Restitution and Reliance

• Author: Franklin G. Snyder, Mark Edwin Burge
• Pages: 501-519

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UNIT 24: RESTITUTION AND RELIANCE 501

Unit 24

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REMEDIES

Part Two

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Restitution and Reliance

FOCUS OF THIS UNIT

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 another—even 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 debet—roughly 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 was—from an economic perspective, at least—harmless.

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502 CHAPTER VIII: REMEDIES

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.