixed by regulation, and the profit was provable to the gallon.
That is the third line on the board. The more definite the promise and the more provable the loss, the more a court will treat the promise as if it were a contract. The vaguer, the more it retreats to what was spent.
Now Hoffman again, from last lecture, because it is the clearest statement of the reliance measure. The Wisconsin court refused the grocer the profits of the store he sold, because this is not a breach of contract action. Where damages are awarded in promissory estoppel instead of specifically enforcing the promisor's promise, they should be only such as in the opinion of the court are necessary to prevent injustice. Mechanical or rule of thumb approaches to the damage problem should be avoided.
And it quoted a scholar for the principle. The wrong is not primarily in depriving the plaintiff of the promised reward but in causing the plaintiff to change position to his detriment. It would follow that the damages should not exceed the loss caused by the change of position, which would never be more in amount, but might be less, than the promised reward. Hold Walters against that sentence and you see the argument that is still going on.
The last case takes the doctrine out of commerce altogether, and shows the injustice element doing real work. Cohen against Cowles Media, Supreme Court of Minnesota, nineteen ninety two. In the closing days of the nineteen eighty two election for governor, a man named Dan Cohen, working for one side, gave reporters at both Minneapolis and St Paul papers court records showing that the other side's candidate for lieutenant governor had been charged years before with unlawful assembly and convicted of shoplifting.
Each reporter promised him confidentiality. The editors overruled the reporters. They decided that the source of the leak was itself the news, and both papers printed Cohen's name and where he worked. He was fired the same day. The jury gave him two hundred thousand dollars for breach of contract.
The Minnesota court threw that out, because the parties were not thinking in terms of a legally binding contract, and went on to say promissory estoppel would fit, but that the First Amendment barred it. The Supreme Court of the United States disagreed, and sent the case back.
On remand the Minnesota court walked the three steps. First, the promise must be clear and definite. It was, the reporters' unambiguous promise to treat Cohen as an anonymous source. Second, the promisor must have intended to induce reliance, and reliance must have occurred to the promisee's detriment. In reliance on the promise of anonymity, Cohen turned over the court records and, when the promises to keep his name confidential were broken, he lost his job.
Third, must the promise be enforced to prevent an injustice? The court said that is a question for the court, not the jury, and it said something about the test that you should write down.
The test is not whether the promise should be enforced to do justice, but whether enforcement is required to prevent an injustice. It then looked at what the newspapers themselves believed about promises to sources. The reporters testified their promises should have been honoured. The editors conceded they had never before or since reneged on one.
Neither side in this case clearly holds the higher moral ground, the court wrote, but in view of the defendants' concurrence in the importance of honoring promises of confidentiality, and absent the showing of any compelling need in this case to break that promise, we conclude that the resultant harm to Cohen requires a remedy here to avoid an injustice. The two hundred thousand dollar verdict was reinstated on promissory estoppel.
Now let's change one fact. The Emerson franchise in Goodman would have been for a fixed three year term, with a minimum of thirty radios a month. Is the three hundred and fifty dollars of profit still struck? Choose an answer before I go on.
Most people say it is still struck, because Goodman is a reliance case. But look at why Goodman cut the profits. The franchise was terminable at will and the profit was speculative. Make the term fixed and the minimum certain and you have Walters, a definite promise and a provable loss. A court following Walters would award the profit. A court following Hoffman's sentence, never more than the change of position, would not. Argue both. The point is that the measure follows the definiteness.
Change one fact again. The editors decide the source's name is the story, but before printing they call Cohen, tell him, and give him a day to protest or withdraw the documents. He objects, they print anyway. Choose.
This one is argued. The promise is the same and it is still broken. But the reliance element shifts, because his reliance, handing over the records, has been met with a chance to undo it, and the injustice element shifts, because the court weighed the absence of any compelling need to break the promise.
A warning does not create a need. Many judges would still find for Cohen, but the newspapers' position is much stronger, and you should be able to say exactly which element got stronger.
Change one fact a third time. Hoffman's grocer, in the Wisconsin case, had sold the Chilton lot on to another buyer at a profit of two thousand dollars before the deal collapsed. Choose.
Most people say it does not matter, because Red Owl still broke its promises. But the reliance measure is a net measure. It asks what the change of position cost, and a change of position that made money on one item and lost it on another is netted. The thousand dollars he paid on the lot comes off his claim, and the profit reduces the rest. That is the discipline of the reliance measure. It compensates loss. It does not reward reliance as such.
Here is what people get wrong here, and why it is tempting. The first mistake is to assume section ninety gives expectation damages because it makes the promise binding. Binding is the ceiling, and the section says the remedy may be limited as justice requires. The second mistake is to treat injustice as satisfied by disappointment. Cohen tells you the test is whether enforcement is required to prevent an injustice, and the court answers it by looking hard at both sides.
The third mistake is to forget what was actually promised. In Goodman the promised franchise could have ended the next day. You cannot lose a year of profits from a deal that could be cancelled tomorrow. Always ask what the promise, kept, would have given the promisee, before you ask what its breach cost.
Here is the rule, in one breath.
When a promise is enforced on the ground of reliance, the court chooses the measure, limiting the promisee to what the reliance cost where the promise was indefinite or the deal terminable, and awarding the value of the promise where it was definite and the loss provable, and in every case the promise is enforced only so far as required to prevent an injustice, which is a question the court decides by looking at both sides. Now, five questions.