November 17, 2008
contracts Limerick of the Week: Hoffman v. Red Owl Stores
Hoffman v. Red Owl Stores is the classic case for illustrating the grounds for liability in cases of pre-contractual reliance. Generations of students have been drawn to the drama of Mr. Hoffman's heroic efforts. He started a grocery store in Wautoma, and then sold that profitable business, as well as a bakery, (while raising a family, volunteering as a local firefighter and inventing the internet in his spare time) based on his good faith belief in the pondscum he was dealing with from Red Owl Stores. Well, it's a nice story, but Columbia University's Robert E. Scott says it's not true. In his article, Hoffman v. Red Owl Stores and the Myth of Precontractual Reliance, 68 Ohio State Law Journal 71 (2007), Professor Scott contends that the case wasn't really about precontractual reliance and that lawyers would be leading unwary clients down the primrose path if they encouraged them to seek recovery based on that doctrine, which courts treat with great skepticism. Here's Professor Scott's abstract:
For decades there has been substantial uncertainty regarding when the law will impose precontractual liability. The confusion is partly attributable to the unfortunate case of Hoffman v. Red Owl Stores and to the unusual degree of scholarly attention that it has attracted. A careful examination of the record of the Hoffman case reveals facts that are much different from conventional understanding. The disagreement between Joseph Hoffman and Red Owl Stores resulted from a fundamental misunderstanding between the parties regarding the terms of Hoffman’s capital contribution to the franchise. The misunderstanding was largely a product of Hoffman’s penchant for moving assets around during the negotiation period, his failure to clarify the terms of his $18,000 capital investment, and the “no debt” condition attached to loans from his father-in-law. These facts show that neither promissory estoppel, negligent misrepresentation, unjust enrichment, or a failure to negotiate in good faith would have been a proper ground for imposing liability on Red Owl Stores. This result is consistent with a systematic survey of the case law showing that courts overwhelmingly decline to impose liability for representations made during preliminary negotiations. The preoccupation with reliance on preliminary negotiations has led scholars to ignore an important recent development in the law. A number of modern courts now impose a duty to bargain in good faith when parties make reliance investments following a “preliminary agreement” in which the parties agree to some terms but leave others open for further negotiation. Professor Scott argues that lawyers and academic commentators should turn their attention away from the Hoffman paradigm and instead focus on key issues that the contemporary cases have yet to resolve: when have parties reached sufficient agreement to trigger the duty to negotiate further in good faith, and precisely what does that duty entail?
Fair enough, but the court's approach in Hoffman v. Red Owl Stores, faulty though it may be, remains Limerickworthy.
Hoffman v. Red Owl Stores
Hoffman moved from Wautoma to Chilton
And his finances were slowly wiltin'.
Because legal science
Protects sound reliance,
He recovered from Red Owl's jiltin'.
He's more popular than Paris Hilton
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