Hoffman v. Red Owl Stores and the Myth of Precontractual Reliance

Abstract:     
Hoffman v. Red Owl Stores is one of the storied cases in modern contract law. The conventional wisdom is that Hoffman represents the emergence of a new legal rule imposing promissory estoppel liability for representations made during preliminary negotiations. Yet a review of contemporary case law shows that, in fact, courts require some form of agreement before they will grant recovery for early reliance. Hoffman's main legacy, therefore, has been as a trap for the unwary lawyer (and unhappy client) who unsuccessfully seek recovery for reliance on preliminary negotiations. This article asks how the court in Hoffman was able to find liability where other courts have not. A careful examination of the trial record shows that the conventional understanding of the facts in Hoffman is simply wrong. The true facts show that the breakdown in the negotiations between Hoffman and Red Owl officials was a product of a misunderstanding as to the nature of his financial contribution to the enterprise, a misunderstanding as attributable to Hoffman's carelessness as to any representations made by Red Owl's agents. The article then uses a large sample of decided cases to recover the law in action that governs precontractual liability. This sample highlights the emergence of a new default rule that imposes liability for a failure to bargain in good faith following a binding preliminary commitment. This new legal duty has been largely unexplored in the casebooks or the secondary literature, in part because of the misplaced attention paid to the unfortunate controversy between Mr. Hoffman and Red Owl Stores.

Keywords: Contracts, Promissory Estoppel, Preliminary Agreements, Hoffman v. Red Owl

JEL Classifications: K12, K41

Accepted Paper Series