Today we're going to talk about another classic of the contracts law cannon. Hoffman versus Red Owl stores. We've already discussed promissory estoppel several times. In Red Owl, we will revisit this concept but in a different context. This case asks whether a plaintiff who relies on a defendant's pre-contractual promises may recover. Joseph Hoffman, who together with his wife, operated a bakery in Wautoma Wisconsin, and he wanted to expand his business by opening a grocery store. He contacted Red Owl, a grocery store chain operating throughout the Midwest. Red Owl stores were often operated as franchises. Hoffman began negotiating with Red Owl manager, named Lukowitz to establish a Red Owl franchise in Hoffman's town. Hoffman told the manager he only had $18,000 to invest in the franchise, and Lukowitz told him that was sufficient. From here, there began a series of moves by Hoffman made on the belief that he'd soon be a Red Owl franchisee. In order to gain experience in the grocery business, he purchased a small grocery store in Wautoma, a move that Lukowitz approved. But several months into its successful operation, Lukowitz advised him to sell it. Though Hoffman did not want to sacrifice the profits the summer tourist season would bring, he was assured he'd be operating a larger Red Owl store by the fall. In the fall, the Red Owl manager suggested Hoffman exercise an option to buy a lot in a different town, Chilton, where he would build his Red Owl franchise. Hoffman took the suggestion and in September of 1961, he put down $1,000 to acquire an option to later purchase the lot. After Hoffman put down the $1,000 on this Chilton lot, Lukowitz indicated, "Everything is ready to go. We are set." But soon thereafter, Lukowitz told Hoffman the only remaining hitch in the plan was Hoffmann's bakery. He and his wife would have to sell it. They did so in November. Hoffman sold the bakery, he and his family moved to a different town and he began working the night shift in another bakery. At the end of November, Red Owl informed Hoffman he'd need to invest $24,000 rather than the $18,000 he originally anticipated. This number was soon raised to $26,000. In order for Hoffman to meet these new amounts, Hoffman's father-in-law agreed to contribute $13,000, provided he'd be a partner in the business. Though Red Owl originally told Hoffman that this sounded fine, Hoffman was informed in late January or early February of 1962 that his father-in-law would have to agree that the $13,000 contribution was a gift. Red Owl then increased the amount needed from Hoffman and his father-in-law to $34,000. And at that point, Hoffman broke off negotiations. Hoffman sued Red Owl for expenses and lost income, and the jury awarded him damages for the sale of the grocery store, sale of his bakery, and the option on the lot as well as incidental damages. However, the trial judge vacated the damages awarded regarding the jury's award concerning the sale of the grocery, and ordered a new trial to be held to determine what the damages on the sale of the grocery would be. Both Hoffman and Red Owl appealed, and the Wisconsin Supreme Court in deciding this case, first determined that it was adopting Section 90 of the restatement, which we've talked about before. So, what are the elements of promissory estoppel contained in Section 90? That provision states that, "A promise which the promisor should reasonably expect to induce action, or forbearance on the part of the promisee, or a third person, and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." The court in Red Owl, concluded that Red Owl gave Hoffman a number of promises and assurances upon which plaintiffs relied and acted upon to their detriment. So, what are some of the promises that Red Owl made? The most prominent was the promise that Hoffman's $18,000 would be a sufficient investment. This is certainly the promise that proved most compelling to the court, and certainly the record suggests that Red Owl numerous times assured Hoffman he would soon get the store. But despite the number of promises the court asserts existed, it's actually somewhat difficult to pin down specific promises that Red Owl made to Hoffman. Rather Red Owl told Hoffman things like, "We're all set and everything is ready to go. " These communications, these utterances certainly wouldn't be definite enough to constitute an offer, to form a binding contract. This indeed was the thrust of Red Owl's defense. It argued that, "An agreement was never reached on essential factors necessary to establish a contract." The court had to determine whether promissory estoppel could apply when the promise in question did not "Embrace all essential details of a proposed transaction between promisor and promisee so as to be the equivalent of an offer that would result in a binding contract." In holding that promissory estoppel could apply in this situation, the court explained that it was wrong to think of promissory estoppel as the equivalent of breach of contract. "The requirements of Section 90 did not," The court said, "indicate anything at all about how detailed a given proposal was, or how close it was to a binding contract." Having concluded that promissory estoppel applied, there remained the question of damages. The court explained 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. Focusing on the primary contest damage award, the sale of the grocery store, about which the trial judge had ordered a new trial, the court responded to Hoffman's claim that he was entitled to the profits he would have had, if he had continued operating the store during those summer tourist months. By emphasizing again, this is not a breach of contract action. We usually see lost profits awarded as part of expectation damages, where the goal of expectation damages is to put the plaintiff in the position he or she would have been in, if a contract had actually been performed. In this case, the plaintiff recovered damages in reliance. The detriment Hoffman incurred by relying on Red Owl representations and assurances. Is there a way you could construe the profits lost by the sale of the grocery store as reliance damages? Well, absent Red Owl's assurances, he'd have a bigger Red Owl grocery store in the fall, Hoffman wouldn't have sold the grocery. On the other hand, he may not have purchased the grocery in the first place, and would have had no profits to gain thereby, if he hadn't initially begun negotiating with Red Owl. Usually courts will not award lost profits when a plaintiff is pursuing a promissory estoppel theory. But in Walters v. Marathon Oil, a Seventh Circuit case decided in 1981, which involved plaintiffs who purchased a gas station from Marathon Oil after the company represented it would provide gasoline. The court upheld the trial courts award of lost profits quote, in reliance upon appellent's promise to supply gasoline supplies to them, appellees purchased the station, and invested their funds and their time. It's reasonable to assume that they did not anticipate a return of profits from this investment. But in reliance upon appellant's promise, they had foregone the opportunity to make the investment elsewhere. Returning to this case, in what other ways did Hoffman rely? Well, he purchased the Wautoma grocery, and later sold it. He paid $1,000 to option a lot in Chilton, and he sold his bakery and moved to a new town. Notice that the award doesn't give him damages for purchasing the Wautoma grocery store. That wasn't in reliance on definite enough of a promise from Red Owl. Or if it was reliance, it wasn't reasonable at that early stage in the negotiation. Reliance damages for selling the Wautoma grocery we're going to be limited now. The court said, "Justice does not require that the damages awarded him because of selling these assets at the behest of the defendants, should exceed any actual loss sustained, measured by the difference between the sale price and the fair market value." This doesn't directly award lost profits, but at least indirectly the fair market value should reflect the expected profits from the upcoming summer tourist season. So, did Red Owl act in bad faith in its negotiations with Hoffman? The court concluded that it didn't. There was no evidence Red Owl intended not to keep any of its offers, or its promises. But even if Red Owl had acted in bad faith, that probably wouldn't matter. The uniform commercial code imposes a duty of good faith as a mandatory part of all contracts. But while duties of good faith arise under contract, negotiators typically don't owe each other any such duty. Then again, the succession of increasing demands certainly creates the appearance of a kind of bait and switch, a strategy that Red Owl was stringing Hoffman along, trying to get more and more out of this potential franchisee. The law of promissory fraud can hold a promise or liable for punitive damages if the plaintiff can establish that the promisor at the time of promising, of making assurances, intends not to perform her promise. Red Owl's repeated assurances probably aren't enough to establish promissory fraud but they are moving in that direction. An important article by Professor Alan Farnsworth provides a way of thinking about pre-contractual liability that offers some insights into why reliance damages are sometimes preferable. Farnsworth distinguishes between agreements to agree, and agreements to negotiate. Unlike the former, parties agreeing to negotiate recognize that if they fail to reach an ultimate agreement, they will not be bound, because the agreement to negotiate is not part of a larger agreement. There is no possibility of a claim for a lost expectation. Indeed, there is no way of knowing what the terms of an ultimate agreement might have been, if one who had ever been reached. In such cases, reliance is appropriate, because that is the only interest a party to an agreement to negotiate reasonably expects should the other party pull out of the negotiations. The case teachers insurance, and Annuity Association of America versus Tribune Company, a case decided the same year Farnsworth article was published, and which concerned failed negotiations for a 14 year, $76 million loan. Federal District Court Judge Pierre Leval warning that there was a strong presumption against finding binding obligation in agreements to negotiate set out a five factor test to determine whether parties had in fact entered into such an agreement to negotiate. These factors included the language of the agreement, the context of the negotiation with particular attention to the parties motives, the number of open terms, the extent to which the agreement had been performed, and usage of trade. Red Owl is considered an incredibly influential case, which often is cited as the catalyst in the expansion of promissory estoppel doctrine to the liability for pre-contractual reliance. The implication indeed are profound. Red Owl suggests that parties must be very careful in negotiations, a realm in which representations are often taken with a grain of salt because reliance on such promises or representations may result in damages. But some argue that the result of Red Owl is in fact unusual. Professor Alan Schwartz and Robert Scott studied over a 100 cases from 1999 to 2003 that directly presented the issue of recovery for pre-contractual reliance. Their research showed that courts consistently have denied recovery for pre-contractual reliance, unless the parties by agreeing on something significant, indicated their intention to be bound. In a sense, the default notwithstanding Red Owl, and its progeny, is that it's not reasonable to rely on pre-contractual promises.
