497: Listen and Learn -- Incidental, Reliance, and Restitution Damages (Contracts)

Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Lee Burgess (00:02):
Welcome back to the Law School Toolbox podcast.
Today, we're talking about incidental,reliance, and restitution damages, as
part of our "Listen and Learn" series.
Your Law School Toolbox hosts are AlisonMonahan and Lee Burgess, that's me.
We're here to demystify the lawschool and early legal career
experience, so you'll be the bestlaw student and lawyer you can be.
We're the co-creators of the Law SchoolToolbox, the Bar Exam Toolbox, and the

(00:24):
career-related website CareerDicta.
Alison also runs TheGirl's Guide to Law School.
If you enjoy the show, pleaseleave a review or rating on
your favorite listening app.
And if you have any questions,don't hesitate to reach out to us.
You can reach us via the contactform on LawSchoolToolbox.com,
and we'd love to hear from you.
And with that, let's get started.

(00:49):
Hello, and welcome back to the "Listen andLearn" series from the Law School Toolbox.
Today, we are going to be expandingon the topic of legal remedies for
breach of contract, which we startedcovering in a previous episode.
Legal remedies are also known as moneydamages and are distinguished from
equitable remedies, like specificperformance, rescission, and reformation.

(01:10):
When we talk about legal remedies,we're typically talking about five

types of damages (01:13):
[1] expectation damages; [2] consequential damages;
[3] incidental damages; [4] reliancedamages; and [5] restitution damages.
In our previous episode, whichwe'll link to in the show notes,
we talked about expectationdamages and consequential damages.

(01:34):
Today, we're going to finish ourdiscussion by focusing on the
remaining three types of damages- incidental, reliance, and restitution.
Note that this episode will assume thatyou are already familiar with the rules
governing expectation and consequentialdamages, so you should check out our
previous episode if you need a refresher.
Alright.

(01:54):
As usual, let's start by going over therules governing each type of damages,
starting with incidental damages.
Incidental damages are thereasonable costs incurred as a
result of a breach of contract.
A party can recover incidentaldamages in addition to expectation
and consequential damages.
To illustrate this rule, let's saythat I run a widget store on your

(02:17):
street, and I breach an agreement tosell you 100 widgets at $10 per widget.
As a result of my breach, you buyreplacement widgets from another
seller across town at the lowest costyou can find, which is $11 a widget.
In addition to paying the increased costof the widgets, you also need to rent

(02:37):
a car to pick up the widgets from thenew seller across town at a cost of $50.
As we discussed last time, the $100increased cost of the widgets are
expectation damages, because theyresult directly from the breach.
the $50 you spent on the car,however, are incidental damages.
They are damages you reasonably incurredafter the breach in trying to deal

(03:00):
with the consequences of the breach.
Because you can recover bothexpectation and incidental damages,
you can recover a total of $150.
Let's move on to the rulefor reliance damages.
Reliance damages are generally theexpenditures made by a party in
reliance on a contract, and are anattempt to put the non-breaching party

(03:22):
in the position it would have beenin if the contract never existed.
Reliance damages are available when,[1] a plaintiff acted in reliance
on the defendant's agreement toperform under a contract; and [2] the
plaintiff's reliance was foreseeable.
Reliance damages are typicallyawarded if expectation damages are
too speculative, or if the plaintiffsuffered no expectation loss.

(03:46):
A party cannot recover bothexpectation and reliance damages.
To illustrate this rule, let's say youagreed to sell me a car for $5,000.
In anticipation of your performance,I purchased several accessories for
that specific car at a cost of $300.
You breach the agreement and I endup buying a different car for $5,500.

(04:09):
The $500 extra I paid for the substitutecar are my expectation damages, because
they result directly from the breach.
The $300 I paid for the accessoriesare my reliance damages.
They don't flow from your breach, butrather from your promise to perform.
In other words, unlike incidentaldamages, I would have incurred these

(04:31):
costs even if you performed as promised.
But because you breached,these costs are now wasted.
Note that I can't recover boththe $500 expectation damages
and the $300 reliance damages.
In this example, I would almost certainlyseek the greater expectation damages.
But what if we change the facts so thatthe substitute car only costs $5,000 - the

(04:57):
same amount as the car you promised me.
Under those facts, I would havesuffered no expectation loss.
I expected to pay $5,000 for yourcar, and instead I paid $5,000
for a car from a different seller.
But I would still have wasted $300on those accessories for your car.
In that situation, I would seek torecover those $300 as reliance damages.

(05:20):
Okay, let's finish up ourrules with restitution.
Restitution is awarded to prevent unjustenrichment and is available when one party
confers a benefit onto another party,even if there is no enforceable contract.
Damages will be awarded based eitheron the market value of the plaintiff's
performance or on the value of thebenefit conferred upon the defendant.

(05:43):
As with reliance damages, restitutionis typically awarded if expectation
damages are too speculative, or if theplaintiff suffered no expectation loss.
A party cannot recover bothexpectation and restitution damages.
Moreover, restitution is notlimited to the non-breaching party.
Under the Restatement [Second] ofContracts, a party is entitled to

(06:04):
restitution for any benefit thatthey have conferred by way of part
performance, in excess of the loss thatthey have caused by their own breach.
The easiest illustration of thisrule involves the payment of money.
If I paid you for a good or a servicethat I did not receive, then I
conferred an obvious benefit on you.

(06:26):
When the benefit is strictly monetary,there is no difference between the
market value of the performance andthe value conferred on the plaintiff.
In an action for restitution,you would simply return the
money I already paid you.
Things become slightly more complicatedwith other kinds of performance.
For example, let's say you agreeto pay me $5,000 to do some

(06:47):
landscaping work on your property.
The work is supposedto take me three weeks.
After I complete the first weekof work, you change your mind
and repudiate the contract.
Clearly, you would be unjustly enrichedif you were allowed to retain the
benefits of my work without paying me.
In an action for restitution, youwould be required to pay me either

(07:07):
the market value of my labor or thevalue of the benefit you've received,
which would likely be measured by anyincrease in the value of your property.
Now, in this situation, I would probablyjust sue for expectation damages.
After all, we agreed you wouldpay me $5,000, so the expectation
damages are not speculative.

(07:28):
And I have clearly suffered expectationloss by your refusal to pay.
So there's really no reason for mehere to seek restitution in this case.
But as we'll see in our first hypo,there are circumstances where restitution
might be appropriate, even whereexpectation damages are available.
So let's do that hypo.
Now this fact pattern is based on aquestion from the California bar exam.

(07:51):
If you listened to our episodeon expectation and consequential
damages, you'll likely recognize itas a slightly modified version of the
first hypo we covered in that episode:
"Paul and Debra entered into avalid written contract for Paul
to remodel Debra's kitchen.
Paul agreed to perform the work for$15,000, payable upon completion.
Paul estimated that he would workapproximately 100 hours a month and would

(08:15):
complete the project in three months.
His usual hourly fee was $100,but he agreed to reduce his fee
because Debra agreed to let himphotograph the finished work for his
website and promotional materials.
He believed that the increased businessfrom the promotional materials would more
than compensate him for his reduced fee.
In preparation for the renovationwork, Paul purchased $5,000 worth

(08:38):
of tools and building materials.
He also purchased $1,000 ofphotography equipment to better
photograph the finished work.
Paul completed two months of thework on the project when Debra
unjustifiably repudiated the contract.
In an attempt to find alternate work forthe third month, Paul ran an advertisement
in the local paper, which cost him $200.

(09:01):
Paul was able to get another smallerremodeling job in the third month, which
paid $1,000 and took 10 hours to complete.
Paul has sued Debra What damagescan Paul reasonably seek?"
Alright, the question here isspecifically asking us about
damages, and we're told that Debraunjustifiably repudiated the contract.
So we don't need to deal withany other contract issues.

(09:24):
We can assume that there was a validcontract and a breach, and focus
solely on what remedies are available.
We're not going to delve into expectationand consequential damages here,
but you can listen to our previousepisode, linked to in the show notes,
for an analysis of those issues.
Okay, let's take each remedy in order,starting with incidental damages.
The question we need to ask ourselvesis whether Paul incurred any reasonable

(09:47):
costs as a result of Debra's breach.
To answer that question, weneed to look at what steps
Paul took after Debra's breach.
We're told that as a result of Debra'sbreach, Paul attempted to find alternate
work by running an advertisement inthe local paper at a cost of $200.
Paul would not have incurred that $200but for the breach, and the amount seems

(10:10):
reasonable under the circumstances.
Therefore, Paul can recover $200in incidental damages, in addition
to any expectation or consequentialdamages he might recover.
Moving on to reliance damages, we now needto ask ourselves a different question.
Instead of determining whetherPaul incurred costs as a result
of Debra's breach, we now need todetermine whether Paul incurred costs

(10:33):
as a result of Debra's promises.
To do that, we need to look atwhat Paul did in the time between
Debra's promises and Debra's breach.
We're told that after Paul and Debraentered into their agreement and before
Debra's repudiation, Paul purchased $5,000worth of tools and building materials
and $1,000 of photography equipment.

(10:53):
These are reliance damages, becausethey are foreseeable expenditures Paul
made in reliance on Debra's promisesto pay for the renovation work and to
allow Paul to photograph that work.
If awarded, they would put Paulin the position he would have been
in if the contract never existed.
In other words, he wouldn't receivethe benefit of his bargain, but he

(11:13):
wouldn't be any worse off financiallythan he was before he entered into the
contract with Debra Now, while thesedamages are technically available,
it's unlikely that Paul would actuallyseek to recover them under these facts.
After all, his reliance damages amount toonly $6,000, where his expectation damages
would likely be at at least $15,000.

(11:36):
Finally, let's address restitution.
To determine whether restitution isappropriate, we need to ask ourselves
whether Debra would be unjustly enriched.
We're told that Paul completed200 hours of work over two months.
At his normal hourly rate of$100, the value of his services
was $20,000, which exceeds the$15,000 of expectation damages.

(11:56):
Paul only charged Debra the lowerrate of $15,000 because she promised
to let him photograph his finishedwork, which he can no longer do,
as a result of Debra's breach.
Under these circumstances, Paulwould argue that Debra would be
unjustly enriched if she onlypaid Paul's expectation damages,
because Debra would receive$20,000 worth of labor for $15,000.

(12:20):
Assuming Paul's normal hourly rate isconsistent with the market value of that
type of labor, he has a strong argumentfor recovering the $20,000 in restitution.
Moreover, if the value of the benefitto Debra was even higher than the
market value of Paul's labor, Paulcould argue for that amount instead.
For example, if Paul's workincrease the value of Debra's home

(12:42):
by $30,000, Paul could argue thatthe conferred value is the more
appropriate measure of restitution.
That's it for our first hypo.
Let's do another quick one that dealswith restitution from a different angle:
"On January 1, a painter and ahomeowner entered into an agreement
providing that the painter would paintthe homeowner's house by February

(13:02):
1 for $10,000 paid upon completion.
The painter estimated that it wouldtake two weeks to paint the house.
After completing one week ofpainting, the painter walked off the
job and told the homeowner that hewouldn't return to complete the work.
The homeowner refused to paythe painter for any of his work.
The homeowner then found anotherpainter to complete the work for $7,000.

(13:25):
The painter sued the homeowner,alleging that the homeowner was
required to pay for the painter's work.
Is the painter entitled toany payment from homeowner?
And if so, under what theory or theories?"
Alright.
As in our first hypo, we only need tofocus on damages here, but unlike in
our first hypo, the breaching party isthe one asserting a claim for damages.

(13:48):
That would be a problem for most types ofcontract damages, but not for restitution.
As was noted in our rule statement,restitution is not limited
to the non-breaching party.
Even though the painter breached thecontract, he can still obtain restitution
if he conferred any benefit by wayof part performance in excess of the
loss that he caused by his own breach.

(14:10):
That seems to be the case here.
We're told that the homeownerexpected to pay the painter
$10,000 for a fully painted house.
Instead, the homeowner paid only$7,000 to another painter, but still
ended up with a fully painted house,due in part to the painter's work.
Accordingly, the homeowner would beunjustly enriched by the painter's

(14:30):
work if the homeowner were allowed tocompletely avoid paying the painter.
So, to prevent that unjust enrichment, thepainter should be able to recover $3,000.
That's all we have for you today.
Hopefully you found these hypos tobe helpful examples of how to work
through these damages issues on an exam.
If you enjoyed this episode of theLaw School Toolbox podcast, please

(14:53):
take a second to leave a review andrating on your favorite listening app.
We'd really appreciate it.
And be sure to subscribeso you don't miss anything.
If you have any questions orcomments, please don't hesitate
to reach out to myself or Alisonat lee@lawschooltoolbox.com or
alison@lawschooltoolbox.com.
Or you could always contactus via the website contact
form at LawSchoolToolbox.com.

(15:14):
Thanks for listening, and we'll talk soon!

All Episodes

Episode Transcript

Popular Podcasts

Stuff You Should Know

Dateline NBC

On Purpose with Jay Shetty

.css-15opob5{left:0;position:absolute;top:0.8rem;} All Episodes

.css-14f5ked{margin:0;word-break:break-word;display:-webkit-box;-webkit-box-orient:vertical;box-orient:vertical;-webkit-line-clamp:2;overflow:hidden;}497: Listen and Learn -- Incidental, Reliance, and Restitution Damages (Contracts)