Restitution and Reliance

AuthorFranklin G. Snyder, Mark Edwin Burge
Unit 24
Part Two
Restitution and Reliance
By far the most common judicial remedy for breach of contract in the United
States is expectation damages, introduced in the previous unit. The expectancy is,
however sometimes unavailable or inadequate in certain situations. This unit
addresses the two primary alternatives to expectation damages.
Restitution: Returning the Ill-Gotten Gain. The first alternative is restitution.
The remedy of restitution did not grow up in contract law. You may have run across
it in other contexts, such as when a criminal defendant is ordered to “make
restitution” to a victim for the harm done. In contract law, however, the concept
involves compensating the wronged party with the ill-gotten gain of anothereven if
the breach has not technically caused measurable economic harm. Restitution has its
roots in equity, tort law, and fiduciary law. Over the years, many situations have
arisen in which one person wrongfully held the property of another, such as by having
stolen, borrowed without returning, or otherwise used property to make money
without permission of the property’s true owner. The English courts, relying on the
equitable maxim, commodum ex injuria sua nemo habere debetroughly translated,
“No one shall profit by his own wrong”—developed a remedy that forced the
wrongdoer to pay back what he had obtained.
An early and straightforward English example of restitution involved stable
operators who boarded horses for the horses’ owners. When the horse owners were
out of town for a prolonged period, the stable operators would rent the horses (much
like a modern auto rental business) to other customers. The horse owners did not give
permission for their horses to be rented out, and they were unhappy about this
apparent breach of contract. Yet, they could show no measurable harm. After all, the
horses would have to have been taken out and exercised anyway. With no economic
loss, the owners could not prove expectancy damages, even if the stable owners were
willfully breaching the contract by renting out the owners’ horses without permission.
The transaction wasfrom an economic perspective, at leastharmless.
Nevertheless, the English courts held early on that, in such a situation, the stable
owner would be liable to “disgorge”—a polite term for the act of spewing something
up and out of one’s stomach—the profits they had made. Thus, the horse owner who
had suffered monetary damage would be awarded damages not for his own loss, but
for the profit wrongfully made by the other commandeering his property.
A natural step from “you’re using my property” is “you’re using the property
(money) that you were supposed to have paid me.” Restitution thus came to be an
alternative remedy for breach of contract. In this unit, we will focus on restitution’s
specific application in contract law, but keep in mind that the restitution principle of
disgorging “unjust enrichment” extends far beyond contract. The principle is so broad,
in fact, that the American Law Institute has an entire Restatement on the subject.
The Restatement (Third) of Restitution and Unjust Enrichment was published in
2011. This enormous and fertile topic takes up much of the course in Remedies, a
course you should strongly consider taking later in law school.
Reliance: “But I Trusted You!” The expectation and restitution remedies go
back far into the early history of the English common law, and they arrived in
America along with the first English colonists. The third major category of damages
is much more recent. Even as a conceptual matter, it dates only back to the 1930s,
although some cases seem to have applied it occasionally before that. In an influential
1936 law review article, The Reliance Interest in Contract Law, Professor Lon Fuller
and his then-student, William Perdue, contended not only that reliance was an
appropriate alternative remedy for breach of contract, but that it might even be the
most appropriate and important remedy in many circumstances.
The idea of a “reliance interest” rests on a simple parallel. Contracts depend
upon promises. So, in many cases, does the tort of fraud. Consider the car thief who
purports to be the car’s owner and sells it to you for $5,000. You relied on the thief’s
statements and you are out $5,000 when the true owner reclaims her car. Change up
the facts a bit, and suppose you had pai d the $5,000 to the car’s true owner, but the
owner has taken your money and refused to deliver the car. You relied on the owner’s
promise, and you are out $5,000. Assuming you cannot get the car, what can you
recover in each case? For fraud, the usual remedy (as you may have learned in torts)
is restitution. But in contract, using the expectancy measure would result in the fair
market value of the car. Fuller and Perdue argued that because both situations
involved reliance, using what they called “the reliance interest” as a measure of
damages would be appropriate in either situation.
While there was a period of time in the last century where it appeared that the
reliance interest might swallow up the expectancy interest, that turned out not to be
the case. Expectation damages remain the most common award in breach of contract
cases. As a practical matter, getting what you expected under a contract is often better
than simply getting back what you spent, but as you will see from the cases below,
that is not always the case.

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