Meaning
The equitable principle that protects a party who suffers a loss after acting on an informal promise provides a basis for recovery outside of a formal contract. This doctrine of promissory reliance applies when a founder takes action based on a partner’s verbal commitment. It governs scenarios where one party quits a job or spends personal funds based on a promise of funding.
The doctrine stops applying if the promise was vague or if the reliance was unreasonable.
Detrimental Action
Recovery requires that the claimant changed their position to their disadvantage because of the promise. In cases of promissory reliance, the founder must show they spent money or abandoned other opportunities. This change in position must be a direct result of the promise.
If the claimant would have taken the action anyway, the claim has no basis.
Value Protection
This legal tool protects the claimant from the loss incurred rather than awarding the full profit of the promised deal. When a founder establishes promissory reliance, the award is limited to the expenses paid. This remedy prevents injustice without creating a windfall for the claimant.
It focuses strictly on returning the injured party to their original position.
Legal Margin
Relying on verbal assurances remains a highly risky approach to business. Even with promissory reliance, proving the exact promise and the resulting detriment requires extensive documentation and witnesses. The cost in hours and attention during a dispute can be devastating to a new venture.
Startups can lose access to funding when their equity structure is clouded by outstanding verbal promises. Founders must prioritize signed, written agreements to secure their interests from the very beginning.
