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What is Detrimental Reliance and Can an Oral Contract Become Enforceable?

Suppose you are propositioned by your neighbor to work on your lawn, and you say “Thank you, I’ll think about it,” and unbeknownst to you, your neighbor proceeds to work on your lawn. Can your neighbor hold you accountable?

Suppose we change the facts somewhat. Suppose you see him working on your lawn, even though you didn’t tell him “okay,” but you do nothing to stop him? Can your neighbor hold you accountable now?

What is Detrimental Reliance?

A person’s words, actions, or inactions can lead another person to believe or do something that leads to their detriment.

The answer to the above questions depends on a number of issues, with the primary issue being “did the neighbor reasonably and detrimentally rely on some statement, action or inaction on your part?”

This is the danger many small business leaders are confronted with. Did you say something, do something or not do something, that would lead a reasonable person to believe (to their detriment) there is “a deal”? Is there detrimental reliance on your words, actions or inactions?

When Detrimental Reliance Becomes a Factor

Detrimental Reliance is used to determine if certain agreements have been breached.

Detrimental reliance is an important component of many causes of action relating to breach of contract. For example, consider fraud: “Fraud consists of a misrepresentation of fact, known by the maker to be untrue, made with the intent to deceive and to induce the other party to act on it, and on which the other party relies to his detriment.” Meiboom v. Carmody, 82 P.3d 66, 69 (N.M. Ct. App. 2003). Similarly, detrimental reliance is required when proving misrepresentation, negligent misrepresentation, violation of the Unfair Practices Act (or UPA), and enforcing an oral contract under the theory of promissory estoppel.

Promissory estoppel may apply when the following elements are proven:

  • A promise was made
  • Relying on the promise was reasonable or foreseeable
  • There was actual and reasonable reliance on the promise
  • The reliance was detrimental (i.e. some sort of harm was suffered)
  • Injustice can only be prevented by enforcing the promise

(Read more)

A Solution to the Problem

If you are unclear about information in an agreement, over communicate until you understand.

Detrimental reliance requires reasonable reliance, which is evaluated on case-by-case basis, taking all provable factors into consideration.

So, back to our neighbor: In the first example, what is the promise you’ve made? That you would think about it. There is no detrimental reliance in this example and your neighbor could therefore not hold you accountable. In the second example, however, did you make a promise? Not directly, no. However, was there detrimental reliance? If your neighbor could prove that a reasonable person would have expected you to tell him to “stop” or that your viewing him doing the work, but doing nothing to stop him, would be viewed by a reasonable person that a deal (i.e. promise) exists.

The conclusion is, over-communicate and don’t assume you and another party understand each other. Make sure others are present or you can otherwise backup your perspective with clear facts. If you cannot get a contract easily in place, at least send an email that summarizes “your understanding” without ambiguity and consider using one of our contract templates to get started.

Avoid a headache. Let us review your contract today.

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