Security Stove & Mfg. Co. V. American Rys. Express Co.
Reliance damages: expenses incurred in reliance on the contract.
Plaintiff asked damages, which the court allowed as follows: $147.00 express charges (on the exhibit); $45.12 freight on the exhibit from Atlantic City toKansas City; $101.39 railroad and pullman fare to and from Atlantic City, expended by plaintiff's president and a workman taken by him to Atlantic City; $48.00 hotel room for the two; $150.00 for the time of the president; $40.00 for wages of plaintiff's other employee and $270.00 for rental of the booth, making a total of $801.51.
Do we have evidence of how much company expected to earn? No, no such evidence introduced. But there is one fact that bears on the question: they spent $801.51 going to the convention, so they must have thought they would make more than that on the stove. So if we give them only $801.51, we give them $0 for lost profits, and we know they thought they would make more. So isn't this undercompensatory? But this is what the court does award.
Reliance vs. expectation
Two ways to view the matter:
(1) The court is not using the expectation measure, it is using a different measure, the reliance measure.
(2) the other theory: the court still has the goal of awarding expectation damages, but this is another case in which it is hard to measure the damages accurately. One measure is: how much did the P spend in reliance on the K? We can infer that the benefits they P thought to gain were at least that much. We can take this as a reasonable estimate of the minimum to be gain as profits and award that much.
Security Stove
Let's apply the expectation measure. Where would the P be if the K had been performed? Stove would have been delivered and shown; there would have been some future sales; it would have had to pay expenses. Where is P as a result of the breach? No sales from the show; all the same expenses. Assume the company properly mitigated. What should we give P? The profit it would have made. How much would this be? Hard to say. Damages not proved with adequate certainty.
Even under the liberal rule about estimating damages--absolute certainty not required, just need some evidence to get to jury--this would be the result: we don't have any track record.
Reliance as a measurement proxy
The language of Security Stove supports the second--measurement proxy--theory. court does not talk as if it is rejecting the expectation measure: "But this is merely a general statement of the rule . . ."; general rule not inconsistent with awarding reliance damages. court should chose whatever method of estimating damages "best achieves the fundamental purpose of compensation."
Sounds like the court is sticking with the expectation measure and using a reliance measure only as a way of estimating damages.
Precontractual expenses
There is evidence in what they do, as opposed to say, that they are really pursuing the goal of awarding expectation damages.
The treatment of precontractual expenses provides such evidence. Reliance damages are supposed to put the non-breaching party back in the same position the party was before the K was made--the court undoes the K. Would Security Stove have saved $801 if there had been no K? No, they spent $270 prior to making the K. So on a strict application of the reliance measure, we should give them only $531.50. But this is not what the court does.
Mixed results on precontractual expenses
Anglica TV illustrates what is probably the most common result: if lost profits are too hard to measure, then one can get reliance expenses--including expenses incurred prior to making the K. The rationale: these expenses are relevant to estimating profits.
Losing contracts
The courts' treatment of breaches of Ks that would have produced a loss also supports the idea that the courts are really pursuing the goal of awarding expectation damages and using reliance considerations as a way to estimate profits.
An example: Suppose the stove company spend $800 on the show and the defendant proved that they would only have made $600 in gross profit from the show. What the court does here is award $600. This is the situation in Albert v. Armstrong Rubber. Profits would be hard to measure, so the court uses expenses made in reliance to estimate profits. But these expenses were greater than the profit that would actually have been made. The court holds that the breaching seller can deduct any amount it can show the P would have lost. The best explanation of this rule is that the courts are really using an expectation rule; this allows us to consider the position the P would have been in if the contract had been performed. And here we see that P would have had losses. If we were merely using a reliance measure, we would not consider what would have happened had the contract been performed.
Reliance vs expectation
The cases so far suggest that the courts only use reliance considerations as a way of estimating damages when it is difficult to make the normal expectation calculation of damages.
Hoffman v. Red Owl Stores
Here the contract was to give Hoffman a Red Owl grocery store franchise. The parties never reached final agreement on the deal. At least that is what the jury found. Now if there is no final agreement, there is no contract. If there is no contract, there is no liability for breach of contract. So is Red Owl liable? Yes. For what? Reliance damages. On what theory? Restitution? Tort? No, the cause of action was based on promissory estoppel; this is a suit to enforce a promise that was relied on.
Reliance as the basis for a separate cause of action
Remember that traditionally there is no cause of action for injuries sustained merely because you relied on someone else. The someone else has to violate a legal duty before you have a cause of action. Did Hoffman have any traditionally recognized cause of action? No. None in contract, tort, or restitution.
Contract: no contract. Tort: no tort committed. Restitution: no benefit conferred by Hoffman on Red Owl.
So what did the court do? It let's Hoffman sue on a new theory--suit for breach of promise that has been relied on.
Reliance as a substitute for technicalities
Reliance considerations can be used–via promissory estoppel--as a substitute for consideration. Promises on which one relied could be enforceable without consideration. Compare the use in Red Owl. We are using reliance as a substitute for agreement--the parties never reached an agreement--there was no offer and acceptance, but now we say that does not matter, we will enforce the promise anyway. It sounds like we are binding parties that had not agreed to be bound. This was how Red Owl was generally perceived when it came out. It was thought inconsistent with freedom of contract.
The black letter rule is §90:
A promise is binding which the promisor
(1) should reasonably expect to induce reliance; (2) which does induce such reliance; (3) which it would be unjust not to enforce.
The damages available
The generally accepted wisdom is that if you sue on a promissory estoppel theory, what you get as damages are reliance damages. I would be suspicious of this however. To begin with, you are not limited to reliance damages when you use promissory estoppel to make a promise enforceable without consideration. Then you can get the full expectation award. Second, there are very few cases using promissory estoppel as a substitute for offer and acceptance. So we cannot be sure what the pattern really is.
Why a reliance award in Red Owl?
There is another reason for a reliance award in Red Owl beside its use of promissory estoppel. Suppose we wanted to give Hoffman expectation damages. Then we have to put him in as good a position as he would have been had the contract been performed. What would he have then? A valuable franchise. How much is that worth? We have to prove its value with reasonable certainty. That might not be impossible; we could look at what Red Owl stores do in similar locations. But we might have trouble here. So what might we do? Fall back on reliance expenses as a low end estimate of the value of the store--if Hoffman was willing to spend so much on getting the franchise, it must be worth at least that much. This is what we said the court did in Security Stove.
Another theory to award reliance damages in Red Owl
We can reach the result of awarding reliance damages in another way. We are holding Red Owl liable because Hoffman relied on their promise to give him the franchise. They intended this promise to induce reliance. What were they saying to Hoffman? "You won't lose by relying on our promise." Reasonable to interpret them as saying that. So what should their liability be? They have to make good on their claim that Hoffman won't lose--i.e., they have to compensate for what he spent in reliance.