Farm Crop Energy v. Old National Bank: a Meaningful Test for Damages Under Promissory Estoppel?

• Publication year: 1986

UNIVERSITY OF PUGET SOUND LAW REVIEWVolume 10, No. 2WINTER 1987

NOTES

Farm Crop Energy v. Old National Bank: A Meaningful Test For Damages Under Promissory Estoppel?

Glen Andrew Anderson

I. Introduction

A 1984 Washington Appellate Court decision, Farm Crop Energy v. Old National Bank,(fn1) provided the court with an opportunity to resolve the confusion in promissory estoppel law(fn2) by announcing a workable standard for computing damages. The unique facts of the case, and the "appropriate circumstances"(fn3) test announced by the court increased, rather than ended this confusion.

Old National Bank (ONB) and Farm Crop Energy had entered a conditional loan agreement for the construction of a fuel alcohol plant. Farm Crop subsequently advanced money to the plant contractor, relying on the assurance of an ONB officer that the loan would be made.(fn4) ONB then refused to make the loan, and Farm Crop brought suit on a number of theories including promissory estoppel. The trial court granted Farm Crop both their reliance costs and lost profits.(fn5) On appeal, the issue was whether lost profits were recoverable under promissory estoppel.(fn6) The appellate court held that they were in "appropriate circumstances."(fn7)

The purpose of this Note is to analyze the issues surrounding an award of lost profits under promissory estoppel and to propose a method for determining when such an award is appropriate. The Farm Crop court took a step in the right direction by advocating a flexible approach to the damages question in promissory estoppel cases. However, because of the inherent ambiguity in the test and the failure of the court to articulate any meaningful criteria on which to base a decision, the "appropriate circumstances" standard provides neither guidance nor justification for determining the appropriate measure of damages.(fn8)

This Note proposes that an award of lost profits under promissory estoppel should be made only when the circumstances surrounding the making of the promise justify enforcing it as if it were a contract.(fn9) Operating on the assumption that a promise is found to be a reasonable basis for reliance, this Note will propose some criteria by which a court can determine when a promise justifies a damage award in excess of the costs of reliance.(fn10) These criteria will then be applied to the Farm Crop facts to demonstrate that remedies can be administered under a standard that is rational and flexible, yet provides reasonable certainty.(fn11)

II. A Brief History of the Promissory Estoppel Damage Dispute

Promissory estoppel was originally created to address the problem of enforcing gratuitous promises,(fn12) which under traditional contract principles were unenforceable because of a lack of consideration.(fn13) This situation frequently resulted in an injustice because if the promisee undertook action in reliance on a gratuitous promise there was no remedy available if the promisor refused to perform.(fn14) Promissory estoppel was created to enforce these promises on the basis of the promisee's reliance.(fn15) One of the major issues concerning recovery under promissory estoppel is whether the promisee is entitled to recover expectation damages, or whether the promisee is limited to recovering the costs of reliance.(fn16) The increasing use of promissory estoppel in commercial cases has sharpened the debate over how -recovery under the doctrine should be limited.(fn17)

Courts and commentators have generally taken three approaches to measuring damages in promissory estoppel cases: the reliance measure,(fn18) the expectancy measure,(fn19) and an ad-hoc approach.(fn20) Advocates of the reliance measure generally argue that because a contract has not been formed and the purpose of enforcing the promise is to prevent an injustice, the promisee should not be permitted to recover more than the cost of reliance.(fn21) Advocates of the expectancy measure argue that if the transaction is worthy of legal enforcement, then it is economically desirable to enforce the expectation interest and thereby encourage similar transactions.(fn22) Finally, those who advocate an ad-hoc approach argue that promissory estoppel is an equitable remedy intended to prevent injustice and that damages should be awarded based on the merits of the case.(fn23) Washington has adopted an ad-hoc approach under the rubric of "appropriate circumstances."(fn24) As will be seen, the Farm Crop decision does not clearly explain what constitutes an appropriate circumstance for an award of lost profits.(fn25)

III. The Farm Crop Facts

Farm Crop Energy, a Washington corporation, was formed in 1980 for the purpose of constructing and operating a fuel alcohol plant in Washington. The investors in Farm Crop approached ONB in February of 1981 intending to obtain a loan for the construction of the plant.(fn26) ONB issued a loan commitment letter with a number of conditions attached.(fn27) In May of 1981, some of Farm Crop's officers met with Mr. Danelo, an ONB officer, to discuss these conditions.(fn28) At this meeting, Farm Crop informed Mr. Danelo that substantial savings on the plant's construction could be had if $175,000 were immediately advanced to Matrix Energy, the plant contractor.(fn29) Farm Crop's Officers contended that Mr. Danelo told Farm Crop to go ahead and advance the money, because the loan would be made.(fn30) After Farm Crop advanced the money to Matrix Energy, ONB announced that because Farm Crop had not met the conditions, the bank would not make the promised loan.(fn31)

Farm Crop brought suit against ONB alleging promissory estoppel as one basis of recovery.(fn32) At trial, the jury returned a verdict for Farm Crop and awarded $175,000 in reliance damages and $120,000 in lost profits.(fn33) ONB appealed, contending, among other things, that lost profits could not be recovered in an action based on promissory estoppel.(fn34) The Court of Appeals rejected this contention and held that lost profits could be recovered under promissory estoppel in "appropriate circumstances."(fn35) The court reasoned that an award of lost profits was appropriate because Farm Crop had lost its opportunity.(fn36)

IV. The Court's Reasoning in Farm Crop

The Court of Appeals recognized that two lines of analysis could be applied to the Farm Crop case.(fn37) The first begins with the premise that the commitment letter from ONB created a binding contractual agreement.(fn38) The court reasoned that the jury could find Farm Crop had not met the conditions of the letter.(fn39) Thus, unless there had been a waiver of the conditions or an equitable estoppel, Farm Crop would not be entitled to performance.(fn40) The court stated that ONB's May assurance could be treated under either of these doctrines,(fn41) but the Court held that promissory estoppel also was applicable.(fn42)

In its analysis, the court held that the May assurance met the elements of promissory estoppel:(1) A promise which (2) the promisor should reasonably expect to cause the promisee to change his position (3) which does cause the promisee to change his position (4) justifiably relying on the promise, in such a manner that (5) injustice can be avoided only by enforcement of the promise.(fn43) Therefore, although the jury could find that ONB was not bound by the loan commitment,(fn44) Farm Crop's reliance on ONB's May assurance provided a proper basis for allowing Farm Crop to recover under the doctrine of promissory estoppel.(fn45) Holding ONB liable on the basis of the May assurance rather than on the loan commitment significantly altered the measure of damages. Under the first line of analysis, recovery would be based on the parties' original contract,(fn46) whereas recovery under the second line of analysis is based solely on the May assurance.(fn47)

The court then analyzed the proper measure of damages under promissory estoppel.(fn48) The court cited a number of judicial and scholarly authorities and determined that the general rule was to fashion an equitable remedy.(fn49) Having decided to fashion an equitable remedy, the court determined that equity called for an award to Farm Crop of not only their reliance expenditures but also their lost profits.(fn50) The reason proffered was that, "[p]resumably, Farm Crop and ONB anticipated a profitable venture. In relying on the loan commitment from ONB, Farm Crop did not seek alternative financing for its venture. Not only did it lose its money advanced, it lost its opportunity."(fn51) The court concluded by holding that these were "appropriate circumstances"(fn52) for an award of lost profits, there was adequate proof of the lost profits,(fn53) and that the trial court did not err in submitting the issue to the jury.(fn54)

The court's reasoning that Farm Crop had lost its opportunity is worthy of further inquiry because it is unclear what the court meant by lost opportunity.(fn55) While it is clear that Farm Crop had lost the opportunity to get a loan from ONB, it is not so clear that this prevented them from entering the fuel alcohol business.(fn56) That the court did not question Farm Crop's failure to obtain another loan indicates that the ONB loan was Farm Crop's only opportunity. This could be one explanation of why the court believed the lost opportunity argument alone justified an award of lost profits.(fn57)

A second possible explanation is that the...