Login
Copyright

Contract Breach Remedies: Reliance & Restitution

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: Non-Recoverable Damages: Damages Due to Breach of Contract

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:05 Damages
  • 1:54 Reliance Damages
  • 3:20 When Reliance Will Be Used
  • 5:27 Restitution
  • 6:42 When Restitution Will Be Used
  • 10:02 Lesson Summary
Add to Add to Add to

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Login or Sign up

Timeline
Autoplay
Autoplay
Create an account to start this course today
Try it free for 5 days!
Create An Account

Recommended Lessons and Courses for You

Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

When a party breaches a contract, a court will often award damages to the other party. There are several different types of damages. The type of damages awarded will depend on the circumstances of the case. This lesson explains when reliance damages and restitution might be used.

Damages

Stacy is a builder. Sam hires Stacy to build his beautiful new house for $100,000. The payment is due to Stacy in four installments of $25,000 each. The first installment is due next month. Stacy purchases $10,000 worth of building supplies and starts building Sam's house. After she completes the foundation, Sam refuses to make the first payment. He denies that he has a contract with Stacy.

Stacy sues Sam for breach of contract. If the court agrees with Stacy, it will need to determine what type of damages to award her. Let's discuss two different options. If the court awards reliance damages, Sam will have to pay Stacy $10,000. Reliance damages are money damages that are awarded to an innocent party for the losses suffered due to a reasonable reliance on a promise.

If the court awards restitution, Sam will have to pay Stacy for the value of her completed foundation. Restitution damages are money damages that are awarded to an innocent party to compensate for the benefit that party gave.

Both of these damage awards involve a loss to the innocent party. The key difference between reliance damages and restitution is that restitution will always involve a loss to the innocent party that benefits the other party. Reliance involves a loss to the innocent party that doesn't benefit the other party.

Let's take a closer look at these two types of damage awards and when each might be used.

Reliance Damages

Stacy's reliance damages are $10,000. We know this because this is the amount of money Stacy spent. Remember that reliance damages are money damages that are awarded to an innocent party for the losses suffered due to reasonable reliance on a promise. Let's take a further look at Stacy's reliance damages.

In our scenario, Sam breached the contract and Stacy is the innocent party. Stacy spent $10,000 after she reasonably relied on Sam's promise. Stacy believed that she would complete the house for Sam, and that Sam would pay her in full. Stacy didn't have any reason to believe that Sam wouldn't fulfill his duties under the contract. By the time she realized Sam wouldn't comply, she'd already spent $10,000.

Reliance damages are meant to restore the innocent party. The court calculates these damages by determining what amount of money it would take to re-establish the innocent party's economic position. This means that Stacy will be awarded damages in order to place her back in the economic position she held before she reasonably relied on Sam's promise. Before that time, Stacy had $10,000 that she no longer has.

When Reliance Will Be Used

Usually, when a court rules that a breach of contract occurred, it will award expectation damages to the innocent party. These are damages awarded to compensate the loss of future income caused by a breach of contract. We know that Stacy expected to receive $100,000 for building Sam's house. We don't know the amount of Stacy's anticipated expenses, if any. If Stacy expected to incur expenses while building the house, this amount will be subtracted from the $100,000. The court can probably calculate Stacy's expectation damages without too much trouble, but sometimes future income is uncertain, making the use of expectation damages impractical.

Let's consider the 1998 case of Hollywood Fantasy Corporation v. Gabor. Hollywood Fantasy Corporation was a business that provided fantasy vacation camps. The vacation camps allowed vacationers to make a pretend movie with a real actor or actress. The corporation planned an event featuring Zsa Zsa Gabor, but Gabor cancelled her appearance only two weeks before the event, and after tickets were sold to vacationers. The corporation ended up canceling the entire vacation event, and, shortly afterward, completely went out of business.

The corporation sued Gabor for breach of contract. The corporation's lost profits were too vague to allow traditional expectation damages. The court couldn't practically determine how many more tickets were to be sold, or the exact profits that might be made from the filmed portions of the event.

However, the corporation was allowed to recover reliance damages. The court ordered damages to cover the corporation's expenses incurred in reliance on Gabor's promise to appear at the event. This included the corporation's actual expenses, such as money spent on printing brochures and advertising the event.

Restitution

Restitution damages are also used when the use of expectation damages isn't practical. For example, restitution is often used when a contract is determined to be unenforceable, but the innocent party already conferred a benefit to the other party.

Restitution damages are money damages that are awarded to an innocent party to compensate for the benefit that party gave. The innocent party will be awarded the value of the benefit he or she conferred to the other party during the time that the innocent party reasonably believed there was a valid contract. Unlike reliance, restitution will always involve a benefit conferred from the innocent party to the other party. Let's take a closer look at the benefit Stacy conferred to Sam.

In our scenario, Stacy built a foundation for Sam. If Stacy is awarded restitution, she'll be awarded the value of the foundation because that's the benefit she conferred to Sam. The court will use comparable statistics to determine a reasonable value for the foundation, and Sam will be ordered to pay Stacy that amount.

When Restitution Will Be Used

Let's change our scenario a little bit. Let's say that Sam and Stacy still made the same agreement. However, when Stacy went to build the foundation, she accidentally built the foundation on the lot next door to Sam's. This lot belongs to Sylvester. Sylvester lives in the house across the street and was also planning to build a new home on his empty lot. Sylvester noticed Stacy building on his lot and didn't point out her mistake. After Stacy built the foundation, Sam comes by to check her work. Sam notices the error and tells both Stacy and Sylvester. So in this scenario, Stacy conferred a benefit to Sylvester.

Stacy, of course, wants to be compensated for her work. Sylvester, however, doesn't believe he should have to pay Stacy. He didn't hire her and they never had a contract. Stacy sues Sylvester. Stacy will likely be awarded restitution damages. Sylvester will be ordered to pay Stacy for the foundation, since he now owns that benefit. The court will use comparable statistics to determine the reasonable value of the foundation, and Sylvester will have to pay Stacy that amount.

Restitution is also sometimes used when there's a valid contract. For example, let's consider the 1970 case of Osteen v. Johnson. Linda Osteen was an aspiring country music singer. Osteen hired Johnson to produce and promote two of her records. Osteen paid Johnson $2,500 when she hired him.

To unlock this lesson you must be a Study.com Member.
Create your account

Register for a free trial

Are you a student or a teacher?
I am a teacher
What is your educational goal?
 Back

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back

Earning College Credit

Did you know… We have over 95 college courses that prepare you to earn credit by exam that is accepted by over 2,000 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it free for 5 days!
Create An Account
Support