Expectation Damages vs. Reliance Damages
A detailed comparison of these two contracts rules, including key differences, exam strategies, and guidance on when to apply each.
Overview
Expectation damages and reliance damages represent two different measures of contract damages, each reflecting a distinct theory of what the injured party has lost due to breach. Expectation damages are the default remedy in American contract law and aim to put the non-breaching party in the position they would have been in had the contract been performed. This is sometimes called the "benefit of the bargain" measure and includes the value of the promised performance minus any costs the plaintiff saved by not having to perform.
Reliance damages, by contrast, aim to put the non-breaching party back in the position they were in before the contract was made. This measure compensates for expenditures made in reliance on the contract that are now wasted because of the breach. Reliance damages do not include lost profits; they only cover out-of-pocket costs incurred in preparing to perform or in actual partial performance. The Restatement (Second) of Contracts Section 349 provides for reliance damages as an alternative when expectation damages are too uncertain to calculate.
The choice between these measures matters most when profits from the contract are speculative or impossible to prove. In such cases, expectation damages may be unavailable due to the certainty requirement, and reliance damages become the fallback. However, reliance damages can be reduced if the breaching party can show that full performance would have resulted in a loss for the plaintiff, meaning the plaintiff cannot use reliance damages to recover more than they would have gained from the contract.
Key Differences
| Aspect | Expectation Damages | Reliance Damages |
|---|---|---|
| Goal | Put plaintiff in the position as if the contract were performed | Put plaintiff in the position as if the contract were never made |
| What is recovered | Lost profits plus incidental and consequential damages | Out-of-pocket expenditures made in reliance on the contract |
| Default vs. alternative | Default measure of contract damages | Alternative when expectation damages are too uncertain |
| Certainty requirement | Must prove lost profits with reasonable certainty | Easier to prove; based on actual expenditures |
| Limitation | Subject to mitigation, foreseeability (Hadley v. Baxendale), and certainty | Cannot exceed what expectation damages would have been (no recovery beyond the contract value) |
Exam Tips
On a contracts exam, always calculate expectation damages first as the default measure. If the lost profits are speculative or difficult to prove (common with new businesses or novel ventures), pivot to reliance damages as the alternative. Show the examiner you understand why the switch is necessary by discussing the certainty requirement. A key trap: if the contract would have been a losing deal for the plaintiff, the defendant can cap reliance damages at what expectation damages would have been, which might be zero or even negative. Always check whether the contract was profitable before concluding that reliance damages are the better measure.
When to Apply Which
Apply expectation damages whenever the plaintiff can prove lost profits with reasonable certainty. This is the standard measure and should be your starting point. Apply reliance damages when the plaintiff cannot establish lost profits with sufficient certainty, such as when the venture was new, the market was speculative, or the contract involved unique services. Also consider reliance damages in promissory estoppel claims, where reliance is the basis of the cause of action and courts often limit recovery to reliance damages rather than full expectation damages.