Business Law and the Legal Environment, v. 1.0.3

by Don Mayer, Daniel M. Warner, George J. Siedel, and Jethro K. Lieberman

adapted by: Lisa Storm (v1.0.3 - Published)

15.2 Promisee’s Interests Protected by Contract

Learning Objective

1. Understand that the nonbreaching party to a contract has certain expectations that contract remedies seek to fulfill to make the nonbreaching party whole.

Contract remedies serve to protect three different interests: an expectation interest, a reliance interest, and a restitution interest. A promisee will have one of these and may have two or all three.

An expectation interestThe interest of a party to a breached contract in receiving the benefit of the bargain by being put in a position as good as he or she would have been in had there been no breach. is the benefit for which the promisee bargained, and the remedy is to put him in a position as good as that which he would have been in had the contract been performed. A reliance interestCompensation for the nonbreaching party as a consequence of relying on the breaching party’s promise to perform. is the loss suffered by relying on the contract and taking actions consistent with the expectation that the other party will abide by it; the remedy is reimbursement that restores the promisee to his position before the contract was made. A restitution interestThe nonbreaching party’s interest in being returned to the position it would have been in had the promises never been made. Where this is not possible, then restitution disgorges any unjust enrichment. is that which restores to the promisee any benefit he conferred on the promisor. These interests do not dictate the outcome according to a rigid formula; circumstances and the nature of the contract, as usual, will play a large role. But in general, specific performance is a remedy that addresses the expectation interest, monetary damages address all three interests, and, not surprisingly, restitution addresses the restitution interest.

Consider some simple examples. A landowner repudiates an executory contract with a builder to construct a garage on her property for $100,000. The builder had anticipated a$10,000 profit (the garage would have cost him $90,000 to build). What can he expect to recover in a lawsuit against the owner? The court will not order the garage to be built; such an order would be wasteful, since the owner no longer wants it and may not be able to pay for it. Instead, the court will look to the builder’s three possible interests. Since the builder has not yet started his work, he has given the owner nothing, and therefore has no restitution interest. Nor has he any reliance interest, since we are assuming that he has not paid out any money for supplies, hired a work crew, or advanced money to subcontractors. But he anticipated a profit, and so he has an expectation interest of$10,000.

Now suppose that the builder had dug out the foundation and poured concrete, at a cost of $15,000. His expectation interest has become$25,000 (the difference between $100,000 and$75,000, the money he will save by not having to finish the job). His reliance interest is \$15,000, because this is the amount he has already spent. He may also have a restitution interest, depending on how much the foundation of the house is worth to the owner. (The value could be more or less than the sum of money actually expended to produce the foundation; for example, the builder might have had to pay his subcontractors for a greater share of the job than they had completed, and those sums therefore would not be reflected in the worth of the foundation.)

Normally, the promisee will choose which of the three interests to pursue. As is to be expected, the choice hinges on the circumstances of the case, his feelings, and the amount at stake.

Key Takeaway

A nonbreaching party might have one or more interests that the law seeks to realize: expectation, reliance, and restitution.

Exercises

1. What is the expectation interest? The reliance interest? The restitution interest?
2. How are these concepts useful in understanding contract remedies?