Draw the Law: Reliance, the Exception to Contract Consideration

So for the past couple of weeks I spent talking about how consideration is the cornerstone of contracts and what is good consideration.  Now, in typical lawyer fashion I am going to tell you that there is a situation where you will have a contract-like situation without consideration.  Another words, an exception.  That exception is known as reliance.

Why did you say Contract-like?

I am using a new sketching app. Let me know if you like it. Anyway, remember that to form the basis of a contract the two parties need to both give consideration.

First, remember that consideration is a two-way street.  Both parties in a contract MUST give good consideration for a contract to be formed.  In Contracts law, all law students learn that there are contracts, and then there are situations that look like contracts.  One of these contract-like situations is promissory estoppel.  As I don’t want to confuse you with legalese in this post I will refer to it by its other name, detrimental reliance.

What is Detrimental Reliance?

Detrimental reliance requires that a party makes a (1) a promise, then (2) the party relying on the promise changes their position. In this case, the orange person bought a whole bunch of goods based on blue's promise.

It is when one party reasonably relies on the other party’s promise to their detriment.  Detriment in this situation is when the promisor reasonably expects to induce an action or forbearance from the promisee, and there is actual action and or forbearance by the promisee.  In other words, the promisee has had to have a change in position.

(3) the detriment now comes into play when blue for whatever reason cannot hold the orignal promise, BUT the orange person now has changed their position (i.e. he bought all the goods for blue). Orange now can sue blue, even without a contract formed.

I am sure you have no clue what I just said, so it is time for an example and pictures:

Example: Construction Projects and Subcontractor Bids

Let’s say a subcontractor (S) submits a bid of $7,100 to a general contractor (GC) trying to secure a public works construction project.  The general contractor uses this bid to prepare his own final bid.  The general contractor is awarded the job.

S submits a bid of $7,100, G relies on this for his final bid for the project; he wins the project, BUT the next day S now tells blue that he cannot do it for less than $15,000.

The following day the subcontractor tells the general contractor that it had underestimated the cost and refused to perform the job for less than $15,000. The general contractor then hires another subcontractor (AS) to do the work for $11,000.

With the final bid being eaten up by S's more costly bid, G uses AS's bid of $11,000. This is more costly than the original promise of $7,100. Therefore, if G sues S, the damages awarded are the difference between AS's bid and S's original bid.

The general contractor sues the original subcontractor for the difference between $11,000 and $7,100.  The main argument is that the general contractor relied on the offer by the subcontractor.

In this situation, the general contractor relied on a promise, there had been no consideration exchanged from the original subcontractor to the general contractor.  However, the general contractor changed his position based on the subcontractor’s bid (he made the final bid with it calculated into the cost).  In this case, a court would award the general contractor the difference of $3,900 as the damage done to the general contractor for detrimentally relying on the subcontractor’s promise.

Last Word: Real World Reliance

Reliance is not some kind of legal fairy-tale that lawyers come up with just to tell you stories.  While it is an old English law concept, it still has very real world consequences.  It has been used successfully in option contracts, employment agreements, franchise arrangements, and as you just saw in construction projects with subcontractor bids.  The example is actually based on a real case.

Detrimental reliance frequently comes up in the situation of employment law;  the typical situation is where the HR person makes a lot of assurances and promises to prospective employee.  However, for whatever reason the job never materializes, but the employee has quit their previous job, moved, and other changes to their life.  Angry and frustrated they usually sue the company that offered them the job or made them certain promises with the claim being detrimental reliance.

Many times lawyers will advise their employer-clients (as well as marketers) not to make promises that they cannot or do not intend to keep, especially in those situations where the other side is going forward with its plans based on those promises.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.


One thought on “Draw the Law: Reliance, the Exception to Contract Consideration

  1. Pingback: Draw the Law: You, Your Contracts, and Other People – Using Agents | The Blawg of Ryan K. Hew, Attorney At Law

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