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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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Court of Chancery Awards Reliance Damages for Promissory Estoppel
Ramone v. Lang, C.A. No. 1592-N, 2006 WL 905347 (Del. Ch. Apr. 3, 2006). This case involved a dispute between two businessmen who hoped to work together on a project to open a swim and fitness center, but who failed to achieve this despite months of efforts and negotiations. Plaintiff and defendant intended to formalize their relationship in a written LLC agreement. Ultimately, defendant closed on the property for himself, frustrated by his inability to reach a final agreement with plaintiff. Plaintiff sued for breach of contract, breach of fiduciary duty, and promissory estoppel. The Court of Chancery found that there was no contract between the parties and that the parties were not partners, therefore defendant did not owe any fiduciary duties. The court did, however, find that plaintiff had a claim for promissory estoppel and awarded reliance damages.
In analyzing the contract claim, the court discussed the elements for the formation of a contract. It requires "a bargain in which there is a manifestation of mutual assent to the exchange and consideration," "that acceptance be identical to the offer," and "contain all material terms in order to be enforceable." The record in this case demonstrated that plaintiff did not manifest objective assent and that he and defendant never reached a complete meeting of the minds on all material terms. Plaintiff also argued that defendant owed him fiduciary duties because, during the course of their relationship, he and defendant formed a partnership. Under 6 Del. C. § 15-202(a), a partnership is "the association of two or more persons (i) to carry on as co-owners a business for profit . . . whether or not the persons intend to form a partnership." Because there is no single dispositive consideration that determines whether or not a partnership exists, a court must find a common obligation to share losses as well as profits. The court examined the parties' relationship to determine whether, in contemplation of their joint interest in the property at issue, they formed a partnership. Finding that their relationship fell short of constituting a partnership, the court stated, "persons who have entered into a contract to become partners at some future time or on the happening of some future contingency do not become partners until or unless the agreed time has arrived or the contingency has happened." Aside from the lack of agreement, the court also reasoned that it would be odd to find a general partnership existed because the parties agreed that their relationship would be as members of a LLC. Because the parties intended to form a LLC, it would be odd to characterize their relationship during the exchange of draft LLC agreements as a partnership. The court found that the plaintiff had a valid claim for promissory estoppel because: (1) a promise was made; (2) it was the reasonable expectation of the promisor to induce action or forbearance on the part of the promisee; (3) the promisee reasonably relied on the promise and acted to his detriment; and (4) such a promise is binding because injustice will be avoided only by enforcement of the promise. In analyzing each of these elements, the court found that plaintiff was induced by defendant's promise to enter into business together, reasonably relied on that promise, and suffered damages as a result. "The quintessential remedy for promissory estoppel is an award of damages measured by the reliance costs reasonably incurred by the plaintiff." As such, the court awarded the plaintiff reliance damages.