SMU Law Review Volume 42 Issue 3 Article 4 1988 Promissory Estoppel and Third Parties Michael B. Metzger Phillips J. Phillips Follow this and additional works at: https://scholar.smu.edu/smulr Recommended Citation Michael B. Metzger & Phillips J. Phillips, Promissory Estoppel and Third Parties, 42 SW L.J. 931 (1988) https://scholar.smu.edu/smulr/vol42/iss3/4 This Article is brought to you for free and open access by the Law Journals at SMU Scholar. It has been accepted for inclusion in SMU Law Review by an authorized administrator of SMU Scholar. For more information, please visit http://digitalrepository.smu.edu. ARTICLE PROMISSORY ESTOPPEL AND THIRD PARTIES by Michael B. Metzger* and Michael J. Phillips** ERHAPS the most significant development in twentieth century con- tract law is a phenomenon that Professor Charles Knapp has aptly termed "the proliferation of promissory estoppel."1 After its first au- thoritative formulation in section 90 of the original Restatement of Con- tracts, 2 promissory estoppel's reliance principle eventually spread throughout the law of contract. 3 In recent years, moreover, the doctrine has shown definite signs of leaving its host and becoming an independent theory of recovery or cause of action in its own right. 4 Over roughly the same period, third parties 5 who have relied on the promisor's promise have begun to use promissory estoppel. This Article concerns this last application of promissory estoppel, its ex- tension to third parties.6 A background discussion begins with a sketch of * A.B., J.D., Indiana University. Professor of Business Law, School of Business, Indi- ana University. ** B.A., Johns Hopkins University; J.D., Columbia University School of Law; LL.M., S.J.D., National Law Center, George Washington University. Professor of Business Law, School of Business, Indiana University. 1. Knapp, Reliance in the Revised Restatement: The Proliferationof PromissoryEstoppel, 81 COLUM. L. REV. 52 (1981). As Knapp notes, promissory estoppel "has become perhaps the most radical and expansive development of this century in the law of promissory liability." Id. at 53. 2. "A promise which the promisor should reasonably expect to induce action or forbear- ance of a definite and substantial character on the part of the promisee and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." RESTATEMENT OF CONTRACTS § 90 (1932). 3. See, e.g., Knapp, supra note 1, at 55-79 (discussing promissory estoppel's proliferation throughout the RESTATEMENT (SECOND) OF CONTRACTS (198 1)). See generally infra notes 8- 99 and accompanying text. 4. See Metzger & Phillips, The Emergence of Promissory Estoppel as an Independent Theory of Recovery, 35 RUTGERS L. REV. 472 (1983); see also infra notes 44-77 and accompa- nying text. 5. As used here, the term "third party" simply means any recipient of the promisor's promise other than the promisee. 6. This Article concerns third-party reliance and the third party's ability to make a prom- issory estoppel claim against the promisor. The discussion omits situations where the third- party beneficiary of a promise attempts to use the promisee's reliance to enforce the promise. SOUTHWESTERN LAW JOURNAL [Vol. 42 promissory estoppel's twentieth century evolution. The Article then consid- ers the present state of the law regarding reliance-based promissory liability to third parties. 7 The analysis principally concerns this body of law's impli- cations for the claim that promissory estoppel is becoming an independent theory of recovery. The Article concludes by briefly considering the benefits and pitfalls of aggressively using promissory estoppel to protect relying third parties. A major theme of this last section is the need for limits on this potentially quite expansive form of promissory liability. I. THE ONWARD MARCH OF PROMISSORY ESTOPPEL A. From the Nineteenth Century to the First Restatement Although authorities frequently have said that the promisee's reliance was critical to the earlier action of assumpsit,8 reliance played relatively little role in the classical contract law that emerged during the nineteenth cen- tury.9 The general result was to diminish the scope of contractual liability, ' 0 primarily through the "bargained-for exchange" requirement of considera- tion outlined in Holmes's The Common Law I I and later adopted by the first and second Restatements.' 2 The Restatement (Second) of Contracts de- clares, "[a] performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise."' 13 Detrimental reliance by the promisee may See Note, Should a Beneficiary Be Allowed to Invoke Promisee's Reliance to Enforce Promisor's Gratuitous Promise?, 6 VAL. U.L. REV. 353 (1972). Apparently, no author has fully treated the subject of third parties' use of promissory estoppel. See IA CORBIN ON CONTRACTS § 200, at 219-20 (1963) (brief discussion generally supporting extension of promissory estoppel to certain third parties); Boyer, Promissory Estoppel: Requirements and Limitations of the Doc- trine, 98 U. PA. L. REV. 459, 465 (1950) (arguing against extension); Knapp, supra note 1, at 61; Metzger & Phillips, supra note 4, at 543-44; Note, Ravelo v. County of Hawaii, Promissory Estoppel and the Employment At- Will Doctrine, 8 U. HAW. L. REV. 163, 174-76, 182-85 (1986) [hereinafter Note, Ravelo]; The Requirements of PromissoryEstoppel as Applied to Third Party Beneficiaries, 30 U. PITT. L. REV. 174 (1968). 7. This discussion includes an examination of the role reliance has come to play in con- ventional contract recoveries by third-party beneficiaries. See infra notes 106-146 and accom- panying text. 8. E.g., RESTATEMENT (SECOND) OF CONTRACTS § 90 comment a (1981) ("[iut is fairly arguable that the enforcement of informal contracts in the action of assumpsit rested histori- cally on justifiable reliance on a promise"); see also Metzger & Phillips, supra note 4, at 482 n.57 (citing sources); cf Feinman, Promissory Estoppel and Judicial Method, 97 HARV. L. REV. 678, 679 (1984) (in 18th century, promises often enforced primarily because promisee relied on promise to his detriment or promisor's benefit). 9. "The reliance principle of the eighteenth century did not fit within the structure of the classical jurisprudence of the nineteenth century." Feinman, supra note 8, at 681. 10. Cf. G. GILMORE, THE DEATH OF CONTRACT 13-16 (paperback ed. 1974) (describing general theory of classical contract law associated with Langdell, Holmes, and Williston, and theory's dedication to limited liability). 11. See, e.g., 0. HOLMES, THE COMMON LAW 230-32 (M. Howe ed., paperback ed. 1963). 12. RESTATEMENT OF CONTRACTS § 75 (1932); RESTATEMENT (SECOND) OF CON- TRACTS §§ 71(1), (2) (1981); see G. GILMORE, supra note 10, at 19-21. 13. RESTATEMENT (SECOND) OF CONTRACTS § 71(2) (1981). 1988] PR OMISSOR Y ESTOPPEL qualify as a performance. 14 Unless the promisor made his promise to obtain that performance,' 5 however, there is no bargained-for exchange and thus no consideration. 16 As Holmes declared in 1884, "[i]t would cut up the doc- trine of consideration by the roots, if a promisee could make a gratuitous promise binding by subsequently acting in reliance on it."', 7 From the per- spective of classical contract law, therefore, "if A, without the protection of a binding contract, improvidently relies, to his detriment, on B's promises and assurances, that may be unfortunate for A but is no fit matter for legal concern."18 Despite the bargained-for exchange requirement, the courts were busy en- forcing gratuitous promises in a wide range of discrete contexts during the late nineteenth and early twentieth centuries. The factor of detrimental reli- ance by the promisee unites these various situations. Examples include: (1) charitable subscriptions, (2) promises to make a gift of land, (3) gratuitous bailments, (4) gratuitous agency relations, (5) promises to pay employees bonuses or pensions, (6) promises to waive conditions on one's contractual liability, and (7) promises to reduce rents. 19 The doctrine of equitable estop- pel also protected reliance during this period. 20 An estopped party, who had made representations regarding material facts, could not later deny or mod- ify such representations in court once another party had relied upon the representations. 21 Equitable estoppel's "material fact" requirement would seem to have blocked the doctrine's use as a device for enforcing promises. By the turn of the century, however, some courts began to use equitable 14. See id.§ 71(3) (performance may consist of act other than promise; forbearance; or creation, modification, or destruction of legal relation). 15. "In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or inducement: the consideration induces the making of the promise and the promise induces the furnishing of the consideration.... [B]oth elements must be present, or there is no bargain." Id. § 71 comment b. 16. For example: "A promises to make a gift of $10 to B. In reliance on the promise B buys a book from C and promises to pay C $10 for it. There is no consideration for A's promise." Id. illustration 3. The illustration concludes: "As to the enforcement of such promises, see § 90." Id. 17. Commonwealth v. Scituate Sav. Bank, 137 Mass. 301, 302 (1884). 18. G. GILMORE, supra note 10, at 15. 19. See generally Boyer, Promissory Estoppel: