Hoffman v.

Red Owl Stores

and the Myth of Precontractual Reliance

Robert E. Scott∗

The conventional wisdom among contemporary scholars is that

courts will impose promissory estoppel liability for reliance invest-
ments undertaken prior to any agreement between commercial par-
ties.1 Evidence of promises made and relied upon during the negotia-
tion process together with a “general obligation arising out of the nego-
tiations themselves” are the supposed grounds for imposing liability
even for preliminary negotiations that ultimately break down.2 But
even a casual survey of contemporary case law casts significant doubt
on the accuracy of the conventional view. Courts actually make some
form of agreement a necessary pre-condition to a promisee’s recovery.
The real issues are: When will a preliminary agreement be found? And
how does the nature of such agreement determine when and how a
promisee can recover?
These questions have generated a literal flood of litigation that has
been virtually ignored in contemporary contract law courses. One rea-
son that this question is ignored is because of the misplaced attention
given to the decision of the Wisconsin Supreme Court in Hoffman v.

∗ Alfred McCormack Professor of Law, Columbia University. This essay

benefited greatly from comments by Ken Abraham, Douglas Baird, George

Cohen, Marvin Chirelstein, Victor Goldberg, Jody Kraus, Alan Schwartz and
George Triantis. It is forthcoming in a symposium on “Commercial Calami-
ties”, 68 Ohio State L. J. 1 (2007).
1See e.g., E. Allan Farnsworth, Precontractual Liability and Preliminary
Agreements: Fair Dealing and Failed Negotiations, 87 Colum. L. Rev. 217
(1987). (“In recent decades, courts have shown increasing willingness to impose
precontractual liability.”) Michael B. Metzger & Michael J. Phillips, The
Emergence of Promissory Estoppel as an Independent Theory of Recovery, 35
Rutgers L. Rev. 472, 496-97 (1983) (“[I]t is clear that promissory estoppel has
been used to enforce promises too indefinite or incomplete to constitute valid
offers.”); RALPH B. LAKE & UGO DRAETTA, LETTERS OF INTENT AND OTHER PRE-
CONTRACTUAL DOCUMENTS 177 (“Liability for action during the precontractual
stage of a transaction may be based on the obligation to bargain and to negoti-
ate in good faith.”); Restatement (Second) of Contracts § 205, comment c (1981)
(“Bad faith in negotiations...may be subject to sanctions.”) ..
2 Id.
1
2 HOFFMAN v. RED OWL
Red Owl Stores, Inc. As a consequence of a fundamental misunder-
3

standing of the law in action, lawyers bring suits claiming reliance on

preliminary negotiations and, to their surprise and that of their cli-
ents, they lose. Meanwhile an entire new body of law enforcing certain
preliminary agreements has emerged unbeknownst to most lawyers
(and legal academics).
The story of this misunderstanding of the law of precontractual li-
ability begins with Hoffman v. Red Owl. In Hoffman, the court held
that even if two parties had never reached agreement on essential fac-
tors necessary to establish a contract, a party who relied on represen-
tations made during the negotiations could recover sunk costs based on
the doctrine of promissory estoppel as expressed in §90 of the Restate-
ment of Contracts. Under this doctrine, the court held that a “prom-
ise”—here Red Owl’s representation that $18,000 was sufficient capital
to secure a franchise—need not be as definite in its terms as a promise
that is the basis of a traditional bargain contract.4
Putting aside for the moment the dubious accuracy of that holding
as a matter of contract doctrine, one fact has become clear in the inter-
vening years during which time Hoffman has been ensconced as a fa-
vorite in contracts casebooks5 and analyzed in numerous law review
articles6: Hoffman is an outlier; the case has not been followed in its

3 133 N.W. 2d 267 (1965).

4 Id. at 275.
5 See, e.g., RANDY E. BARNETT, CONTRACTS: CASES AND DOCTRINE 732 (3d ed
2003); JOHN P. DAWSON, WILLIAM BURNETT HARVEY & STANLEY D. HENDERSON,
CONTRACTS: CASES & COMMENT 409 (8th ed. 2003); E. ALLAN FARNSWORTH, WIL-
LIAM F. YOUNG & CAROL SANGER, CONTRACTS: CASES & MATERIALS 235 (6th ed.
2001); LON L. FULLER & MELVIN ARON EISENBERG, BASIC CONTRACT LAW 573
(7th ed. 2001); EDWARD J. MURPHY, RICHARD E. SPEIDEL & IAN AYRES, STUDIES
IN CONTRACT LAW 435 (6th ed. 2003); STEWART MACAULAY, JOHN KIDWELL & WIL-
LIAM WHITFORD, CONTRACTS: LAW IN ACTION 390 (2D ED. 2003); ROBERT E. SCOTT
& JODY S. KRAUS, CONTRACT LAW AND THEORY 204 ( REV. 3d ed. 2003).
6 See, e.g., Gregory Duhl, Red Owl’s Legacy, 87 Marquette L. Rev. 297

(2004); Peter Linzer, Rough Justice: A Theory of Restitution and Reliance, Con-
tracts and Torts, 2001 Wisc. L. Rev. 695, 717–20; Juliet P. Kostritsky, When
Should Contract Law Supply a Liability Rule or Term?, 32 Ariz. St. L. J. 1283,
1322-23 (2000); Jason Scott Johnston, Communication and Courtship: Cheap
Talk Economics and the Law of Contract Formation, 85 Va. L. Rev. 387, 494–
99 (1999); Avery Katz, When Should an Offer Stick? The Economics of Promis-
sory Estoppel in Preliminary Negotiations, 105 Yale L.J. 1249, 1255–57 (1996);
Richard Craswell, Offer, Acceptance and Efficient Reliance, 48 Stan L. Rev.
481 (1996); Edward Yorio & Steve Thel, The Promissory Basis of Section 90,
101 Yale L.J. 111 (1991); Mark P. Gergen, Liability for Mistake in Contract
ROBERT E. SCOTT 3
own or other jurisdictions. Indeed, a recent case applying the Wiscon-
7

sin law that governed Hoffman refused to award reliance damages on a

promissory estoppel claim under similar facts.8 Courts in other juris-
dictions have established strict limitations for imposing promissory
liability based on representations made during the negotiation proc-
ess.9
All of this begs for answers to several key questions: How could the
court in Hoffman find liability where so many other courts could not?
And, what exactly is the law of contracts in the muddy area of precon-
tractual liability? In this essay, I begin with a close look at the Hoff-
man case. The transcript of the trial reveals a story far different from
the conventional understanding of the dispute between Joseph Hoff-
man and the representatives of Red Owl Stores.10 The truth suggests
an important lesson for law teachers (and law students): It is danger-
ous to draw inferences about emerging doctrine from isolated cases and
it helps to read cases systematically if one wishes to recover the law in
action. By setting the record straight on what really happened in Hoff-

Formation 64 S. Cal. L. Rev. 1, 27–42 (1990); E. Allan Farnsworth, Precontrac-

tual Liability and Preliminary Agreements: Fair Dealing and Failed Negotia-
tions, 87 Colum. L. Rev. 217 (1987); Daniel Farber & John H. Matheson, Be-
yond Promissory Estoppel: Contract Law and the “Invisible Handshake, 52 U.
Chi. L. Rev. 903 (1985); Jay M. Feinman, Promissory Estoppel and Judicial
Method, 97 Harv. L. Rev. 678 (1984); Michael Metzger & Michael J. Phillips,
The Emergence of Promissory Estoppel as an Independent Theory of Recovery,
35 Rutgers L. Rev. 472 (1983); Charles Knapp, Enforcing the Contract to Bar-
gain, 44 N.Y.U. L. Rev. 673, 686–90 (1969); Robert Summers, Good Faith in
General Contract Law and the Sales Provisions of the Uniform Commercial
Code, 54 Va. L. Rev. 195, 225 (1968).
7 Farnsworth, supra note 1.

8 Beer Capitol Distributing, Inc. v. Guinness Bass Import Co., 290 F.3d 877
(7th Cir. 2002). The court denied both promissory estoppel and unjust enrich-
ment claims based on the plaintiff’s reliance on defendant’s representation dur-
ing the negotiations that he would recommend plaintiff as the exclusive dis-
tributor of defendant’s beer for southeastern Wisconsin.
9 See e.g., Banco Espirito Santo de Investimento v. Citibank, 2003 U.S. Dist

Lexis 23062 (S.D.N.Y. 2003); R.G. Group v. Horn & Hardart, 751 F.2d 69,71
(2d Cir. 1984).
10 Commentators have been virtually unanimous in accepting the story, as
told by the Wisconsin Supreme Court, that Red Owl’s escalating financial de-
mands were the proximate cause of the breakdown in negotiations between the
parties. Marvin Chirelstein is a notable exception to this uncritical view of the
case in suggesting that there is a plausible alternative story to tell about Hoff-
man. MARVIN A. CHIRELSTEIN, CONCEPTS AND CASE ANALYSIS IN THE LAW OF
CONTRACTS 57-58 (5th ed. 2006). See also Johnston, supra note 6, at 497–99.
4 HOFFMAN v. RED OWL
Hoffman and pointing where the legal rules governing preliminary
agreements have evolved in the years since the case was decided, I
hope to encourage a more systematic approach to the “discovery” of
new legal doctrines.

The True Facts of Hoffman v. Red Owl Stores

The Supreme Court of Wisconsin relied on an edited transcript of
the trial as the basis for its decision.11 But the complete trial transcript
of the case12 paints a very different picture of the relationship between
Joseph Hoffman13 and Edward Lukowitz and the other Red Owl agents
headquartered in Minneapolis.14 This is true even if one endeavors to
interpret all facts in the light most favorable to Hoffman as the appel-
lee holding a jury verdict.
The key to unraveling the true story behind Hoffman is to ignore
the red herring. Specifically, let’s put to one side a consideration of the
various actions taken by Hoffman in reliance on statements made by
Lukowitz and the other Red Owl representatives during the negotia-
tion process. Rather, let’s focus on a single fact. Hoffman claimed to
have “about $18,000” available to be set up in a Red Owl franchise.15
This much is conceded by all. These, then, are the pertinent questions:
What was the understanding as to the composition of the $18,000? Was
it supposed to be all equity, or was it to be cash composed of some eq-
uity and some debt? If the latter, from what sources was Hoffman to
obtain his encumbered cash? Finally, how reasonable was Red Owl’s
reaction to the changing sources of Hoffman’s prospective $18,000 con-

11
See Brief of the Appellants, Hoffman v. Red Owl Stores, Inc., and Edward
Lukowitz, Supreme Court, State of Wisconsin, August Term, 1964, No. 147,
Appendix at 101-241.
12Joseph and Shirley Hoffmann v. Red Owl Stores, Inc., and Edward Luko-
witz, Circuit Court, Outagamie County, Wisconsin, File No. 14954,Transcript
(October 21, 1963, A.W. Parnell, J.). Trial Record at 77 et seq. [hereinafter Re-
cord].
13 Joseph Hoffmann in fact spelled his name with two Ns,” thus “Hoffmann”

and it was so spelled in the trial transcript and in respondents brief to the Su-
preme Court of Wisconsin. See Record at 77-78 et seq. The majority opinion of
Justice Currie in the Supreme Court misspelled his name and the misspelling
has remained ever since.
14 As I suggest in this essay, the misunderstanding between the parties that

led to the dispute cannot be appreciated if one merely reads the edited tran-
script. Moreover, Red Owl’s attorneys did a poor job of highlighting the key
facts and their legal relevance either at trial or on appeal.
15 Record at 86.
ROBERT E. SCOTT 5
tribution as he moved his assets around between September 1961 and
January of 1962? While these financing questions are complex, they
contain the answer to the puzzle that has perplexed students and
commentators for years: What explains the behavior of Red Owl offi-
cials who, according to the court, repeatedly increased Hoffman’s
minimum capital requirements, first from $18,000 to $24,000, then to
$26,000, and ultimately to $34,000?
1. The purchase and sale of the Wautoma grocery store and the
$18,000 “assurance”
In the fall of 1959, Joseph Hoffman was restless. He had operated a
bakery in Wautoma, Wisconsin since 1956 but he wanted to do more.16
So, in November 1959, Hoffman contacted Sid Jansen, the Division
Manager of Red Owl Stores,17 and inquired about the possibility of ac-
quiring a Red Owl franchise store. Informal discussions continued but
without much progress and, by the fall of 1960, Edward Lukowitz had
taken over from Jansen as Division Manager. Around Christmas that
year Hoffman had an idea. He thought “it might be a good idea to get a
little experience in the grocery business before I go into a bigger
store.”18 A friend in Wautoma who was running such a store had suf-
fered a heart attack and the store was available. He called Lukowitz
who looked into it and advised him to go ahead.19
Hoffman bought the Wautoma grocery store business from his
friend for $16,000 in February 1961 and assumed the lease on the
building.20 Things went well even though Hoffman was stretched thin
in managing both the bakery and the grocery business at the same
time. In May, Lukowitz and another Red Owl employee came to the

16 Hoffman had done well in this business and, in February 1959, he had
bought the building in which the bakery was located for $10,000 under an in-
stallment land contract ($100 down and $100 per month). By September of
1961, when he paid off this mortgage, he had paid down the principal liability
to about $7,500. See Record at 79-81 and note 33 infra.
17Jansen’s responsibilities included “future development” (finding new fran-
chisees and facilitating the process by which they could begin operations as a
Red Owl franchisee).
18 Record at 84.
19 Id.
20Hoffman paid $7,000 for the business and $9,000 for the inventory and
leased the store building for $175 per month. Record at 89. Hoffman’s cost in
acquiring and operating the grocery business in Wautoma was $18,000. Id. at
90. He financed this transaction in part by borrowing $9,500 from the Union
State Bank of Wautoma and giving the bank a chattel mortgage on his bakery
equipment. (Exhibit 41).
6 HOFFMAN v. RED OWL
store to conduct an inventory and they concluded that the store was
running a 3 to 4% profit, which they judged as pretty good under the
circumstances. Lukowitz thereupon urged Hoffman to sell the business
to his assistant, Edward Wrysinski, in order to free up his equity for
the larger Red Owl store.21 Hoffman was reluctant to sell in June be-
cause the summer business in the lake country was historically very
brisk (an estimated 5,000 tourists would increase the summer popula-
tion significantly).
At this meeting in May 1961, Hoffman said to Lukowitz and his
colleague, “Fellows, you know how much money I got—about $18,000.
Will this put me in a bigger operation or won’t it?” Lukowitz replied
that there would be no problem with that level of investment.22 There
was, however, no discussion then (or at any time thereafter) as to the
nature of the $18,000 investment. Was it to be all equity, or was it to
be part equity and part borrowed cash?23 Hoffman clearly assumed the
latter. At the time, Hoffman had only $10,500 in cash of his own. He
expected the balance to come from a loan to the business by his father-
in-law, Simon Vanden Heuvel, a prosperous local farmer.24 By saying
he had $18,000, Hoffman treated what he had to contribute to the
business the same as what someone else would lend to it. But a fran-
chisor is hardly indifferent between the two. Red Owl regarded a sub-
stantial equity contribution from its franchisees as the key to a suc-
cessful franchise.25
Indeed, Red Owl officials had reason to believe that Hoffman
could and would supply at least $18,000 of his own cash in setting up
the business and would not rely on money lent by others to make that
contribution. On September 11, 1961, Hoffman had provided a finan-
cial statement to Lukowitz that was passed on to the home office in
Minneapolis. This statement represented that Hoffman had business

21 There also was evidence that Hoffman and Wrysinski were not working
well together and that this might have been a contributing factor in the deci-
sion to sell. Record at 119. Though conflicting, the evidence is sufficient to find
that Lukowitz urged this move so as to ”set Hoffman up” in a bigger Red Owl
store.
22 Record at 86.
23On cross-examination, Hoffman was asked “Was there any discussion at
any time as to how this $18,000 was to be made up? That is, was it all unen-
cumbered cash or partly to be borrowed cash?” Hoffman answered: “I don’t be-
lieve there was any discussion on that.” Record at 167.
24 See Hoffman’s financial statement of September 11, 1961 (Exhibit 40).
25Equity participation helps to align the interests of a franchisee with those
of the franchisor. See note 86 infra.
ROBERT E. SCOTT 7
equity of at least $28,000, consisting of $10,000 in cash, $1,500 in in-
ventory in the bakery, $4,500 equity in the bakery building and
$12,000 equity in his bakery equipment.26 Thus, from Red Owl’s per-
spective, Hoffman would have ample equity provided he liquidated his
bakery business. At that time, however, they did not know that Hoff-
man had no intention of selling his bakery business in order to free up
his own cash for the new franchise. Rather, he hoped to continue that
business and operate the new Red Owl Store at the same time.27
The Wautoma grocery store was sold to Ed Wrysinski on June 6,
1961 for $18,000.28 At the time he sold in June, many details about es-
tablishing Hoffman in a bigger store were unresolved, including which
town would be the best location for the new store, the size and site of
the store building, fixtures needed for a store, etc.29 Shortly afterward,
Lukowitz suggested alternative locations for the new store—Lake
Mills, Clintonville, Kewaunee and Chilton. The two of them traveled
around looking at these places and finally settled on a lot in Chilton.
On August 3rd, Hoffman acquired a 30-day option to purchase the
Chilton lot at a price of $6,000 with $1,000 down on exercise of the
option.30 The plan was that Hoffman would purchase the lot and then
resell it at a profit to the contractor who was building the new store,
taking back a lease at a rental that reflected the enhanced price the
builder agreed to pay.31 In essence, the sale/leaseback was designed
both to capture equity in the lot and to serve as an indirect loan from
the builder to Hoffman. The goal was to open the new store by Decem-
ber 1.

26 See Exhibit 40. Financial statement dated 9/11/61. Although the state-
ment also reflects a $6,000 equity in his residence in Wautoma, there was
never any indication that personal as opposed to business assets were to be
contributed to the franchise.
27 Record at 133-34.
28 Hoffman testified that it was his decision to sell the store business but
that he acted on Lukowitz’ advice that he should sell before the summer tourist
season in order to prepare for the new store. Hoffman testified: “I told Ed that
the fellow that was working for me was interested in the business. Ed says:
Let’s sell it to him now and go into a bigger operation.” Record at 94.
29 On cross-examination Hoffman was asked “Didn’t you know at this time

that in [selling the Wautoma store and] establishing a bigger store there would
be a lot of things to be worked out?” “That’s right”, Hoffman replied. Record at
171.
30 The option was subsequently extended to September 15th. Id. at 104.
31 Record at 100.
8 HOFFMAN v. RED OWL
2. The September 27 proposed financing plan
Based on Hoffman’s September 11th financial statement,32 it ap-
peared to Red Owl officials that, by selling the bakery building and
business and combining the proceeds with cash on hand, Hoffman
would have $26,500 in liquid assets, more than enough to make his
equity contribution to the franchise operation. Hoffman, as we have
seen, had much different intentions, however. He did not intend to sell
the equipment or the bakery building. Rather, he wanted to lease the
building and business to someone else and take some of the equipment
to operate a bakery in the new store. Hoffman saw the bakery business
as his livelihood, available to support his wife and six children while
getting started in the new store.33
On September 13th, acting on Lukowitz’s advice, Hoffman paid the
$1,000 and exercised his option on the Chilton lot. Hoffman was eager
to do so in any event because he had heard of the possibility of an A&P
acquiring the same property for a store in Chilton. The next day, Hoff-
man paid off the $7,500 mortgage on the bakery building, reducing his
cash on hand in the bank to $2,500. On September 27th Lukowitz
called Hoffman and arranged for him to meet two people from the Red
Owl home office—Herman Carlson, the future development manager,
and Walter Hall, the credit manager—at the lot in Chilton.34 During
that meeting, Hoffman gave Carlson a second financial statement
which listed the bakery building as worth $12,000 and clear of liens
together with cash in hand of $2,500.35 Based on that statement, the
parties prepared the first “proposed financing plan.”36 It showed Hoff-
man making an $18,600 equity contribution, consisting of $3,600 cash,
$12,000 from the sale of the bakery building and $3,000 from the re-
sale of the lot to the builder.37 Also listed under “Other trade payables”

32 The statement showed $10,000 cash in the bank and additional equity in

the bakery business of $16,500, consisting of the bakery building (worth

$12,000 with a $7,500 mortgage) and equipment (worth $19,500 subject to a
chattel mortgage of $7,500). See Exhibit 40. Apparently, this financial state-
ment was prepared at Lukowitz’ request.
33 Record at 117.
One reason to meet at the lot was to examine the map of the site and
34

gauge its relationship to “downtown” Chilton. Exhibit 29.

35 (Exhibit 38).
36 See Exhibit 39. Record at 103–04.
Hoffman’s contribution to the business was designated on the statement
37

as “Equity capital: Amount owner has to invest.” Exhibit 39. Based on this first
financial proposal, it appears that both Red Owl and Hoffman understood that
ROBERT E. SCOTT 9
was a loan from Hoffman’s father-in-law of $7,500, designated as “pay
interest only at 5%.” Hoffman’s equity interest in the bakery equip-
ment and the bakery merchandise was indicated in a note on the pro-
posal under “Bakery” but these assets were not part of Hoffman’s pro-
posed equity contribution for the new store. It thus appears from this
first proposed plan that Red Owl assumed that the bakery would be a
separate operation run by Hoffman out of the franchise store.38
At the end of this meeting, someone said: “There seems to be no
hitch,” and the parties left in an optimistic frame of mind. Several days
later, Lukowitz called Hoffman, telling him to “get your money to-
gether.”39 During this phone conversation, Lukowitz reiterated that the
only remaining issue was the sale of the bakery business and building
(presumably to realize the $12,000 in cash as per the September 27
financing plan). While Hoffman had preferred to lease the business
minus enough equipment to have a bakery in the new store, he
nonetheless agreed to sell the business if that was a necessary
condition to obtaining the franchise.
3. The November 22 proposed financing plan
On October 11, Hoffman returned to the Union State Bank and bor-
rowed $13,500 secured by a further $6,000 chattel mortgage on the
bakery equipment and a $7,500 mortgage on the bakery building.40
Hoffman left the bank with $13,500 in cash.41 This amount was aug-
mented a month later when Hoffman sold the bakery building for
$10,000, using $7,500 of the proceeds to retire the mortgage and re-

Hoffman would put in $18,600 of his own exclusive of any borrowed funds from
his father-in-law.
38 A key question, of course, was whether Hoffman mentioned during this
meeting with Carlson and Hall his understanding that $18,000 was a sufficient
contribution to establish a franchise and his understanding that he could make
this contribution partly with cash and partly with borrowed money from his
father-in-law. During cross-examination Hoffman was asked: “Did you mention
your $18,000 understanding to Carlson and Hall when filling out your financial
statement,” and he answered, “I can’t recall.” Record at 179.
39 Id. at 230.
40Exhibit 42 (There is no copy of this mortgage in the record). The previous
day, October 10, Red Owl officials had shown Hoffman a floor plan they had
prepared of a proposed store in Chilton.
41 Thus, as of October 11 Hoffman had $16,000 in cash equity. When asked
on cross-examination about his timing in paying off the prior mortgage on the
bakery building on September 14th and creating a new one less than one
month later, Hoffman stated that he got the cash in response to Lukowitz’
statement that he should get his money together in anticipation of consummat-
ing the deal. Id. at 182.
10 HOFFMAN v. RED OWL
taining $2,500 in cash. Thus, as of November 6, Hoffman had over
42

$18,000 in cash equity although his net worth had declined slightly
given the lower than expected sale price for the bakery building. Most
of his cash ($13,500) was borrowed against his equity in the bakery
equipment. Thereafter, Hoffman took a job working nights at the Elm
Tree Bakery. 43
Just before Thanksgiving, Lukowitz called to invite Hoffman to
Minneapolis to iron out final details with the home office financial
folks so as to get the store in operation after the first of the year. Hoff-
man met with Lukowitz, Carlson, Hall and their boss, Frank Walker,
in Minneapolis around November 22. At that meeting, the parties pre-
pared a new financing proposal based on a new financial statement
that Hoffman prepared and signed.44 This new plan provided that
Hoffman would contribute $12,500 in cash ($4,500 in savings plus
$8,000 from the Chilton Bank secured by the bakery equipment) to-
gether with the bakery equipment. Because the equipment was worth
$18,000 and subject to a loan of $8,000, it represented an in-kind capi-
tal contribution to the business of about $10,000.45 In essence, the deal
now proposed that the residual value of the bakery equipment (i.e., its
value after the bank loan was paid off) become the major component of
his contribution to the franchise. It replaced the previous plan to raise
$12,000 in cash from the sale of the bakery building, an asset that
Hoffman had previously listed as free from liens.

42 He also guaranteed the lease to his top baker Michael Grimm at $120 per

month. Id. at 137.

43 Id. at 138. Presumably, Hoffman still had $18,000 in cash on hand at

that time.
44 This new financial statement is not in the record. But based on the fi-

nancing plan that the parties then concluded it appears that Hoffman had in
the interim retired most or all of the $13,500 chattel mortgage on the bakery
equipment owed to the Union State Bank, thereby reducing his cash on hand to
@ $4,500.
Exhibit 32. The plan called for Hoffman to contribute “equity capital” of
45

$4,600 in cash and $17,000 in bakery equipment (now clear of liens). The plan
again proposed that Hoffman would borrow $7,500 from his father-in-law, still
on a “no pay, interest at 5%” basis. In addition, the “profit” on the resale of the
lot was increased to $4,000, and Hoffman was to borrow an additional $8,000
from the Union State Bank in Chilton to be secured by the bakery equipment
(thereby turning some of his equity in the equipment into cash). The parties
must have agreed that Hoffman would use $13,500 of his cash to retire the
chattel mortgage on the bakery equipment (that would leave him with about
$4,500 in cash as per the proposed financing plan).
ROBERT E. SCOTT 11
Shortly after the meeting, Hoffman received a copy of the November
financing proposal in a letter from Carlson, the credit manager. In the
letter, Carlson explained the changes from the previous plan: “You will
find enclosed a report indicating our capital requirements. You will
recall that in your visit to the office that our original thinking on this
was subsequently revised in order to properly reflect the amount of
equity capital that you personally have for investment.”46 The problem,
in essence, was that the sale of the bakery building yielded less than
was predicted and, moreover, contrary to Hoffman’s initial representa-
tions, the building had been mortgaged. When it became clear that the
building was not unencumbered and thus could not provide a major
portion of Hoffman’s equity contribution, the financing plan had to be
revised. After some reflection, Hoffman agreed to this revised pro-
posal.47
Throughout this period, while Red Owl was interesting in tying
down Hoffman’s equity contribution, Hoffman was concerned about an
entirely different issue. Rather than focusing on how much equity he
was putting into the operation, he was focused on the amount of cash,
whether encumbered or unencumbered, that he was required to “con-
tribute.” Consequently, he considered this November proposal to re-
quire an additional $6,000 in cash beyond his original $18,000 com-
mitment.48 He reached that conclusion by adding together the $7,500
loan from his father-in-law, plus his cash contribution of $4,600, plus
the $8,000 loan from the Chilton bank secured by the bakery equip-
ment, plus the $4,000 profit on the lot. This conclusion reflects Hoff-
man’s basic misunderstanding of the economics of the transaction;49 a

46 Record at 144–45. This statement by Carlson reflects the realization on

the part of the Red Owl financial people that Hoffman could raise $18,000 in
cash equity only by committing his equipment to the enterprise. They had ini-
tially thought, based on the September 11th financial statement, that Hoffman
had business equity of $28,000 ($2,500 cash + $12,000 bakery building +
$14,500 equity in equipment and inventory). But the November financial
statement showed business equity of only $22,100 ($4,600 cash + $17,500 bak-
ery equipment).
47 Record at 102.
48 Id. at 141-44.
49 Hoffman was making an apples and oranges comparison. The $18,000
was his equity contribution. The amount of cash he might need to successfully
start up the franchise was a different issue. Red Owl was eager to have him
borrow sufficient cash to avoid a cash flow crunch in the early months. Their
point to him was that he had control over this debt and if he did not need the
additional cash he could retire any or all of it. See text accompanying notes 63-
64 infra. It wasn’t until the very end of the negotiations that Red Owl learned
12 HOFFMAN v. RED OWL
misunderstanding that began with the first proposed financing plan,
continued through the November meeting and ultimately was the
proximate cause of the deal breaking down the following February.
In retrospect, the source of the misunderstanding following the No-
vember meeting seems clear. Hoffman believed he was making an ad-
ditional $6,000 cash “contribution” while the Red Owl people believed
that the equity Hoffman had available to contribute was $6,000 less
than he had originally represented. Throughout the negotiations in
Minneapolis and thereafter, Red Owl officials expressed concern that,
of the $24,000 to $26,000 that Hoffman was planning to contribute,
only $13,000 was equity (free cash and amounts borrowed against his
equity in the bakery equipment).50 The balance was to be borrowed un-
secured from Hoffman’s father-in-law and the building contractor.
4. The December financing proposal
Shortly after the November meeting, Lukowitz called Hoffman and
asked to meet him at the Red Owl store in Appleton. Lukowitz had a
wire from Carlson stating that they needed to secure an additional
$2,000 for marketing and promotion of the new store. Hoffman replied,
“I have to find out if I can make $2,000 more available.”51 Several days
later, Hoffman talked the situation over with his wife and his father-
in-law. They hit upon a solution to Hoffman’s evident problems in com-
ing up with the needed financing: Hoffman and Simon Vanden Heuvel
would go into the franchise as equal partners. Vanden Heuvel would
contribute $13,000 in cash and Hoffman would contribute the bal-
ance.52
Before this new scheme had been vetted with Lukowitz, the Red
Owl home office people sent a third financing proposal in early Decem-
ber. This plan reflected the additional $2,000 needed for promotion. It
showed Hoffman’s equity contribution unchanged at $22,100 ($4,600 in
cash and $17,500 in bakery equipment).53 In order to raise additional
cash to operate the store, the plan proposed a $8,000 loan from the
Chilton bank secured by Hoffman’s equity in the bakery equipment, a

that Hoffman was constrained by his father-in-law from incurring any more
debt. Id. Nevertheless, Hoffman’s calculation was also used by Hoffman’s law-
yers, accepted implicitly by defendants’ counsel and by the trial judge. As a
result, the fundamental misunderstanding between Red Owl officials and
Hoffman was never made clear to the jury..
50 Record at 223.
51 Id. at 145-6.
52 Id. at 147.
53 Exhibit 33.
ROBERT E. SCOTT 13
$7,500 no pay, 5% interest loan from his father-in-law, and a $6,000
cash “profit” from the resale of the Chilton lot to the builder. In short,
Hoffman’s cash contribution (borrowed funds plus equity) had been
increased by $2,000 to $26,100 but the only change from the previous
plan was to increase the “profits” from selling the lot from $4,000 to
$6,000.
Shortly after receiving this proposal, Hoffman called Lukowitz and
told him of the new arrangement he had made with Simon Vanden
Heuvel to secure $13,000. Lukowitz replied, “This is good. I’m sure that
we can go ahead at this point.”54 He then passed on this latest informa-
tion to the Red Owl front office in Minneapolis. Two days later, Luko-
witz called to arrange a meeting at the end of January with Carlson
and Walker at the Red Owl store in Appleton. Prior to that meeting
Lukowitz and Hoffman met to discuss the new arrangement in more
detail. Upon learning of the terms for Vanden Heuvel’s contribution,
Lukowitz suggested, “Let’s not go into the partnership with the front
office. After it is all done, you can take your father-in-law in the way
you want.”55
5. The January 26 financing proposal
On January 26, 1962, Hoffman met Carlson, Walker and Lukowitz
at the Appleton store. One of the Red Owl people said, “We are ready to
go forward” and showed Hoffman a final financing proposal,56 one that
addressed Red Owl’s continuing concerns about approving Hoffman for
a franchise: the high debt to equity ratio reflected in Hoffman’s pro-
posed contribution to the enterprise. The solution was to have the
$13,000 loan from Simon Vanden Heuvel subordinated to general
creditors.57 Without a subordination agreement, the $13,000 (whether
considered an unsecured debt or a contribution to equity) would have
reduced Hoffman’s equity contribution to $9,000. But with a subordi-
nation agreement in place, Hoffman’s equity would remain at $22,500
and his cash position would be significantly enhanced. The additional
$6,000 from Simon together with a further proposed bank loan of
$2,000 would increase the cash available to fund operations from

54 Record at 149.
55 Record at 186. Notwithstanding his trial testimony (which we must as-
sume that the jury believed), in deposition, Hoffman was asked: “To whom in
the Red Owl organization did you tell that your father-in-law had to be a part-
ner?” Answer: “I don’t know if I ever told anybody.” Id.
56 Exhibit 34.
57Red Owl had prepared a subordination agreement that was also delivered
to Hoffman to be signed by his father-in-law. See Exhibit 46.
14 HOFFMAN v. RED OWL
$62,500 (as reflected in the previous plan) to $70,500. This latest (and
last) plan listed Hoffman’s equity contribution as essentially un-
changed at $22,500, consisting of $5,000 in cash and $17,500 in bakery
equipment.58
From Hoffman’s perspective, however, this latest plan required
$8,000 more in borrowed funds, bringing to $34,000 the combined total
of debt and equity. He had two objections to the plan. The first re-
vealed clearly the divergence in the parties’ understanding of the
transaction: Hoffman felt that with the additional cash from his father-
in-law and the new bank loan of $2,000 he should not be required to
borrow $8,000 from the Chilton bank secured by his equity in the bak-
ery equipment. Frank Walker, the senior Red Owl officer, attempted to
reassure him that the additional $8,000 in cash to begin operations
was for his benefit and was not an increase in his equity contribution.
After all, Hoffman had complete control over those borrowed funds.
“It’s your money” Walker said, “It isn’t ours.” He tried again: “Joe, if
after a reasonable length of time these funds aren’t used, pay them
back to the bank.”59 Hoffman was adamant in reply, “My father-in-law
won’t let me be in debt.” That was the end of the meeting.
It seems plain, in retrospect, that Hoffman’s real objection had to do
with his personal relationship with his father-in-law, who appears to
have been a prosperous, but stern, Calvinist. Hoffman could not borrow
the $8,000 from the Chilton bank because his father-in-law didn’t be-
lieve in debt. He could not propose to his father-in-law that his $13,000
contribution be subordinated to creditors and treated legally as a gift
because his father-in-law was sufficiently skeptical about Joe’s busi-
ness acumen that he wanted to have some control over his money. As a
consequence, despite Lukowitz’ urging, Hoffman never even asked his
father-in-law to sign the proposed subordination agreement. He re-
turned home and called Walter Hall, the development officer, in Min-
neapolis to complain. Hall admitted “this thing has gotten a little
goofed up.” But when Hoffman asked “what about a smaller store,”
Hall replied “It’s this store or none and that’s it...”60 Finally, on Febru-
ary 2, 1962 Hoffman wrote to Lukowitz: “After doing my utmost to put
this together for 2½ years, it seems to me Red Owls’[sic] demands have
gotten beyond my power to fulfill. Therefore, the only thing I can do at

58 Id.
59 Record at 333.
60 Record at 156.
ROBERT E. SCOTT 15
this time is drop the entire matter and try to make up the losses I suf-
fered, due to your ill-advice.” 61

The Trial
Joseph Hoffman’s plan to “make up” for the losses he had incurred
from the failed negotiations with Red Owl officials was to consult legal
counsel and ultimately to sue Red Owl and Lukowitz for damages aris-
ing out of his reliance on their representations made during the nego-
tiation process. A year and a half later, on October 21, 1963 at 9:30
a.m., trial began in the Circuit Court of Outagamie County in the City
of Appleton, Wisconsin. The presiding judge was A. W. Parnell. Repre-
senting Joseph and Shirley Hoffman was G.H. Van Hoof and John
Wiley of the firm of Van Hoof & Van Hoof of Little Chute, Wisconsin.
Representing the defendants, Red Owl Stores, Inc. and Edward Luko-
witz, was David Fulton of the firm of Benton, Bosser, Fulton, Menn
and Nehs of Appleton.62
The word “promise” was not uttered during the trial. The plaintiffs’
theory of the case was that a representation made by the defendants
on which Hoffman reasonably relied to his detriment was actionable
without more. As Hoffman’s attorney argued to the court following the
conclusion of the trial: “It is our position that if Mr. Hoffmann acts in
reliance on any representations, statements or misconduct, we don’t
care if it ever results in a final contract. Our position is that they are
then liable for damages, regardless, because they have jockeyed him
out of position.” In response, the court replied: “I don’t think what you
are saying makes legal sense—if you will pardon me. In other words,
they had to make a material representation that if he would do certain
things the end result would be they would give him a store in Chilton.
Unless there is a promise all the representations in the world wouldn’t
make any difference. If they are dealing at arm’s length, without any
eventual promise to do anything on the part of Red Owl, it doesn’t
make any difference what they represented to him.”63
Here was the big opening for Fulton, the defendants’ lawyer, to
press the point that there were no grounds for misrepresentation liabil-
ity whether in tort or contract in the absence of a legal duty owed to
the plaintiffs. In the absence of a promise conditioned on such a mis-
representation there was no duty in contract. Moreover, courts gener-

61 Exhibit 35.
62 Record at 77.
63 This is the only time in the entire proceedings that the word “promise”
was spoken. Record at 439–40(emphasis added) .
16 HOFFMAN v. RED OWL
ally hold that there is no tort duty of care owed to a commercial party
engaged in arm’s length negotiations.64 Nor have courts in the United
States recognized a duty to bargain in good faith, much less a duty to
bargain carefully to avoid careless but non-willful misrepresentations.
Mistake, in other words, is relevant generally only if the parties have
already formed a contractual relationship.65
But Fulton, as he had throughout the trial, chose to rest on a single
argument: The negotiations were too indefinite to form a contract and
absent a contract there was no basis for liability. This might well have
been true, but Fulton did not educate the court as to why it was so.
Nor did he try to narrow the scope of the special verdict that permitted
the jury to find liability based on innocent misrepresentations that
were relied upon. Thus, the issue of mutual misunderstanding—that
neither party knew or had reason to know the meaning attached by the
other to the representations about Hoffman’s capital contribution—was
not put before the jury.
In consequence, the court prepared a special verdict that took the
contract question away from the jury but left them with the task of de-
termining: 1) were representations made by Red Owl officials that if
Hoffman fulfilled certain conditions a deal for a franchise store would
be concluded?; 2) Did Hoffman reasonably rely on those representa-
tions? 3) Was it reasonable for Hoffman to so rely? 4) Did Hoffman ful-
fill all the conditions required by the terms of the negotiations? And 5)
what sum of money would reasonably compensate Hoffman for the sale
of the Wautoma store, the bakery building, the option on the lot, mov-
ing to Neenah and the rental of a house in Chilton? 66
Subsequently, when instructing the jury, the court used the subjec-
tive/objective test of reasonable reliance usually reserved for fraudu-
lent misrepresentation. Judge Parnell told the jury to determine the
reasonableness of Hoffman’s reliance by taking into consideration Hoff-
man’s experience, his education and all other circumstances. Thus, the
question was not whether a reasonable person would have so relied,
but whether a person of like business experience, knowledge and
background acting under the same circumstances would have relied.67

64 See RESTATEMENT (FIRST) OF TORTS §762 (1939).

There are exceptions, most notably the construction bid cases such as
65

Drennan v. Star Paving, 333 P.2d 757 (1958). See Mark P. Gergen, Mistake in
Contract Formation, 64 S. Cal. L. Rev. 1, (1990).
66 Record at 26–28.
67 Record at 448–51.
ROBERT E. SCOTT 17
Following the court’s instructions, the jury retired at 12:06 p.m. to
elect a foreman and have lunch. They returned with their verdict at
4:27 p.m., having eaten lunch and elected Abe Golden as foreman. The
jury found for Hoffman on all the specific questions and fixed damages
at $140 for the moving expenses, $125 for the house rental, $1000 for
the option on the lot, $2,000 for the sale of the bakery building and
$16,735 for the sale of the Wautoma store. Given that these items sum
to $20,000, and given the short time for deliberation, it seems plausible
that the jury decided that $20,000 would be the right amount to punish
Red Owl for disrespecting one of their fellow citizens and then simply
designated the balance of the “damages” to losses arising from the
premature sale of the Wautoma store after making specific findings on
the other items. In any event, there was no evidence introduced that
would have supported the $16,735 figure reached by the jury.
Judge Parnell immediately questioned whether there was any evi-
dentiary basis for that finding and dismissed the jury with his
thanks.68 The defendants’ filed a motion for judgment not withstanding
the verdict on the ground that the evidence was insufficient as a mat-
ter of law to support Red Owl’s liability and, in the alternative, to re-
duce the awards for losses on the sale of the store and bakery building
to such sums as an unprejudiced jury could have awarded or, in the
alternative, to grant defendant a new trial on the issue of damages.
On March 16, 1964 Judge Parnell entered his order on the motion
for judgment. He affirmed the jury verdict in all respects save dam-
ages, in particular the claimed losses in the sale of the Wautoma store.
There he found the award of $16,735 against the weight of the evi-
dence, wholly without foundation or support and contrary to the in-
structions of the court. Thus, he ordered a new trial on the sole issue of
damages for loss, if any on the sale of the Wautoma inventory and fix-
tures. Red Owl appealed the court’s decision affirming the jury verdict
to the Supreme Court of Wisconsin and Hoffman appealed that portion
of the order that reversed the verdict on damages.69

68 There seems more than a little irony in his final statement to the jury

that: “I know that it has been a long and protracted case and called for consid-
erable patience on your part, and sacrifice and considerable effort, as is evi-
denced by the fact that you have been out all afternoon on the verdict.” Id. at
457.
69 Red Owl perfected its appeal to the Supreme Court of Wisconsin from the

Order on Motions after Verdict on June 25, 1964.

18 HOFFMAN v. RED OWL
The Appeal
1. The appeal briefs
Red Owl’s brief to the Supreme Court of Wisconsin raised three sub-
stantive issues. First, Red Owl argued there should be no recovery as a
matter of law in contract because, as found by the trial court, the
statements made by Red Owl representatives were preliminary nego-
tiations and any statements made during the negotiations were too
uncertain or indefinite to be the basis for finding an enforceable con-
tract claim. Second, recovery could not be had under a theory of estop-
pel in pais since, under Wisconsin law, equitable estoppel can be used
only as a shield—to prevent the defendant from denying that a particu-
lar fact is true—and not as a sword to create a right of recovery that
does not exist in the first instance. Third, the plaintiff could not re-
cover on the basis of promissory estoppel because there were no repre-
sentations definite enough to qualify as “promises” within §90 and, in
any event, plaintiff suffered no injustice since the reason the deal fell
through was Hoffman’s refusal to present the subordination issue to
his father-in-law.70
In response, Hoffman’s lawyers primarily rested their case, as they
had at trial, on the theory of equitable estoppel. They argued that, in
light of the misrepresentations of its agents, Red Owl was estopped
from claiming that there was no contract.71 They also argued for an
implied-in-fact contract on the grounds that Hoffman would not have
done the things he did had there not been a contract to award him the
store.72 Finally, they claimed a right to damages on the basis of prom-
issory estoppel, simply ignoring the appellant’s argument that promis-
sory estoppel is available where there is a promise but no considera-
tion, but is not available when there is no promise in the first place.73

70 Appellants’ brief at 31-52. With respect to damages, Red Owl claimed

that the award of $16,735 was reached by merely subtracting awards for mov-
ing expenses, rent of a house in Neenah, sale of the bakery building, option on
the lot, from a gross figure of $20,000, demonstrating that the jury pulled the
figure out of the air. There was no evidence of loss of bargain in the June sale
of the grocery business and thus it was error to remand for a new trial.
71 Appellee’s brief at 23.
72 Id. at 19–20.
With respect to the promissory estoppel claim, the appellee’s brief simply
73

quoted from Restatement of Contracts §90, Ill. 3 that if “A promises B that if B

will go to college and complete his course he will give him $5,000 and B does so:
Then A’s promise is binding.” Id. at 24.
ROBERT E. SCOTT 19
2. The decision of the Wisconsin Supreme Court
Writing for a unanimous court, Justice Currie ignored the issue of
equitable estoppel and focused exclusively on the promissory estoppel
argument. The Court asked: Should the doctrine of promissory estoppel
as embodied in Restatement §90 be recognized and, if so, is it satisfied
here? The court held that this issue was squarely presented since “no
other possible theory has been presented to or discovered by this court
which would permit plaintiffs to recover.”74 Promissory fraud was the
only other possible theory the court could imagine might cover this
case, but the court held that such action would not lie absent a present
intent by Red Owl not to fulfill a promise at the time it was made. The
court rejected the possibility that Red Owl had made any of its “prom-
ises” in bad faith or with a present intent not to perform.
Turning then to §90, the court endorsed and adopted the doctrine of
promissory estoppel and found ample evidence of all of its elements to
support the jury verdict. Indeed, the court identified a number of
“promises and assurances” made by Red Owl representatives, the
foremost being the promise by Lukowitz “that for the sum of $18,000
Red Owl would establish Hoffman in a store.”75 The court adopted
Hoffman’s claim that, after the store was sold and the lot purchased,
the $18,000 figure was changed to $24,100, then increased to $26,100
with the assurance that the deal would go through, then Hoffman was
induced to sell his bakery building on the assurance that this was the
last necessary step but instead the figure was increased yet again to

74 133 N.W. 2d at 273. Given that the plaintiff’s primary theory at trial and

on appeal was equitable estoppel, this is a most peculiar statement, only ex-
ceeded by the following: “the trial court frame[d] the special verdict on the the-
ory of sec. 90 of the Restatement.” Id. In fact, the word “promise” was never
uttered during the trial testimony or in the court’s instructions to the jury, not
to mention “§90” or “promissory estoppel.”
75 Id. at 274.

f This statement by the court is not supported by the record, even as it was
edited for the appeal. Hoffman testified only that Lukowitz assured him that
$18,000 was a sufficient amount to secure a franchise. There was no testimony
that Lukowitz ever said that in return for an $18,000 contribution “he would
establish Hoffman in a store.”
20 HOFFMAN v. RED OWL
$34,000. Based on these findings, the court concluded that there was
ample evidence to sustain the jury’s findings that the promissory rep-
resentations made by Red Owl were reasonably relied upon by Hoff-
man to his detriment.
The court then turned to the central question raised by Red Owl on
appeal—that the representations made by Lukowitz were simply too
uncertain and indefinite to form the basis of contract liability. Under
the indefiniteness doctrine, a representation does not qualify as a
promise if the undertaking is uncertain or unclear or if key material
facts essential to that undertaking have not been specified. The court
conceded that many factors were never agreed upon, including the de-
sign, layout, and cost of the store, who the builder would be, the price
the builder would pay for the land and the resulting rental, the term of
the franchise and the renewal and purchase options. All of these con-
siderations are what led the trial court to conclude as a matter of law
that the parties’ negotiations were preliminary and could not form the
basis for a contract. But, the appellate court held, a promise sufficient
to sustain a claim in promissory estoppel need not be the equivalent of
an offer that would result in a binding contract if accepted.76
Finally, the court turned to the issue of damages and here it af-
firmed the trial court’s order of a new trial on the issue of damages for
the premature sale of the Wautoma store. The court held that since
recovery was had under §90, Hoffman’s damages should not exceed his
actual reliance losses suffered by the sale and thus the evidence did
not sustain the $16,735 jury award.

The Hoffman Saga as a Cautionary Tale

Even with the facts as found by the court, grounding Red Owl’s li-
ability on a promissory estoppel theory is simply untenable as a matter
of contract doctrine. Nothing in the law of contracts supports the
court’s legal analysis. To the contrary, the Restatement of Contracts
has only one definition of a promise, and that definition applies equally

76 Specifically, the court held that:

If promissory estoppel were to be limited to only those situations
where the promises giving rise to the cause of action must be so defi-
nite with respect to all details that a contract would result were the
promise supported by consideration, then the defendant’s promises
to Hoffman would not meet that test. However, §90 of the Restate-
ment does not impose the requirement that the promise giving rise
to the cause of action must be so comprehensive in scope as to meet
the requirements of an offer that would ripen into a contract if ac-
cepted by the promisee. Id. at 275.
ROBERT E. SCOTT 21
to a promise that is the product of a bargained-for exchange and a
promise for which enforcement is sought on the grounds of induced re-
liance.77 The doctrine of indefiniteness holds that, for a representation
to qualify as a promise, it must be sufficiently clear and definite that it
justifies the promisee in believing that a commitment has been made.
If the terms of a manifestation of intent are uncertain or indefinite,
then, by definition, it fails to qualify as a promise.78 If neither party
has made a promise, there is no claim under §90. Rather, the parties’
initial communications to each other fall in the category of unenforce-
able preliminary negotiations. Hoffman thus is wrong as a matter of
contract doctrine.
1. Are there any theories on which liability could be based?
Some scholars have suggested that the opinion in Hoffman can be
grounded on a duty to negotiate in good faith.79 Putting aside the diffi-
culties inherent in applying such a standard, there is simply no evi-
dence of any bad faith by any of the Red Owl officials. At most Luko-
witz was careless in his initial representation because he did not in-
quire further as to what Hoffman meant by his statement that he had
about $18,000 to contribute. But, if anything, Hoffman was much more
careless. Certainly, he could see by September 1961, when he was
handed a proposed financing plan, that what he was to contribute was
“equity” of at least $18,000. While the proposed cash requirements for
the franchise did increase over time, the equity requirements remained
largely fixed and the additional proposals for cash were loans that
Hoffman was free to repay if he didn’t need the cash flow for his gro-
cery business.80

77 See e.g., RESTATEMENT (SECOND) OF CONTRACTS §§2 and 90 (1979) [herein-

after RESTATEMENT]. (Restatement §2 defines a promise as a manifestation of

an intention to be bound so made that it justifies the promisee in believing a
commitment has been made. Restatement §90 begins “A promise....”).
78 RESTATEMENT §33.
79See, e.g., Duhl, supra note 6, at 315–21; PATRICK ATIYAH, PROMISES, MOR-
ALS, ANDLAW 80-92 (1981); Charles Knapp, Enforcing the Contract to Bargain,
44 N.Y.U. L. Rev. 673, 686–90 (1969); Robert Summers, Good Faith in General
Contract Law and the Sales Provisions of the Uniform Commercial Code, 54
Va. L. Rev. 195, 225 (1968).
80Red Owl was appropriately concerned that Hoffman have sufficient cash
on hand to begin operations, since a failure of a new franchise store would ad-
versely affect the Red Owl brand. Lukowitz testified that the proposed increase
in cash reflected in the January financing plan was prompted by Red Owl’s
experience in opening new franchises and finding that additional cash was of-
ten needed to “get them off the ground, especially if you are new in a location.”
22 HOFFMAN v. RED OWL
Moreover, Red Owl’s continued insistence that Hoffman make a sub-
stantial equity contribution to the franchise reflects perfectly appropri-
ate business judgment. The risk in any franchise contract is that the
interests of the parties will be misaligned and, as a consequence, the
franchisee may manage its operation in a manner inconsistent with the
interests of the franchisor. A widely recognized conflict that arises with
excessive debt financing is that the agent may be motivated to increase
the riskiness of his management of the franchise. By “putting all his
eggs in one basket,” the agent can gamble with the borrowed funds. If
the venture is successful, all the returns in excess of the fixed debt ac-
crue to the agent. But if the venture fails, the agent shares the loss
with his creditors.81 Red Owl, therefore, was properly concerned about
avoiding this problem by working toward a jointly beneficial financing
plan, one that protected their brand name from the possibility that its
value would be diluted by Hoffman’s risky business decisions.
Mark Gergen and others have suggested that the best theory of li-
ability is negligent misrepresentation.82 But there are many problems
applying this theory to arm’s length bargaining contexts. Many courts
don’t recognize this tort at all83 and the Restatement rule requires that
the party making the statement owe a duty to the plaintiff to supply
correct information to him.84 Because casual statements and contacts
are prevalent in business, under the majority rule in commercial con-
texts, liability for negligent misrepresentation is imposed only where
the party making the statement possess unique or specialized expertise
or is in a special position of trust and confidence with the injured party
such that reliance on the negligent misrepresentation is justified.85 It

This additional cash was intended “for the protection of the operator.” Record
at 307.
81 For discussion, see Robert E. Scott, A Relational Theory of Secured Fi-

nancing, 86 Colum. L. Rev. 901, 919-22 (1986).

82 See, e.g., Mark P. Gergen, Liability for Mistake in Contract Formation, 64

S. Cal. L. Rev. 1, 34–36 (1990); CHARLES FRIED, CONTRACT AS PROMISE 24

(1981).
83 See, e.g., Haigh v. Matsushita Elec. Corp., 676 F. Supp. 1332 (E.D. Va.

1987) (applying Virginia law).

84 Under Restatement (Second) of Torts §552, an action for negligent mis-

representation lies only against one “who in the course of his business or pro-
fession, or in any other transaction in which he has a pecuniary interest sup-
plies false information for the guidance of others in their business transac-
tions...”
See, e.g., Eternity Global Master Fund, Ltd. v. Morgan Guar. Trust Co.,
85

375 F.3d 168 (2d Cir. 2004). Thus, many courts hold there is no tort of negli-
gent misrepresentation in the vendor/purchaser context. The key to the tort is
ROBERT E. SCOTT 23
has been specifically held, for example, that a franchisee could not
maintain an action for negligent misrepresentation where the franchi-
sor was not in a business of supplying information.86 Moreover, a claim
for negligent misrepresentation ordinarily cannot be based on unful-
filled promises or statements as to future events. Finally, recovery of
purely economic loss for negligent misrepresentation is available only
when there is a special relationship between the parties or when the
representation is made by one in the business of supplying information
for the guidance of others.87
A final theory of liability is recovery in quasi-contract for unjust en-
richment. Here the argument would be that Hoffman conferred a bene-
fit on Red Owl during the period from May through November when he
purchased and then sold his grocery store, sold the bakery building and
purchased an option on the lot in Chilton. All these actions gave Red
Owl some further indication of the kind of franchisee that Hoffman
was likely to be—was he enterprising and resourceful or was he a bit of
a doofus? Quasi-contract claims based on unjust enrichment rarely
succeed, however, unless the defendant specifically and wrongfully in-
duced the benefit. A quasi-contract claim does not lie simply because
one party benefits from the efforts or obligations of others, but instead
“it must be shown that a party was unjustly enriched in the sense that
the term ‘unjustly’ could mean illegally or unlawfully.”88 This at least
puts the key question to a court: Was Hoffman induced to provide in-
formation to Red Owl by trick or was he a “mere volunteer”?
The trial transcript strongly suggests that Lukowitz was trying to
mediate between Hoffman’s meager capital assets and the home office’s
capital requirements. The facts as found by the court show only that
Lukowitz was eager to secure a franchise for Hoffman, no doubt be-
cause he would earn a commission if the deal went through. The steps
that he urged Hoffman to take—selling the store, buying the lot and

that plaintiff must allege and prove that the defendant owes a duty to plaintiff
to communicate accurate information. Thus, plaintiff must show that defen-
dant either was in the business of supplying information or that defendant had
a pecuniary interest in plaintiff’s transaction with a third party. Continental
Leavitt Communications, Ltd. v. Paine Webber, Inc., 857 F. Supp. 1266 (N.D.
Ill 1994); American Protein Corp. v. AB Volvo, 844 F.2d 56 (2d Cir. 1988).
86 Bonfield. v. AAMCO Transmissions, Inc. 708 F. Supp. 867 (N.D. Ill. 1989).
87Gebrayel v. Transamerica Title Ins. Co., 888 P.2d 83 (Or. 1995); Conti-
nental Leavitt Communications, Ltd. v. PaineWebber, Inc. 857 F. Supp. 1266
(N.D. Ill. 1994).
88See, e.g., First National Bank of St. Paul v. Ramier, 311 N.W. 502, 504
(Minn. 1981); Greg Fimon v. Kenroc Drywall Supplies, Inc., 203 Minn. App.
Lexis 311 (Minn. 2003).
24 HOFFMAN v. RED OWL
moving to Neenah—all seem designed to accelerate the approval proc-
ess, not to induce an unbargained-for benefit for Red Owl. Under the
circumstances, then, shouldn’t Hoffman have been more cautious in
nailing down exactly how much capital he would have to provide prior
to buying the grocery store, selling the store, selling his bakery, and
buying an option on a lot?
Jason Johnston has argued that Red Owl might properly be held li-
able if the facts showed that Red Owl had a low opinion of Hoffman’s
prospects as a franchisee but hid that fact from Hoffman and instead
encouraged his subsequent actions to see whether—against the odds—
he turned out to have better talents than they initially believed.89 The
problem with this argument is that the facts simply belie that story.
The evidence shows that Red Owl officials worked hard to find a way to
stretch what they discovered to be Hoffman’s meager capital so as to
make the franchise deal work. The series of financial proposals from
September 1961 to January 1962 were motivated less by Red Owl’s
escalating financial requirements than by Hoffman’s frequent shifting
of his capital. That the deal broke down is more a function of the thin
margin on which Hoffman was operating than any attempt by Red Owl
to disguise their pessimism about the proposed transaction.
2. What about “fundamental fairness”?
But, as others have noted, there is a highly salient aspect to the
Hoffman story–the evident disparity in income, education and business
acumen between Joe Hoffman and the Red Owl corporate officers. Is
Hoffman v. Red Owl simply a case about fundamental fairness—one
where the search for a strong doctrinal justification for liability is be-
side the point? In Peter Linzer’s words, this may be a case for “rough

Jason Scott Johnston, Communication and Courtship: Cheap Talk Eco-

89

nomics and the Law of Contract Formation, 85 Va. L. Rev. 387, 496-99 (1999)
(suggesting that Red Owl should be found liable if it misrepresented its relative
optimism about the deal in order to learn more about Hoffman as a potential
manager). A variant of this argument is offered by Ofer Grosskopf and Barak
Medina in their interesting article, Regulating Contract Formation: Precon-
tractual Reliance, Sunk Costs, and Market Structure, 39 Conn. L. Rev --
(2007). They argue that the Hoffmans, being inexperienced and naïve, under-
appreciated the risk of failed negotiations and thus over-invested in precon-
tractual reliance. Red Owl, as an experienced repeat player, should have been
conscious of this risk and taken steps to prevent it. Holding Red Owl liable for
Hoffman’s reliance costs motivates it to prevent such unwarranted investment.
Id. Apart from the fact that this solution would seem to have negative activity
level effects (such as chilling negotiations with prospective franchisees who are
behaviorally impaired), as with Johnston’s argument, the theory simply doesn’t
fit the facts.
ROBERT E. SCOTT 25
justice” and not for doctrinal niceties. The story of the hometown “lit-
90

tle guy” pitted against a large, impersonal and out-of-state corporation

certainly seems the best explanation for the jury verdict, but more,
surely, is required from the Wisconsin Supreme Court. And, the truth
is that the facts as revealed at trial simply do not support the fairness
claim. Nowhere in the record, for example, is there any testimony that
Lukowitz said what was attributed to him by the Wisconsin court nor
were Hoffman’s proposed equity contributions ever substantially in-
creased as the court implied.
The testimony is that Hoffman said to Lukowitz and his associate at
the May 1961 meeting, “Fellows, you know how much money I got—
approximately $18,000. Will this put me in a bigger operation or won’t
it?” And Lukowitz then responded that an investment at that level
“would not be a problem.”91 At most this is a representation that
$18,000 of capital is enough for one to be established in a store assum-
ing all other details are ironed out. In addition, the capital require-
ments for Hoffman were not increased in the manner the court sug-
gests. As indicated earlier, Hoffman’s proposed equity contribution
changed from $18,600 in the first financial proposal in September to
$22,100 in the second proposal in November. This change was appar-
ently motivated by the fact that the bakery building was encumbered
(contrary to Hoffman’s earlier representation) and the resulting need
to shift the focus of Hoffman’s proposed equity contribution to the bak-
ery equipment. Thereafter, Hoffman’s equity contribution remained
essentially unchanged through the third and fourth financing propos-
als in December and January.
To be sure, Lukowitz did make two subsequent assurances—that
with the additional $2,000 in promotion “the deal would go through,”
and that the sale of the bakery building in November “was the last
step.” But these statements were all made after the September meet-
ing between Hoffman and Carlson and Hall from the home office. By
that time, Hoffman knew well that their approval and not Lukowitz’s
was the key to securing the franchise. Given these facts, the question is
not whether Hoffman was exploited by corporate barons (Lukowitz,
after all, had less education than he did).92 The real issue was whether
Hoffman’s understanding of the transaction was a reasonable one and,
more importantly, was it the only reasonable one.

90 Linzer, supra note 6, at 719–20.

91 Record at 86.
92Lukowitz had a high school degree; Hoffman had a year of business and
management courses at a local business college. Record at 78.
26 HOFFMAN v. RED OWL
At the end of the day, imposing liability for precontractual reliance
because one party failed to correct the other’s misunderstanding has
significant costs, especially if one believes that, ordinarily, precontrac-
tual negotiations are essentially truthful. Jason Johnston has argued
persuasively that such “cheap talk” should not be subject to liability in
the ordinary case because delay in reaching a deal is costly to the par-
ties and thus negotiators already have incentives to communicate use-
ful information.93 There may be sound reasons to accept the costs of
chilling future negotiations in order to prevent exploitation of the weak
by the strong, but there is scant evidence of any exploitation in the ne-
gotiations between Joseph Hoffman and the representatives of Red
Owl Stores.
3. Lawyering matters: Arguments that Red Owl failed to pursue
One lesson from a close review of the Hoffman case is that the qual-
ity of legal argument matters. The record of the case reveals much to
criticize about the way Red Owl’s attorneys defended their clients.94 In
particular, they failed to raise three issues, either at trial or on appeal,
that seem quite cogent given the trial testimony. First, did Lukowitz
have apparent authority to make financial representations? This ques-
tion is particularly important once the chronology is clear. According to

93 Johnston, supra note 6, at 418-39

Among other dubious trial tactics, Red Owl’s attorneys apparently re-
94

sponded to the plaintiffs’ request to call Carlson, Hall and Walker as adverse
witnesses by instructing the Red Owl home office personnel not to be present in
court during the plaintiffs’ case in chief. Thus, the following colloquy occurred
in the presence of the jury:
Mr. Van Hoof (Hoffman’s attorney): I would like to call Mr. Carlson ad-
versely.
Mr. Fulton (Red Owl’s attorney): Carlson is not present.
Mr. Van Hoof: I would like to call Mr. Hall adversely.
Mr. Fulton: He is not present
Mr. Van Hoof: I would like to call Mr. Walker adversely.
Mr. Fulton: He is not present.
The Court: Did you make a request to have them present?
Mr. Van Hoof: They are out of state, and I couldn’t subpoena them.
Record at 344-45.
It is hard to imagine any more powerful way in which Hoffman’s attorney could
have emphasized to the jury that this was a case of a native son of Wisconsin
who was in a dispute with out-of-state corporate big-wigs who were too busy to
even show up to hear what Hoffman had to say.
ROBERT E. SCOTT 27
Hoffman, Lukowitz made his first representation in May when he as-
sured Hoffman that $18,000 would be a sufficient capital investment.
In September, Hoffman met with Carlson and Hall and, by then, he
was aware that they were the parties who would negotiate the finan-
cial terms of the transaction.95 In the interim, the only actions Hoffman
plausibly took in reliance on the Lukowitz assurance were the sale of
the grocery business in June and the purchase of the option on the lot
in Chilton in September. But the moving expenses, the house rental in
Neenah and the sale of the bakery building all occurred subsequently.
There is no testimony that either Hall or Carlson made any similar
representations to Hoffman. Thus, the one representation which Hoff-
man might reasonably assume Lukowitz was authorized to make was
the initial assurance in May regarding the minimum “capital” re-
quirements for a franchise, and, as suggested earlier, the parties at-
tached different meanings to this assurance.
Second, was Hoffman’s reliance reasonable? At the September meet-
ing with Hall and Carlson, and thereafter until he broke off negotia-
tions, Hoffman never asked the Red Owl home office people to confirm
his understanding about the source of funds for his contribution or to
explain what Red Owl meant by its assurance that $18,000 would be a
sufficient capital investment. This silence is all the more puzzling since
Hoffman saw four different financing proposals, each of which specifi-
cally listed “Equity Capital (Amount owner has to invest)” as a sepa-
rate line item apart from “Loans.”96 To be sure, the reasonableness of
Hoffman’s reliance was a question of fact for the jury. But recall that
the trial court instructed the jury on the subjective/objective test of
reasonable reliance, one that required the jury to assess Hoffman’s be-
havior against the standard of a person with similar education, busi-
ness experience and acumen rather than the purely objective standard
of the reasonable person. This more forgiving test of reasonable behav-
ior is properly applied to fraud, duress and other intentional acts but
not to a promissory estoppel or a negligent tort theory of the case.
Thus, Red Owl’s attorneys had an opportunity to object to that instruc-
tion and thereby challenge the reasonableness of Hoffman’s behavior
on appeal.

95 RESTATEMENT, SECOND, AGENCY §136(1) provides that an agent’s apparent

authority is terminated (a) when the principal states such a fact to the third
person.” Thus, the key question was whether Hall and Carlson indicated di-
rectly or indirectly to Hoffman that Lukowitz had no authority to make finan-
cial representations on behalf of Red Owl. Clearly, Hoffman had reason to
know that this was so.
96 See Exhibits 32, 33, 34 & 39.
28 HOFFMAN v. RED OWL
Third, and most important, the transcript makes clear that the par-
ties never had a mutual understanding about the meaning of the state-
ment: “I have approximately $18,000—will this put me in a bigger op-
eration or won’t it?” The Red Owl representatives clearly meant that
he would have to contribute equity of at least that amount and Hoff-
man clearly was focusing on how much cash he would put into the
transaction, whether borrowed or not. Who is responsible for Hoffman’s
misunderstanding about the assurance that $18,000 of capital would
be sufficient? The rule in contract negotiations is that each party is
responsible for clarifying his understanding of the meaning the other
attaches to ambiguous words and phrases, and this rule would strongly
argue against liability in this case.97 While the appellants’ brief does
point out that this ambiguity was unresolved, Red Owl’s attorneys
failed to tie this apparent misunderstanding to any legal conclusion
and they raised the point only to show that the negotiations were ongo-
ing and indefinite.
One shouldn’t be too hard on the attorneys for Red Owl, however.
From their perspective there was no theory on which liability could
properly be based as the law existed at the time. There was no justifi-
able claim for breach of a bargain contract because the representations
were too indefinite to be a promissory commitment. For the same rea-
son, liability could not properly be based on promissory estoppel. Equi-
table estoppel was inappropriate under Wisconsin law as it could not
be used to create a right where none previously existed. And, there was
then no cause of action in Wisconsin for negligent misrepresentation.
Where Red Owl’s lawyers failed, from the outset, was to present their
clients’ behavior and actions in a reasonable and defensible light. They
could and should have elicited testimony about how hard everyone
worked to make the negotiations succeed, and how it came to naught
ultimately because of Hoffman’s personal constraints: He needed
Simon Vanden Heuvel’s money to make the deal work and yet those
funds came with strings attached that ultimately undermined the deal.
4. Epilogue
How was this dispute resolved and what happened to Joseph Hoff-
man? Professor Stewart Macaulay and his colleagues report that the
parties settled the case for $10,600. Of that sum, $4,000 went for at-
torney’s fees and the Hoffmans retained the balance. Joseph Hoffman,

97 RESTATEMENT (SECOND) OF CONTRACTS §20(2) provides “There is no mani-

festation of mutual assent to an exchange if the parties attach materially dif-

ferent meanings to their manifestations and (a) neither party knows or has
reason to know the meaning attached by the other; or (b) each party knows or
has reason to know the meaning attached by the other.”
ROBERT E. SCOTT 29
meanwhile, became a very successful insurance salesman, wining sev-
eral awards for sales volume. He and his family moved to Milwaukee
where he rose through the ranks of the Metropolitan Life Insurance
Company to become District Manager. Thereafter, he was transferred
to Indiana and remained with the company in a managerial capacity.98
Finally, why was Hoffman so restless and eager to escape the bakery
business in the first place? Grant Gilmore reported some years ago
that Hoffman’s motivations may have been largely independent of Red
Owl’s representations: the poor fellow, he told me, was allergic to
bread!

Whither the Law of Preliminary Negotiations and Preliminary

Agreements?
How do contemporary American courts actually treat reliance in-
vestments made before the parties have written a complete contract?
Alan Schwartz and I report the results of a study of recent litigation in
a forthcoming article.99 We began with a sample of 108 cases litigated
between 1999 and 2003.100 Thirty of the cases raised the issue of reli-
ance in the context of on-going negotiations. The underlying question
in each case was whether the plaintiff could recover reliance costs if
the parties had not yet reached agreement. The courts denied liability,
whether premised on promissory estoppel, quantum meruit, or negli-
gent misrepresentation, in 87% of these preliminary negotiation cases.
The case data show that, absent intentional misrepresentation or de-
ceit, there is generally no liability for reliance investments made dur-
ing the negotiation process.101
In sum, courts will not grant recovery for “early reliance” unless the
parties, by agreeing on something significant, have indicated their in-

98 STEWART MACAULEY ET AL, CONTRACTS: LAW IN ACTION 403-4 (2D ED. 2003).
99Alan Schwartz & Robert E. Scott, Precontractual Liability, 120 Harv. L.
Rev. –– (2007).
100 We examined all public data bases for preliminary negotiation and pre-

liminary agreement cases proceeding under the following theories of liability:

promissory estoppel, quantum meruit, implied contract, definiteness and intent
to be bound. The final sample of 108 relevant cases represented 29 state juris-
dictions, 19 federal district courts and seven federal courts of appeal.
101“It is fundamental to contract law that mere participation in negotiations
and discussions does not create a binding obligation, even if agreement is
reached on all disputed terms. More is needed than agreement on each detail,
which is over all agreement to enter into the binding contract.” Teachers In-
surance & Annuity Association v. Tribune, 670 F. Supp. 491, 497 (S.D.N.Y.
1987); See also Reprosystem, BV v. SCM Corp., 727 F.2d 257 (2d Cir. 1984).
30 HOFFMAN v. RED OWL
tention to be bound. Put more directly, the cases do not revolve around
preliminary negotiations, but rather around preliminary agreements.
Thus, for example, in the remaining seventy-eight cases in our sample,
the parties had agreed on at least some material terms. In twenty-nine
cases, the court denied recovery, even though the parties had reached
agreement on some (or even most) terms, because the parties had indi-
cated, either expressly or by implication, that they did not yet intend to
be legally bound. In thirty-seven cases, the court held that the parties
had made a complete contract, even though they contemplated a fur-
ther memorialization of terms, because the evidence showed that the
formal writing was not essential. Finally, and most interesting, in
twelve cases involving agreements to agree, the court found a binding
preliminary agreement to negotiate further in good faith. These latter
cases are interesting because they are the forefront of an emerging rule
governing preliminary agreements.
The common law has historically had great difficulty with prelimi-
nary agreements that expressed a mutual commitment on agreed
terms but where significant additional terms remained to be negoti-
ated. Typically, parties have agreed to negotiate further over the re-
maining terms. These “agreements to agree” confront the indefinite-
ness doctrine head on. Until recently, courts have held consistently
that such “agreements to agree” were unenforceable under the common
law of contracts so long as any essential term was open to negotia-
tion.102 The cases in our sample thus reflect a major shift in doctrine
involving agreements to agree where key terms remain unresolved.
The modern framework for determining intent in agreements to agree
(as well as cases dealing with the timing of enforcement) was first pro-
posed by Judge Pierre Leval in Teachers Insurance and Annuity Asso-
ciation of America v. Tribune.103 The Leval framework has subse-
quently been adopted by the Second Circuit,104 and is now followed in
at least thirteen states, sixteen federal district courts and seven fed-
eral circuits.105 The framework sets out a new default rule for cases
where the parties contemplate further negotiations. This rule relaxes

102 ROBERT E. SCOTT & JODY S. KRAUS, CONTRACT LAW AND THEORY 34–44,

322–25 (Rev. 3d ed. 2003). Agreements to agree on price in sales contracts are
enforceable under the Uniform Commercial Code if the parties evidence an
intention to be bound. See UCC § 2-305(1)(b).
103 670 F. Supp. 491 (1987).
Adjustrite Sys., Inc. v. GASB Business Services., Inc., 145 F.3d 543, 547-
104

48 (1998).
105 Schwartz & Scott, supra note 99, at –––.
ROBERT E. SCOTT 31
the knife-edge character of the common law under which agreements
are either fully enforceable or not enforceable at all.106
Leval’s framework relies on two distinct categories of preliminary
agreements that will have binding force. The first (Type I) is a fully
binding preliminary agreement. Here the parties agree on all the
terms that require negotiation (including whether to be bound) but
agree to memorialize their agreement in a more formal document. A
Type I agreement binds both sides to their ultimate contractual objec-
tive just as if it were a formalized agreement, since the signing of a
more elaborate contract is seen only as a formality. Thus, either party
may demand performance of the transaction even though the parties
fail to produce the more elaborate documentation of their agreement.107
The second and more interesting type of preliminary agreement
(Type II) is a binding preliminary commitment which is created when
the parties have reached agreement on certain major terms of the deal
but leave other terms open for further negotiation. The parties to such
an understanding “accept a mutual commitment to negotiate together
in good faith in an effort to reach final agreement.”108 Neither party,
however, has a right to demand performance of the transaction. Rather
they have a legal obligation to attempt to negotiate the open issues in
good faith within the agreed framework. If a final contract is not
agreed upon, the parties may abandon the transaction. Our sample
shows that the enforcement of these binding preliminary agreements is
now well-accepted. Indeed, a federal court recently declared the en-
forcement of such agreements as “the modern trend in contract law.”109
The preceding discussion demonstrates that scholars interested in
commercial contracting should shift their focus from the largely irrele-
vant issue of precontractual reliance to the fundamental questions
raised by the enforcement of these preliminary agreements. The
emerging rule requires courts to resolve two key questions. When have
the parties reached “an agreement” sufficient to impose a duty to nego-
tiate in good faith? And, what behavior constitutes a breach of that

106 145 F.3d. at 548.

107Id.; Gorodensky v. Mitsubshi Pulp Sales (MC), Inc., 92 F. Supp. 2d 249,
254-55 (S.D.N.Y. 2000).
108 Teachers Insurance & Annuity Association v. Tribune, 670 F. Supp. 491,

498 (S.D.N.Y. 1987).

109 Beazer Homes Corp. v. VMIF/Anden Southbridge Venture, 235 F. Supp.

2d 485, 498 (E.D. Va. 2002).

32 HOFFMAN v. RED OWL
duty? The current framework fails to provide much guidance in an-
swering these questions.110
Indeed, we can’t answer the legal questions until we first under-
stand better the commercial behavior that has generated this litiga-
tion. The sheer volume of litigation over these preliminary agreements
exposes a deep puzzle. Parties often write fully binding contracts be-
fore they invest in reliance. And, when they need to invest early prior
to final contract they can (and do) contract directly on reliance. Yet
these parties invest prior to final contract and they fail to contract spe-
cifically on reliance. Why do parties put themselves in this situation?
And, finally, when negotiations break down and one party exits, when
would the other party have a reasonable expectation of compensation
absent an explicit promise to reimburse reliance expenditures?
Schwartz and Scott provide one answer to this question,111 but the aca-
demic debate over the law of preliminary agreements is only just be-
ginning. The delay in understanding this important and heretofore
largely ignored area of commercial law is attributable, at least in part,
to the myth of precontractual reliance and the unfortunate case of
Hoffman v. Red Owl Stores, Inc.

The multi-factored character of the Leval test confines the court’s discre-
110

tion more than a broad standard based on intent. But so long as the courts do
not attach weights to the factors or otherwise specify the relationship between
them, the factors may point in different directions and thus the test will lack
transparency.
Schwartz and Scott argue that the duty to bargain in good faith arises
111

where one party promises to make a simultaneous investment prior to negoti-

ating the remaining terms and thereafter delays its investment strategically.
Under those circumstances, they argue that the party who invested first should
be entitled to recover its reliance costs and a failure by the delaying party to
bargain over the amount of those costs would qualify as a breach of the duty.
Schwartz & Scott, supra note 99, at ––.