Reliance Damages
What is the Reliance Damages?
Reliance damages compensate the non-breaching party for expenditures made in reasonable reliance on the contract, restoring them to the position they occupied before the contract was formed.
Source: Security Stove & Manufacturing Co. v. American Railway Express Co., 227 Mo. App. 175 (1932)
Definition
Reliance damages compensate the non-breaching party for expenditures and costs incurred in reasonable reliance on the promise that the contract would be performed. Unlike expectation damages, which look forward to the profit or benefit the party would have received, reliance damages look backward to restore the party to the status quo ante—the position they were in before the contract was made. This measure is particularly useful when expectation damages are too uncertain or speculative to prove.
Reliance damages include both essential reliance (expenditures made in performing or preparing to perform the contract, such as purchasing materials or hiring labor) and incidental reliance (expenditures made in connection with the contract but not in direct performance, such as forgoing other opportunities). The party seeking reliance damages must show that the expenditures were made in reasonable reliance on the contract and were foreseeable to the breaching party.
One critical limitation on reliance damages is that they cannot put the non-breaching party in a better position than performance would have. If the breaching party can prove that the contract was a losing deal and the non-breaching party would have suffered a net loss from full performance, reliance damages are reduced accordingly. This prevents a party from using reliance damages to escape a bad bargain. Reliance damages are the standard measure in promissory estoppel cases, where the court may limit enforcement as justice requires.
Key Elements
- 1A breach of contract or enforceable promise exists
- 2The non-breaching party incurred expenditures in reliance on the contract
- 3The reliance was reasonable and foreseeable
- 4The expenditures were made before the breach occurred
- 5The damages are reduced if the breaching party proves the contract was a losing deal
Landmark Cases
Security Stove & Manufacturing Co. v. American Railway Express Co.
227 Mo. App. 175 (1932)
Awarded reliance damages including travel and booth expenses when a carrier failed to deliver a furnace exhibit, as lost profits were too speculative.
Chicago Coliseum Club v. Dempsey
265 Ill. App. 542 (1932)
Allowed recovery of reliance expenditures made after formation but denied pre-contract expenses, distinguishing essential from pre-contractual reliance.
Anglia Television Ltd v. Reed
[1972] 1 Q.B. 60 (C.A.)
Lord Denning allowed recovery of pre-contract production expenditures as reliance damages when an actor repudiated, as the defendant must have known they would be wasted.
L. Albert & Son v. Armstrong Rubber Co.
178 F.2d 182 (2d Cir. 1949)
Learned Hand established that reliance damages are reduced to account for any loss the plaintiff would have suffered even with full performance—the losing contract limitation.
Exam Tips
- Use reliance damages when expectation damages are too speculative to prove—reliance is the fallback measure.
- Remember the losing contract limitation: the breaching party can reduce reliance damages by proving the contract was unprofitable.
- Distinguish essential reliance (expenditures in direct performance) from incidental reliance (collateral expenditures).
- In promissory estoppel cases, reliance damages are often the appropriate measure rather than full expectation damages.
Common Mistakes to Avoid
- Allowing reliance damages to exceed expectation damages—reliance cannot make the plaintiff better off than performance would have.
- Failing to account for the losing contract limitation when the breaching party raises it as a defense to reliance damages.
- Confusing reliance damages with restitution—reliance restores the plaintiff to the pre-contract position, while restitution disgorges the defendant's unjust enrichment.
Memory Aid
Reliance = 'What did I SPEND because of this promise?' Look backward to undo the loss, but never better off than full performance.