Werner v. Xerox Corp.

Brief Fact Summary. Company 1 was a manufacturer of lathes that are used to make metal products.  Company 1 was encouraged by a representative of company 2 to construct a lathe fitted to make a component for one of company 2's products, and to lease an office to house the machine.

Synopsis of Rule of Law. To recover under promissory estoppel, the promisee's reliance must have been reasonable.

Facts. The Plaintiffs, John a Werner ("Mr. Werner") and W&D Services Inc. (the "Plaintiffs"), had a business relationship with the Defendant, Xerox Corp. (the "Defendant").  Mr. Werner was a consulting engineer with vast experience in the design and manufacture of special metal working machinery.  The Defendant was looking for a better way to produce metal rollers, so the Defendant's agent Frank Wolf ("Mr. Wolf"), approached the Plaintiffs and requested that they try to develop a machine to manufacture the necessary rollers.  The Plaintiffs developed a machine that could produce the rollers, but not to the Defendant's exact specifications.  Nonetheless, in November 1978, the Defendant issued a purchase order for one of the Plaintiffs' machines.  In both March 1979 and November 1979, the Defendant ordered one more machine.  The Plaintiffs delivered all three machines to the Defendant for installation.  The district court found that Mr. Wolf offered to make the Plaintiffs the principal offload producer of the Defendant's roller.  This would allow the Defendant to sell small quantities of rollers without revamping its in-house machines. 
•    The district court found that Mr. Wolf told Mr. Werner that "if they were 'smart' they would build a machine for themselves and run off parts for Xerox".  Additionally, Mr. Wolf also said, in November 1978, after touring a facility Mr. Werner leased with Don and Gene Verhein to produce the parts "producing parts would be a 'nice little business' to get into, and one that would 'really pay.' " However, Mr. Werner testified that Mr. Wolf's manager visited the same facility in July 1979, and said that the Plaintiffs would never produce parts there.  This comment took Mr. Werner by surprise.  Mr. Wolf then reassured Mr. Werner and said his manager did not know what he was talking about and that he would still be an off load supplier.  The Defendant eventually terminated the parties' relationship and opened its own facility for offload production.  The Plaintiffs sued the Defendant for breach of con¬tract, promis¬sory estoppel, and deceit.  The trial court awarded the Plaintiffs damages on the theory of promissory es¬toppel, but only up until the time Mr. Wolf's supervisor made his comments.

Issue. Does the reliance necessary to demonstrate a cause of action for promissory estoppel need to be reasonable? 

Held. Yes.  Three elements must be proven to successfully plead a cause of action for promissory estoppel:  "(1) Was the promise one which the promisor should reasonably expect to induce action or forbearance of a definite and substantial character on the part of the promisee? (2) Did the promise induce such action or forbearance? (3) Can injustice be avoided only by enforcement of the promise?"
•    The court affirms the district court's treatment of all three elements.  As to the first, the court affirmed that "Wolf, promised Werner that he would be an off-load parts supplier for Xerox" and that "Wolf's promises were more than mere representations regarding what Xerox might do in the future."  Additionally that the Defendant should have "reasonably expected" Mr. Wolf's actions to induce the Defendant's actions.  Further, that after Mr. Wolf's supervisor made his comments, Mr. Werner could no longer have reasonably relied on the Defendant's promises. 
•    As to the second, the court found that the phrases "justifiable" reliance and "in the exercise of ordinary care" are synonymous with one another, and that to recover under promissory estoppel the promisee's reliance must have been reasonable.  Applying this to the facts here, the court found that Mr. Werner's conduct was reasonable until July 1979, when Mr. Wolf's supervisor made his comment that the Plaintiffs would never produce parts at the leased facility.  After the supervisor made his comments, however, the reliance became unreasonable. 
•    As to the third, the court recognized that the district court "held that injustice could only be avoided [   ] by enforcement of Wolf's promise."  The court could not find that the district court abused its discretion by finding "Werner "deviated from his usual manner of doing business, … leased a large facility [, went] into business with the Verheims (sic) and hired an employee, Robert Parr, to work for the newly created corporation."
•    The court also refused to overturn the lower courts award of reliance damages

Discussion. This case demonstrates that recovery under promissory estoppel is limited to reliance that is reasonable.