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Monday, August 29, 2011

Nevada Supreme Court Adopts Modern Flexible Approach to Promissory Estoppel Damages

By Professor Jay Mootz

The creation of the doctrine of promissory estoppel is one of the most significant developments in modern contract law. In Dynalectic Co. of Nevada, Inc. v. Clark & Sullivan Constructors, Inc., 255 P.3d 286 (Nev. 2011), the Supreme Court of Nevada unanimously embraced the flexible approach to damages in promissory estoppel cases that is articulated in the Restatement (Second) of Contracts. With its succinct and clear opinion, the Court ensures that Nevada courts will follow the modern trend to determine the appropriate measure of damages by looking to "considerations of what justice requires and the foreseeability and certainty of the particular damages award sought."

One of the roots of promissory estoppel is the common scenario when a subcontractor reneges on a bid on which the general contractor has already relied to secure a construction contract with the owner. Under classical contract principles, because the general contractor has not yet entered a formal agreement with the subcontractor, there can be no cause of action for breach of contract. However, beginning with Justice Traynor’s famous opinion in Drennan v. Star Paving, courts began to find that the general contractor reasonably relies on bids to place its own bid, and that there is an "implied" and "subsidiary promise" by the subcontractor that it will not withdraw its bid before the general contractor has a fair opportunity to secure a contract. This is the situation that was presented by the Dynalectric litigation. Clark & Sullivan sued Dynalectric after it repudiated its bid, alleging that it relied on Dynalectric's bid to formulate its own bid. The trial court refused to find a breach of contract, but it did award more than $2 million in damages on a theory of promissory estoppel, based on the increased payments that Clark & Sullivan made to finish the work on which Dynalectric had bid.

Dynalectric appealed, arguing that the trial court was wrong to award expectation, or "benefit of the bargain," damages since the suit was grounded in promissory estoppel rather than breach of contract. The Court rejected this argument, finding that the modern trend is to tailor the damages to the requirements of justice, and to ensure that the resulting damages are foreseeable and reasonably certain. The Court further held that the presumptive measure of damages in a subcontractor bidding case is the expectation measure, citing Drennan and its progeny.

The Court established the correct rule. Although promissory estoppel is a doctrine that might permit recovery when the requirements of a contract are not satisfied, it is not a wholly distinct cause of action with a separate measure of damages. In fact, there is irony in the Court’s decision. Under the Restatement (First) of Contracts, promissory estoppel could be used as a substitute for consideration to establish a breach of contract, and ordinary contract damages (the expectation measure) were awarded. More recently, courts have been more aggressive in using promissory estoppel in situations in which a contract is contemplated but not completed, and in these cases the courts have developed a flexible approach to the measure of damages in light of the expanded liability. As a consequence, the Restatement (Second) of Contracts sec. 90(1) now provides that the "remedy granted for breach may be limited as justice requires." In other words, the general measure of damages in a case utilizing promissory estoppel should be the expectation measure, unless it is not subject to reasonably certain measure or the requirements of justice suggest that a more limited remedy is appropriate. Courts generally have limited the remedy to the "reliance expenditures" of the plaintiff, awarding out-of-pocket costs but not anticipated profits. The modern flexible approach, however, was never meant to unseat the expectation measure as the presumptive measure of damages.