Welcome to the Bar Exam Toolbox podcast. Today, we're talking about incidental, reliance, and restitution damages, as part of our "Listen and Learn" series. Your Bar Exam Toolbox hosts are Alison Monahan and Lee Burgess, that's me. We're here to demystify the bar exam experience, so you can study effectively, stay sane, and hopefully pass and move on with your life. We're the co-creators of the Law School Toolbox, the Bar Exam Toolbox, and the career-related website CareerDicta.
Alison also runs The Girl's Guide to Law School. If you enjoy the show, please leave a review on your favorite listening app, and check out our sister podcast, the Law School Toolbox podcast. If you have any questions, don't hesitate to reach out to us. You can reach us via the contact form on BarExamToolbox.com, and we'd love to hear from you. And with that, let's get started. Hello, and welcome back to the "Listen and Learn" series from the Bar Exam Toolbox podcast.
Today, we are going to be expanding on the topic of legal remedies for breach of contract, which we started covering in a previous episode. Legal remedies are also known as money damages and are distinguished from equitable remedies, like specific performance, rescission, and reformation. When we talk about legal remedies, we're typically talking about five
[1] expectation damages; [2] consequential damages; [3] incidental damages; [4] reliance damages; and [5] restitution damages. In our previous episode, which we'll link to in the show notes, we talked about expectation damages and consequential damages. Today, we're going to finish our discussion by focusing on the remaining three types of damages - incidental, reliance, and restitution.
Note that this episode will assume that you are already familiar with the rules governing expectation and consequential damages, so you should check out our previous episode if you need a refresher. Alright. As usual, let's start by going over the rules governing each type of damages, starting with incidental damages. Incidental damages are the reasonable costs incurred as a result of a breach of contract.
A party can recover incidental damages in addition to expectation and consequential damages. To illustrate this rule, let's say that I run a widget store on your street, and I breach an agreement to sell you 100 widgets at $10 per widget. As a result of my breach, you buy replacement widgets from another seller across town at the lowest cost you can find, which is $11 a widget.
In addition to paying the increased cost of the widgets, you also need to rent a car to pick up the widgets from the new seller across town at a cost of $50. As we discussed last time, the $100 increased cost of the widgets are expectation damages, because they result directly from the breach. The $50 you spent on the car, however, are incidental damages. They are damages you reasonably incurred after the breach in trying to deal with the consequences of the breach.
Because you can recover both expectation and incidental damages, you can recover a total of $150. Let's move on to the rule for reliance damages. Reliance damages are generally the expenditures made by a party in reliance on a contract, and are an attempt to put the non-breaching party in the position it would have been in if the contract never existed.
Reliance damages are available when, [1] a plaintiff acted in reliance on the defendant's agreement to perform under a contract; and [2] the plaintiff's reliance was foreseeable. Reliance damages are typically awarded if expectation damages are too speculative, or if the plaintiff suffered no expectation loss. A party cannot recover both expectation and reliance damages. To illustrate this rule, let's say you agreed 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 end up buying a different car for $5,500. The $500 extra I paid for the substitute car are my expectation damages, because they result directly from the breach. The $300 I paid for the accessories are my reliance damages. They don't flow from your breach, but rather from your promise to perform.
In other words, unlike incidental damages, I would have incurred these costs, even if you performed as promised. But because you breached, these costs are now wasted. Note that I can't recover both the $500 expectation damages and the $300 reliance damages. In this example, I would almost certainly seek the greater expectation damages. But what if we change the facts so that the substitute car only costs $5,000 - the same amount as the car you promised me.
Under those facts, I would have suffered no expectation loss. I expected to pay $5,000 for your car, and instead I paid $5,000 for a car from a different seller. But I would still have wasted $300 on those accessories for your car. In that situation, I would seek to recover those $300 as reliance damages. Okay, let's finish up our rules with restitution.
Restitution is awarded to prevent unjust enrichment and is available when one party confers a benefit onto another party, even if there is no enforceable contract. Damages will be awarded based either on the market value of the plaintiff's performance or on the value of the benefit conferred upon the defendant. As with reliance damages, restitution is typically awarded if expectation damages are too speculative, or if the plaintiff suffered no expectation loss.
A party cannot recover both expectation and restitution damages. Moreover, restitution is not limited to the non-breaching party. Under the Restatement [Second] of Contracts, a party is entitled to restitution for any benefit that they have conferred by way of part performance, in excess of the loss that they have caused by their own breach. The easiest illustration of this rule involves the payment of money.
If I paid you for a good or a service that I did not receive, then I conferred an obvious benefit on you. When the benefit is strictly monetary, there is no difference between the market value of the performance and the value conferred on the plaintiff. In an action for restitution, you would simply return the money I already paid you. Things become slightly more complicated with other kinds of performance.
For example, let's say you agree to pay me $5,000 to do some landscaping work on your property. The work is supposed to take me three weeks. After I complete the first week of work, you change your mind and repudiate the contract. Clearly, you would be unjustly enriched if you were allowed to retain the benefits of my work without paying me.
In an action for restitution, you would be required to pay me either the market value of my labor or the value of the benefit you've received, which would likely be measured by any increase in the value of your property. Now, in this situation, I would probably just sue for expectation damages. After all, we agreed you would pay me $5,000, so the expectation damages are not speculative. And I have clearly suffered expectation loss by your refusal to pay.
So there's really no reason for me here to seek restitution in this case. But as we'll see in our first hypo, there are circumstances where restitution might be appropriate, even where expectation damages are available. So let's do that hypo now. This fact pattern is based on a question from the California bar exam.
If you listened to our episode on expectation and consequential damages, you'll likely recognize it as a slightly modified version of the first hypo we covered in that episode: "Paul and Debra entered into a valid 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 work approximately 100 hours a month and would complete the project in three months.
His usual hourly fee was $100, but he agreed to reduce his fee because Debra agreed to let him photograph the finished work for his website and promotional materials. He believed that the increased business from the promotional materials would more than compensate him for his reduced fee. In preparation for the renovation work, Paul purchased $5,000 worth of tools and building materials. He also purchased $1,000 of photography equipment to better photograph the finished work.
Paul completed two months of the work on the project when Debra unjustifiably repudiated the contract. In an attempt to find alternate work for the third month, Paul ran an advertisement in the local paper, which cost him $200. Paul was able to get another smaller remodeling job in the third month, which paid $1,000 and took 10 hours to complete.
Paul has sued Debra What damages can Paul reasonably seek?" Alright, the question here is specifically asking us about damages, and we're told that Debra unjustifiably repudiated the contract. So we don't need to deal with any other contract issues. We can assume that there was a valid contract and a breach, and focus solely on what remedies are available.
We're not going to delve into expectation and consequential damages here, but you can listen to our previous episode, 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 ourselves is whether Paul incurred any reasonable costs as a result of Debra's breach. To answer that question, we need to look at what steps Paul took after Debra's breach.
We're told that as a result of Debra's breach, Paul attempted to find alternate work by running an advertisement in the local paper at a cost of $200. Paul would not have incurred that $200 but for the breach, and the amount seems reasonable under the circumstances. Therefore, Paul can recover $200 in incidental damages, in addition to any expectation or consequential damages he might recover. Moving on to reliance damages, we now need to ask ourselves a different question.
Instead of determining whether Paul incurred costs as a result of Debra's breach, we now need to determine whether Paul incurred costs as a result of Debra's promises. To do that, we need to look at what Paul did in the time between Debra's promises and Debra's breach. We're told that after Paul and Debra entered into their agreement and before Debra's repudiation, Paul purchased $5,000 worth of tools and building materials and $1,000 of photography equipment.
These are reliance damages, because they are foreseeable expenditures Paul made in reliance on Debra's promises to pay for the renovation work and to allow Paul to photograph that work. If awarded, they would put Paul in the position he would have been in if the contract never existed.
In other words, he wouldn't receive the benefit of his bargain, but he wouldn't be any worse off financially than he was before he entered into the contract with Debra Now, while these damages are technically available, it's unlikely that Paul would actually seek to recover them under these facts. After all, his reliance damages amount to only $6,000, where his expectation damages would likely be at at least $15,000. Finally, let's address restitution.
To determine whether restitution is appropriate, we need to ask ourselves whether Debra would be unjustly enriched. We're told that Paul completed 200 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. Paul only charged Debra the lower rate of $15,000 because she promised to let him photograph his finished work, which he can no longer do, as a result of Debra's breach.
Under these circumstances, Paul would argue that Debra would be unjustly enriched if she only paid Paul's expectation damages, because Debra would receive $20,000 worth of labor for $15,000. Assuming Paul's normal hourly rate is consistent with the market value of that type of labor, he has a strong argument for recovering the $20,000 in restitution. Moreover, if the value of the benefit to Debra was even higher than the market value of Paul's labor, Paul could argue for that amount instead.
For example, if Paul's work increased the value
of Debra's home by $30,000, Paul could argue that the conferred value is the more appropriate measure of restitution. That's it for our first hypo. Let's do another quick one that deals with restitution from a different angle: "On January 1, a painter and a homeowner entered into an agreement providing that the painter would paint the homeowner's house by February 1 for $10,000, paid upon completion. The painter estimated that it would take two weeks to paint the house.
After completing one week of painting, the painter walked off the job and told the homeowner that he wouldn't return to complete the work. The homeowner refused to pay the painter for any of his work. The homeowner then found another painter to complete the work for $7,000. The painter sued the homeowner, alleging that the homeowner was required to pay for the painter's work. Is the painter entitled to any payment from homeowner? And if so, under what theory or theories?" Alright.
As in our first hypo, we only need to focus on damages here, but unlike in our first hypo, the breaching party is the one asserting a claim for damages. That would be a problem for most types of contract 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 the contract, he can still obtain restitution if he conferred any benefit by way of part performance in excess of the loss that he caused by his own breach. That seems to be the case here. We're told that the homeowner expected 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 be unjustly enriched by the painter's work if the homeowner were allowed to completely avoid paying the painter. So, to prevent that unjust enrichment, the painter should be able to recover $3,000. That's all we have for you today. Hopefully you found these hypos to be helpful examples of how to work through these damages issues on an exam.
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