Beyond Promissory Estoppel: Contract Law and the 'Invisible Handshake'

45 Pages Posted: 9 Jul 2011 Last revised: 29 Jul 2011

See all articles by John H. Matheson

John H. Matheson

University of Minnesota Law School

Daniel A. Farber

University of California, Berkeley - School of Law

Date Written: January 1, 1985

Abstract

As every law student knows, promissory estoppel is based on detrimental reliance. Law students share this idea with the American Law Institute and with treatise writers. Indeed, promissory estoppel is one of the few points of agreement between the critical legal scholars on the left and the law and economics writers on the right. Both agree that reliance has been the foundation of promissory estoppel, and both accuse the courts of incoherence in applying the doctrine.

We have recently surveyed over two hundred promissory estoppel cases decided in the last ten years. Our conclusion is that reliance is no longer the key to promissory estoppel. Although courts still feel constrained to speak the language of reliance, their holdings can best be understood and harmonized on other grounds.

Part I of this article reports the results of our survey. It documents the declining role of reliance in establishing liability and determining remedies. It also suggests that most cases denying recovery, purportedly for lack of reasonable reliance, can be readily explained on other grounds. Part II explores the implications of these findings. We believe that a new rule of promissory liability is emerging from the courts' encounters with an economy in which Okun's "invisible handshake" is increasingly important. The rule is quite simple: any promise made in furtherance of an economic activity is enforceable.

Our proposed rule unifies promissory estoppel and other exceptions to the consideration requirement with consideration doctrine itself. In each instance, the underlying legal policy is to protect the ability of individuals to trust promises in circumstances in which that trust is socially beneficial. Traditional consideration doctrine allows trust to function in contexts such as sales, leases, insurance, and loans – key economic arrangements that could not function effectively without legal enforceability. Promises involving firm offers, sureties, and options are enforceable without consideration because some economically useful transactions would otherwise be difficult to structure. Promissory estoppel fills a similar function by enforcing promises in other settings not amenable to traditional bargaining transactions, in which reliance is beneficial both to the promisor and to society as a whole.

In our view, the expansion of promissory estoppel is not, as some have argued, proof that contract is in the process of being swallowed up by tort. Rather, promissory estoppel is being transformed into a new theory of distinctly contractual obligation. We also think, for reasons that will appear more fully in Part II, that our proposed rule not only harmonizes many otherwise inconsistent cases, but also furthers the often divergent values proclaimed by the law and economics writers and the critical legal scholars. Besides serving the interest of economic efficiency, our proposed rule also furthers the important moral value of mutual trust.

Suggested Citation

Matheson, John H. and Farber, Daniel A., Beyond Promissory Estoppel: Contract Law and the 'Invisible Handshake' (January 1, 1985). University of Chicago Law Review, Vol. 52, p. 903, 1985. Available at SSRN: https://ssrn.com/abstract=1874328

John H. Matheson (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-3879 (Phone)

Daniel A. Farber

University of California, Berkeley - School of Law ( email )

Boalt Hall
Room 894
Berkeley, CA 94720-7200
United States
510-642-0340 (Phone)
510-642-3728 (Fax)

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