What is Detrimental Reliance, What Defense is Detrimental Reliance a Part of, and How Can You Use it?
When discussing the legal concept of detrimental reliance, it is helpful to start with an example of how it can arise in the real world. For instance, imagine you are a franchisee of a national fast-food franchise. In July, while working as the manager of the franchise, your corporate manager promises you a pay raise at the end of the year. Upon hearing this, you express your gratitude and mention that this raise will enable you to purchase a car that your family needs. Once you leave the office, you go home, and after a long conversation with your family, go to the local car dealership and purchase a new vehicle based on the fact that you will be able to pay for it off more quickly with the help of the new raise. However, when the end of the year meeting came around, your corporate manager tells you that they are not giving you the raise they promised due to a corporate decision. Due to decisions and situations that were out of your control, you are now stuck with a car that you might not be able to pay off as you did not get the raise that you were promised.
Now that we have this example, what is detrimental reliance, what legal defense does detrimental reliance fall in with, and how can you use it to protect yourself if a situation like this occurs to you?
Detrimental Reliance is the Legal Definition for Relying on a Failed Promise
Detrimental Reliance is “a legal concept in contract law where one party suffers harm or incurs a loss as a result of relying on the promises or representations made by another party.” Detrimental reliance is one of the four prongs of the estoppel test and needs to be found potentially when a suit for damages that occurred from relying on a bad promise. In our example in the introduction, the franchisee detrimentally relied on the corporate manager’s promise of an end of the year pay raise by buying the car. Now although detrimental reliance is a major legal concept, it cannot be used solely to fight a bad promise, such as the one in the example. In order to protect oneself from a bad promise, you will have to explain your detrimental reliance to the bad promise in the claim of promissory estoppel. Now what is a promissory estoppel claim and how does detrimental reliance play into it?
Promissory Estoppel is the Legal Defense Used When Protecting Oneself from a Bad Promise
Cornell Law School’s Legal Information Institute defines promissory estoppel as a “doctrine that a party may recover on the basis of a promise made when the party’s reliance on that promise was reasonable, and the party attempting to recover detrimentally relied on the promise.” Defined in another way, within the realm of contracts, a person who was promised something, and relied on that promise to a point where it became detrimental to them, the person can sue for damages based on relying on the promise.
To have a case under the doctrine of promissory estoppel, you must satisfy the following five-pronged tests
- “a promise which induced the promisee’s action or forbearance;
- the promisee’s reliance must have been reasonable;
- the promisee’s action or forbearance must have amounted to a substantial change in position;
- the promisee’s action or forbearance must have been actually foreseen by the promisor when making the promise; and
- the enforcement of the promise is required to prevent injustice.”
If a person has been made a promise by a person making a promise, and that promise was relied upon to a detriment, then a person could sue the promise giver for damages.
Promissory Estoppel can be Used to Recover Damages that Arise from Detrimentally Relying on a Promise
When it comes to our situation from the above, our franchisee is the promise, i.e. the one who received the promise, and our corporate manager is the promisor, i.e. the one who gave the promise. In this case, our franchisee could most likely raise a successful promissory estoppel claim as 1) the promise the franchisee received made him come to the decision to buy the car; 2) the franchisee’s reliance was reasonable as the manager promised to give the raise; 3) the franchisee put himself in a substantially different position based off of the promise; and 4) the manager could have actually foreseen you buying the new car as you had told him so. Therefore, under the legal concept of detrimental reliance and its use in the defense of promissory estoppel, our franchisee would be able to most likely get a court to uphold the promise that was made to him by their manager.
If you have any more questions about detrimental reliance or promissory estoppel, please contact your local business attorney or take a look at our other blog posts at https://www.l4sb.com/blog/.
Law 4 Small Business (L4SB). A Slingshot company. A little law now can save a lot later.
