10.3.14.1 Fuller and Perdue, The Reliance Interest in Contract Damages | Kessler, Gilmore & Kronman | October 31, 2012

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10.3.14.1 Fuller and Perdue, The Reliance Interest in Contract Damages

by Kessler, Gilmore & Kronman
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(Pt. 1), 46 Yale L.J. 52, 53ยท57 (1936)
FULLER & PERDUE, THE RELIANCE INTEREST IN CONTRACT DAMAGES

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It is convenient to distinguish three principal purposes which may be pursued in awarding contract damages. These purposes, and the situations in which they become appropriate, may be stated briefly as follows:

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First, the plaintiff has in reliance' on the promise of the defendant conferred some value on the defendant. The defendant fails to perform his promise. The court may force the defendant to disgorge the value he received from the plaintiff. The object here may be termed the prevention of gain by the defaulting prornisor at the expense of the promisee; more briefly, the prevention of unjust enrichment. The interest protected may be called the restitution interest. For our present purposes it is quite immaterial how the suit in such a case be classified, whether as contractual or quasi-contractual, whether as a suit to enforce the contract or as a suit based upon a rescission of the contract. These questions relate to the superstructure of the law, not to the basic policies with which we are concerned.

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Secondly, the plaintiff has in reliance on the promise of the defendant changed his position. For example, the buyer under a contract for the sale of land has incurred expense in the investigation of the seller's title, or has neglected the opportunity to enter other contracts. We may award damages to the plaintiff for the purpose of undoing the harm which his reliance on the defendant's promise has caused him. Our object is to put him in as good a position as he was in before the promise was made. The interest protected in this case may be called the reliance interest.

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Thirdly, without insisting on reliance by the promisee or enrichment of the promisor, we may seek to give the promisee the value of the expectancy which the promise created. We may in a suit for specific performance actually compel the defendant to render the promised performance to the plaintiff, or, in a suit for damages, we may make the defendant pay the money value of this performance. Here our object is to put the plaintiff in as good a position as he would have occupied had the defendant performed his promise. The interest protected in this case we may call the expectation interest.

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It will be observed that what we have called the restitution interest unites two elements: (1) reliance by the promisee, (2) a resultant gain to the promisor. It may for some purposes be necessary to separate these elements. In some cases a defaulting promisor may after his breach be left with an unjust gain which was not taken from the promisee (a third party furnished the consideration), or which was not the result of reliance by the promisee (the promisor violated a promise not to appropriate the promisee's goods). Even in those cases where the promisor's gain results from the promisee's reliance it may happen that damages will be assessed somewhat differently, depending on whether we take the promisor's gain or the promisee's loss as the standard of measurement. Generally, however, in the cases we shall be discussing, gain by the promisor will be accompanied by a corresponding and, so far as its legal measurement is concerned, identical loss to the promisee, so that for our purposes the most workable classification is one which presupposes in the restitution interest a correlation of promisor's gain and promisee's loss. If, as we shall assume, the gain involved in the restitution interest results from and is identical with the plaintiff's loss through reliance, then the restitution interest is merely a special case of the reliance interest; all of the cases coming under the restitution interest will be covered by the reliance interest, and the reliance interest will be broader than the restitution interest only to the extent that it includes cases where the plaintiff has relied on the defendant's promise without enriching the defendant.

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It should not be supposed that the distinction here taken between the reliance and expectation interests coincides with that sometimes taken between "losses caused" (damnum emergens) and "gains prevented" (lucrum cessans). In the first place, though reliance ordinarily results in "losses" of an affirmative nature (expenditures of labor and money) it is also true that opportunities for gain may be forgone in reliance on a promise. Hence the reliance interest must be interpreted as at least potentially covering "gains prevented" as well as "losses caused." (Whether "gains prevented" through reliance on a promise are properly compensable in damages is a question not here determined. Obviously, certain scruples concerning "causality" and "foreseeability" are suggested. It is enough for our present purpose to note that there is nothing in the definition of the reliance interest itself which would exclude items of this sort from consideration.) On the other hand, it is not possible to make the expectation interest entirely synonymous with "gains prevented." The disappointment of an expectancy often entails losses of a positive character. It is obvious that the three "interests" we have distinguished do not present equal claims to judicial intervention. It may be assumed that ordinary standards of justice would regard the need for judicial intervention as decreasing in the order in which we have listed the three interests. The "restitution interest," involving a combination of unjust impoverishment with unjust gain, presents the strongest case for relief. If, following Aristotle, we regard the purpose of justice as the maintenance of an equilibrium of goods among members of society, the restitution interest presents twice as strong a claim to judicial intervention as the reliance interest, since if A not only causes B to lose one unit but appropriates that unit to himself, the resulting discrepancy between A and B is not one unit but two.[52]

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On the other hand, the promisee who has actually relied on the promise, even though he may not thereby have enriched the promisor, certainly presents a more pressing case for relief than the promisee who merely demands satisfaction for his disappointment in not getting what was promised him. In passing from compensation for change of position to compensation for loss of expectancy we pass, to use Aristotle's terms again, from the realm of corrective justice to that of distributive justice. The law no longer seeks merely to heal a disturbed status quo, but to bring into being a new situation. It ceases to act defensively or restoratively, and assumes a more active role.[53] With the transition, the justification for legal relief loses its self-evident quality. It is as a matter of fact no easy thing to explain why the normal rule of contract recovery should be that which measures damages by the value of the promised performance.

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[52] Aristotle, Nicomachean Ethics, 1132a-1132b.

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[53] "No doubt, when, after having an object delivered, or profiting from a service, I refuse to furnish a suitable equivalent, I take from another what belongs to him, and we can say that society, by obliging me to keep my promise, is only preventing an injury, an indirect aggression. But if I have simply promised a service without having previously received remuneration, I am not less held to keep my engagement. [This is true in Anglo-American law in the case of the bilateral contract.] In this case, however, I do not enrich myself at the expense of another; I only refuse to be useful to him." Durkheim, On the Division of Labor in Society (Simpson's trans. 1933) 217. Where the defendant has not already received some remuneration, the enforcement of the contract is viewed by Durkheim as having "an eminently positive nature since it has for its purpose the determination of the way in which we ought to cooperate." Id. at 216.

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". . . [T]he principle that promise or consent creates obligation is foreign to the idea of justice. . . . It is plain that if anyone promises a friend to give him something and does not do it, he does not commit an injustice, at least, understand, if he does not wrong this friend indirectly." Tourtoulon, Philosophy in the Development of Law (Read's trans. 1922) 499-500.

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June 02, 2014

10.3.14.1 Fuller and Perdue, The Reliance Interest in Contract Damages

10.3.14.1 Fuller and Perdue, The Reliance Interest in Contract Damages

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