Reliance, restitution and the Code's measures

Kansas City, September nineteen twenty six. A stove manufacturer has built a furnace with a new combination oil and gas burner, and it wants to show it at the American Gas Association convention in Atlantic City in October, because a company it hopes to interest will be there. It books a booth.
It is too late for freight, so it writes to the express company, explains the exhibit and the date, and is told when the shipment must be collected to arrive by the eighth of October. The company collects on the second.
The shipment is twenty one numbered packages. Twenty arrive. The twenty first, the gas manifold, the part that makes the burner work, is found a week later in the express company's over and short bureau in St. Louis. The president waits in Atlantic City until the convention closes. The manifold never comes. He packs up and goes home. The company sues for the express charges, the freight home, the fares and hotel, the booth rent, and the time of the two men who went.
Eight hundred and one dollars and fifty one cents.
So here is the question. The stove company cannot show that it would have sold a single furnace. It told the court the exhibit was not sent there for sale but primarily to show. Under last lecture's rule, its lost profits are unprovable. Does it get nothing but the express charges? Think about it before I go on, because the answer is the second measure of damages, and it exists for exactly this case.
And now the question I keep asking. What exactly did these people promise each other? Carriage within a reasonable time, with knowledge of why the time mattered. Expectation asks what the plaintiff would have had. Today's first measure, reliance, asks what the plaintiff spent because he trusted the promise. The second, restitution, asks what the defendant received. And the Code writes both expectation and its substitutes into statute for the sale of goods.
Here is the first line for the board. Where expectation cannot be proved, or the court thinks it inappropriate, the injured party may recover his reliance interest, the expenditures made in preparation for performance or in performance, less any loss the defendant proves the plaintiff would have suffered had the contract been performed. Reliance puts the plaintiff where he was before the contract. It is capped, in effect, by the expectation he cannot prove, because a defendant may show the bargain would have lost money.
Second line. Restitution puts the defendant where he was before the contract, by making him give back what he received. It is available to a party injured by a total breach, and, as you saw with the farm labourer in Module Nine, to a party who has himself broken the contract after part performance. It is measured by the value of the benefit conferred, and for the breaching party it is capped at the contract rate.
Third line, the Code. A buyer whose seller fails to deliver may cover, buying substitute goods in good faith and without unreasonable delay, and recover the difference between the cost of cover and the contract price, or if he does not cover, the difference between the market price when he learned of the breach and the contract price, plus incidental and consequential damages.
A seller whose buyer refuses the goods recovers the difference between the market price at the time and place for tender and the unpaid contract price. And if that is inadequate to put the seller in as good a position as performance would have done, the seller recovers the profit he would have made from full performance.
Now the case. Security Stove against American Railway Express, Kansas City Court of Appeals, nineteen thirty two, Judge Bland. The express company said the damages were unrecoverable in principle. The plaintiff is endeavoring to achieve a return of the status quo in a suit based on a breach of contract. Instead of seeking to recover what he would have had, had the contract not been broken, plaintiff is trying to recover what he would have had, had there never been any contract of shipment.
The expenses, it said, would have been incurred in any event.
The court agreed that was the general rule, and made the exception. It is no doubt the general rule that where there is a breach of contract the party suffering the loss can recover only that which he would have had, had the contract not been broken.
But this is merely a general statement of the rule and is not inconsistent with the holdings that, in some instances, the injured party may recover expenses incurred in relying upon the contract, although such expenses would have been incurred had the contract not been breached.
Here is the reasoning. There were no profits contemplated. The furnace was to be shown and shipped back to Kansas City. There was no money loss, except the expenses, that was of such a nature as any court would allow as being sufficiently definite or lacking in pure speculation.
Therefore, unless plaintiff is permitted to recover the expenses that it went to, which were a total loss to it by reason of its inability to exhibit the furnace and equipment, it will be deprived of any substantial compensation for its loss. The law does not contemplate any such injustice.
And the booth rent, paid before the shipping contract was made? The court allowed it. Plaintiff arranged for the exhibit knowing that it could call upon defendant to perform its common-law duty to accept and transport the shipment with reasonable dispatch. The whole damage, therefore, was suffered in contemplation of defendant performing its contract, which it failed to do, and would not have been sustained except for the reliance by plaintiff upon defendant to perform it. Foreseeability did the work.
The express company knew what the shipment was for.
You have already seen reliance chosen for a different reason. In Sullivan against O'Connor the patient's expectation could have been estimated, but the court thought it harsh against a doctor found not negligent, and applied a reliance measure instead, recovering her expenses, the worsening of her condition, and the pain of the unnecessary third operation.
The tendency of the formulation, that court said, is to put the plaintiff back in the position he occupied just before the parties entered upon the agreement, to compensate him for the detriments he suffered in reliance upon the agreement.
Now restitution, briefly, because Module Nine did the work. The farm labourer in Britton against Turner, who left after nine and a half months of a year's service, could not sue on the contract he had broken. He recovered the reasonable worth of his labour, less the farmer's damages, because the farmer had received it. That is restitution for the party in breach. For the party injured by a total breach, restitution is an alternative to damages.
He may give back what he got and take back what he gave, or its value, and he will choose it when the bargain was a bad one for him, because restitution is not capped by the contract price.
Now the Code, and a boat. New York, nineteen seventy. A couple contracts to buy a new boat of a specified model for twelve thousand five hundred and eighty seven dollars, and puts down four thousand two hundred and fifty so the dealer will get it from the manufacturer at once. Six days later their lawyer writes rescinding. Mr. Neri is going into hospital and cannot pay. The boat has already arrived. The dealer keeps the deposit.
Four months later it sells that boat to someone else for the same price. The couple sue for their deposit.
Under the common law the dealer would have had nothing to deduct. The boat was sold at the contract price. No loss. The trial court gave the dealer the five hundred dollars that the Code allows a seller to keep from a deposit absent proof of more, and returned the rest. The Court of Appeals, in Neri against Retail Marine, nineteen seventy two, reversed, because the dealer had proved more, under a section the lower courts ignored.
Section two seven oh eight, subsection two. If the measure of damages provided in subsection one is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit, including reasonable overhead, which the seller would have made from full performance by the buyer, together with any incidental damages.
The dealer had proved that its profit on the sale would have been two thousand five hundred and seventy nine dollars, and that storage, upkeep, finance charges and insurance while the boat sat unsold came to six hundred and seventy four.
Why is the resale no answer? The court quoted Dean Hawkland. If a private party agrees to sell his automobile to a buyer for two thousand dollars, a breach by the buyer would cause the seller no loss if the seller was able to sell the automobile to another buyer for two thousand. But the situation is different with dealers having an unlimited supply of standard-priced goods.
If the dealer has an inexhaustible supply of cars, the resale to replace the breaching buyer costs the dealer a sale, because, had the breaching buyer performed, the dealer would have made two sales instead of one.
The lost volume seller. The buyer's breach depletes the dealer's sales to the extent of one, and the measure of damages should be the dealer's profit on one sale. The couple recovered their deposit less three thousand two hundred and fifty three dollars, the dealer's lost profit and incidental expenses. Not the attorneys' fees, which the Code does not treat as incidental damages. Expectation, written into statute, and applied to the dealer who would have made two sales.
Now the buyer's side, from the sections themselves. Section two seven twelve. After a breach the buyer may cover by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages, but less expenses saved in consequence of the seller's breach.
And if the buyer does not cover, section two seven thirteen. The measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages. Cover is the practical measure and the mitigation rule in one. A buyer who can buy substitute goods is expected to, and is made whole for the difference.
Put the measures side by side. Expectation, the value of performance. Reliance, the cost of trusting the promise, chosen where expectation cannot be proved, as with the furnace, or where the court thinks it harsh, as with the nose. Restitution, the return of what the defendant received, chosen by a defaulting party who has conferred a benefit, or by an injured party who made a bad bargain.
And the Code, which gives buyers cover and market damages, and sellers market damages or, where that would not make them whole, lost profit.
Now let's change one fact. The express company proved that the stove company's furnace had a design defect, that no gas company would have bought it, and that the trip to Atlantic City would have been a waste even with the manifold. Choose an answer before I go on.
Then the reliance recovery shrinks toward nothing. Reliance is an alternative to expectation, not an escape from it. A defendant who can prove that the plaintiff would have lost the money anyway, because the bargain was a losing one, may deduct that loss from the reliance claim. The Security Stove court allowed the expenses because there was no contention that the exhibit would have been entirely valueless. Prove that it was, and the expenses were not wasted by the breach.
They were wasted by the plaintiff's own venture.
Change one fact again. The boat dealer had ordered that specific boat only because of the couple's contract, had no other stock of the model, and could not have obtained a second one that season. Choose.
Now the dealer is not a lost volume seller and subsection one does its job. The resale at the contract price gives the dealer the price it bargained for, the market damages are zero, and it recovers only the incidental costs of holding the boat until the resale. Hawkland's private seller of a single car is the model. The lost profit rule of subsection two applies only where the seller could and would have made both sales.
Change one fact a third time. The patient in Massachusetts had been a dockworker, not an entertainer, and the surgery had been an ordinary commercial repair to a machine part rather than to a person. Choose.
Then expectation returns as the measure, and Sullivan tells you why. The court leaned on Fuller and Perdue's observation that expectation is at its strongest when the promises are made in a business context, when they have to do with the production or distribution of goods. A machine promised to a specification and delivered short of it is Hawkins's own analogy, the warranty case, with damages measured by the difference in value.
The reliance measure in Sullivan was a concession to the medical context, not a general rule.
Here is what people get wrong here, and why it is tempting. The first mistake is thinking reliance lets a plaintiff escape a bad bargain. It does not. The defendant may prove the loss the plaintiff would have suffered anyway. The second mistake is forgetting the lost volume seller. A resale at the contract price does not make a dealer whole when the dealer could have sold two.
The third mistake is confusing restitution with reliance. Reliance measures the plaintiff's outlay. Restitution measures the defendant's gain. They coincide when the outlay went to the defendant, as with a fee, and diverge when it went elsewhere, as with a booth in Atlantic City.
Here is the rule, in one breath. Where expectation cannot be proved with reasonable certainty or is inappropriate, the injured party may recover his reliance expenditures, less any loss the defendant proves he would have suffered on performance, or restitution of the benefit he conferred, and a party in breach may recover restitution of the benefit conferred less the damages he caused.
Under the Code a buyer recovers cover or market damages plus consequential loss, and a seller recovers market damages or, where those would not put him in the position performance would have, his lost profit. Now, five questions.