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The reliance interest is a damage theory in the law of contracts. In short, when there is a breach of contract, one can pursue the reliance interest to get back in damages an amount sufficient to put one in the position that one would have been in had the contract not been signed. For example: Seller contracts with buyer to sell 1000 bushels of apples at 8 dollars a bushel. Buyer buys a machine to turn the apples into applesauce, at a cost of 5000 dollars. Seller breaches. Pursuing reliance interest, the buyer can sue for the cost of the applesauce machine, which buyer purchased in reliance of the delivery of the apples from the seller.

We have previously discussed the notion of expectation damages - the preferred remedy for a breach of contract in the United States legal system. This node will concentrate on an alternative remedy known as reliance damages. Where the aim of expectation damages is to leave the non-breaching party's wallet as full as it would have been upon full performance of a contract, reliance damages places them where they would be had the contract never existed.

Reliance damages are subject to the same requirements of attempted mitigation as expectation damages, and exist in the Uniform Commercial Code as well as in the Common Law.

You might wonder why the non-breaching party would ever request reliance damages in lieu of expectation damages, since expectation damages returns their losses AND their unrealized profits, while reliance damages only put them back where they started - that is, return any expenditures and leave you at net 0. There are two primary reasons a non-breaching party would sue for reliance instead of expectation:

  1. The expectation damages are impossible to calculate, or unreasonably speculative.  This could occur, for example, in a shopping center lease situation.  For example, A TCBY Yogurt shop determines that the location in XYZ Center would provide better foot traffic than its current location and enters into negotiations to lease space with the owner of the shopping center.  The manager signs the contract and says "Welcome to XYZ!"  TCBY then moves out of their current lease, stores their equipment, and prepares to move.  Two days later, XYZ calls back and says "Uh... sorry about that.  No lease for you. We plan to give that lot to someone who sells real ice cream instead of that crap you shill."  XYZ can then sue for the money spent for storage, for finding a new lease, the difference in price of the new and old lease possibly, and a number of other things, but their expected profits would be increidbly difficult to calculate with accuracy, so they can only recover expenditures made in reliance of the new contract.
  2. The reliance damages might actually EXCEED the expectation damages.  This is rare.  Typically, this will only occur where the plaintiff enters a losing contract (perhaps they are a new company drumming up business), or circumstances change such that the contract which WAS profitable is no longer so.  Let's examine the latter possibility using the formula we describes in Expectation Damages and our friend the builder.

 

In our last example in expectation damages, a contractor built a home for $100,000 - 90k materials and labor, 10k profit.  If the breach occurred exactly as it happened in that example, and, for some strategic reason unknown to my brain, the contractor's lawyer decided they should ask for reliance damages, the contractor would come out with $45k minus any mitigated losses when the buyer refuses payment exactly halfway through.  He does not get the profit, remember, because the goal of reliance damages is like a reset button - the contract never happened, and neither did it's ill effects on the non-breaching party.

But suppose that Joe the Contractor, who may later hire Joe the Plumber - I hear they're related, agreed to build a home for $100,000 - $90k materials and labor, $10k profit.  A week before ground is broken to lay the foundation, some natural disaster occurs that greatly affects the cost of wood in the United States.  His contract price is still $100,000, but it will now cost him $110k for materials and labor, leaving him with a -$10k profit.  The home buyer, luckily for Joe, backs out on the contract after he has completed half of the work (in other words, used up exactly 55k in material and labor - we're assuming there is nothing left over to sell or any way to mitigate his damages in this example).  Let's see what happens when calculating both expectation damages AND reliance damages:

 

Expectation Damages:

You may recall from before that with expectation damages we want the award to be (cost of reliance + profit + other losses) - (loss avoided).  In this instance, he relied materially to the tune of $55,000 (half the materials and labor allotment), but his expected profit was actually NEGATIVE $10,000.  So, since he was unable to mitigate any damages, in this instance we award 55k-10k = $45k in expectation damages.

 

Reliance Damages:

With reliance damages, we want the plaintiff (non-breaching party) to recover any amount they spent in materially relying on the contract, minus any mitigated losses.  In this instance, that's $55,000 - the parts and labor used, with no mitigated losses. Profit never comes into the picture, so that -$10,000 just magically disappears.  If it helps, drawn a line graph:

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---------------------------------- 0    This is Joe before the contract occurred.

|-------------------------------  -10k This would have been Joe's unfortunate profit

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|-------------------------------  -55k This is the money Joe spent on the construction.

 

While expectation damages intend to put Joe back at that -10k mark, reliance wants him right back where he would have been had the whole thing never happened - 0.

Great!  Joe the contractor comes out of a potentially losing contract unscathed except.... there's a little rule that says Reliance damages shall never exceed expectation damages (2nd Restatement of Contracts Section 349), so even though Joe can prove $55k in reliance... the court will still only award him $45k.  However, the burden of PROVING that reliance damages exceed expectation damages falls on the other party, so if Joe's lawyer is smart and asks for reliance and Buyer's lawyer is an idiot and doesn't do the math, Joe may walk away with $55,000.  Some of you may still think Joe is being gypped.  He is.  "Why is there no JUSTICE?!" I hear you cry.  Well it's ok, because we have a third method of recovery for Joe that will let him escape his losing contract not only unscathed, but possibly better than he was before...

Tune in next time when Joe the Contractor meets... RESTITUTION DAMAGES!  Same law time, same law channel.

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