How Simple Offers Become Binding Contracts?

Parties in many industries submit and receive offers to provide goods and services on a routine basis.  Seldom if ever does either party consider such offers to become legally binding contracts.  Yet offers can unwittingly become binding contracts under a legal theory or doctrine known as “promissory estoppel”.

While promissory estoppel differs in form and name from binding contracts, the result is identical in many respects.  Legally binding contracts consist of 3 elements, offer, acceptance and consideration. Promissory estoppel contains these same elements; however, they are equitably created as a substitute for the traditional form of these 3 elements.  Traditionally, an offer arises when one party promises to take, or refrain taking some action, that the offeror is not already legally required to perform.  Acceptance occurs when the party to whom the offer is made, knowingly communicates approval of the offer either expressly through words or implicitly trough overt action.  Consideration is evidenced by the exchange of something of value between the offeror and acceptor, which neither was not already obligated to provide.  When contracts arise as a result of promissory estoppel, detrimental reliance typically serves as a substitute for both express acceptance and the consideration required to support a binding contract.  Detrimental reliance occurs when when the acceptor commits an act or omission in reliance upon an offer that was intended, or should have been foreseen by the offeror, to induce such reliance.

The doctrine of promissory estoppel is an equitable theory dating back to the early 1900’s under which the Courts essentially create a legally binding contract where the 3 traditional elements do not formally exist.  The rationale behind promissory estoppel is to prevent an injustice under circumstances where the accepting party relies to its detriment upon the promise made by the offering party that was intended to induce such reliance.  In practice, promissory estoppel represents an attempt at rough justice to remedy a perceived wrong.

The most common application of promissory estoppel relates to the offer or bidding process relating to the procurement of goods or services.  Often times one party solicits offers from a vendor or contractor seeking to procure or purchase something.  The offeror is generally aware that the party seeking the offer may rely upon the offer to provide goods or services and act thereon.   Sometimes the accepting party informs the other party their offer is being relied upon,  sometimes not, since promissory estoppel is based upon justifiable reliance, not knowledge of acceptance.  Either way, If the accepting party relies upon the offer to its detriment, the courts frequently find, it would be inequitable if the offeror was allowed to withdraw its offer post award.  Courts generally find the offeror knew or should have known the acceptor may might rely upon the offer to its detriment.  The simple offer therefore results in a binding contract between the parties based upon promissory estoppel.

Courts enforce the promissory estoppel upon equitable grounds under the guise of established contract law to achieve rough justice.  The proposal or bid is viewed as the offer.  Reliance upon the offer is deemed acceptance by the other party.  If the accepting party is subject to liability as a result of such reliance, the change of status is viewed as detrimental and serves as a substitute for consideration.  The 3 elements of a binding contract are present and the simple offer is deemed a binding contract under the doctrine of promissory estoppel.

Savy offerors have developed methods to avoid the application of promissory estoppel  to their proposals or bids.  Rather than submitting their proposals as an “open offer” with no restrictions thereon, many offerors submit proposals or bids as “conditional offers” requiring notice of acceptance or negotiation of final terms of a written agreement.  Alternatively, promissory estoppel will not apply where the bid or proposal is withdrawn or revised by the offeror prior to detrimental reliance by the accepting party.  While promissory estoppel generally arises in the context of bids or proposals, there is nothing with the doctrine that limits its application to other applications.