Tuesday Tips: Yehuda Adar & Efi Zemach on Reliance as Promise

Reliance as Promise

Yehuda Adar & Efi Zemach

Reliance as Promise (63 Am. Bus. L. J., forthcoming)

When courts award reliance damages as a standalone remedy for breach of contract, what precisely are they doing, and why? For decades, this seemingly straightforward question has sparked a surprisingly unsettled debate. Fuller and Perdue’s familiar taxonomy of contractual interests – expectation, reliance, and restitution – has long provided the conceptual framework for the law of contract remedies. Yet the theoretical foundations of their cornerstone remedy – reliance damages – remain elusive.

In Reliance as Promise, we argue that the dominant justifications for awarding reliance damages as a standalone remedy – as opposed to protecting reliance incidentally when calculating expectation damages – fail to provide a coherent explanation for courts’ established practice of awarding reliance damages when expectation damages are unavailable, unproven,  or simply not pursued by the aggrieved promisee. Highlighting these deficiencies, we suggest a different way of understanding this practice. Our core claim is simple: reliance damages are best understood as a means of enforcing an implied promise that every contracting party implicitly undertakes upon entering a contract. More concretely, when parties form a contractual agreement, they tacitly promise each other that, if the worst occurs and one of them breaches in a way that leads to the total failure of the contractual plan, the breaching party will reimburse the other for their reasonably foreseeable investment in the contract up to the point of breach.

Prevalent Theories of Reliance Damages

Consider a familiar scenario. A party enters into a contract and, relying on the other party’s future performance, incurs significant costs: it may spend money and resources in preparation for performance or in actual performance, or it may forgo alternative opportunities to earn a profit. The counterparty then commits a total breach, rendering any future performance futile. The injured party cannot establish expectation damages with sufficient certainty and thus seeks to recover her reliance costs, instead. Courts will most often grant such recovery. Under American law, for example, §349 of the Restatement (Second) of Contracts explicitly recognizes reliance damages as an alternative measure of recovery. But why? 

Two dominant approaches to this puzzle have emerged in the literature: The first, which we call pure reliance, treats the reliance interest as a normatively independent interest of the victim of the breach. On this view, the law protects reliance because doing so reinstates the promisee in her pre-contract position, thereby making her whole. Famously associated with Fuller and Perdue, this approach grounds the reliance interest in corrective justice. The second approach, which we call instrumental reliance, rejects the pure reliance theory. It treats reliance damages as merely a substitute or approximation for expectation damages. When expectation damages are difficult to prove, reliance damages serve as a minimal approximation of what the promisee would have gained from performance. On this view, reliance damages are, in essence, nothing more than a form of expectation damages.

Critique: The Limits of Existing Accounts

The pure reliance approach is problematic both normatively and descriptively. Descriptively speaking, if reliance were truly independent, why is it routinely capped by the expectation interest? If protecting reliance were truly an independent objective of contract damages, there would be no reason to limit the reliance award by reference to the expectation measure. Normatively, attempts to ground reliance in corrective justice encounter serious difficulties, particularly in cases of losing contracts, where awarding reliance damages would give the promisee more than the value of the promise – resulting in a windfall rather than a restoration of the status quo ante.

Instrumental reliance, by contrast, aligns more comfortably with doctrinal features such as the expectation cap. Yet it falters precisely where reliance damages are most prominent in practice: in cases where expectation damages cannot be established with sufficient certainty. We contend that, in these circumstances, treating reliance as a mere approximation of the expectation interest is unconvincing. If the value of the expectation interest is unknown, there is no reason to assume that the plaintiff’s actual reliance costs – which are contingent and unpredictable – would necessarily approximate it. Indeed, reliance damages may overcompensate or undercompensate, making them a rather imperfect proxy for expectation damages.

To bridge this gap, instrumental accounts often rely on additional assumptions—such as the notion that most contracts are profitable or that reliance expenditures correlate with expected gains. However, as we demonstrate, these assumptions areunfounded. This is underscored by the fact that courts rarely, if ever, refer to the expectation interest when awarding reliance damages as a standalone remedy.

Reliance as Promise

But if courts are not genuinely attempting to approximate expectation in these cases, what are they trying to achieve instead? We suggest that, when courts award reliance damages, they are simply enforcing a contractual promise – one that is rarely articulated, yet deeply embedded in the structure of contractual relations. When parties enter into a contract, they create more than just primary obligations. They may also undertake secondary remedial commitments (e.g., to pay liquidated damages upon breach). One such obligation is, arguably, the secondary duty to cover the other party’s reasonably foreseeable reliance investment, if the contract collapses due to breach. This is neither an express promise, nor one inferred from particular facts (i.e., implied in fact). Rather, we argue, it is an obligation implied in law – a background default term that attaches automatically to every contractual relationship, unless the parties indicate an intention to deviate from it. We call this conception reliance as promise.

On this view, reliance damages are neither a tort-like restoration of the status quo ante nor an instrument for protecting a promisee’s primary contractual expectancy. They are simply the embodiment of a specific secondary contractual promise – the “promise to reimburse”. Most importantly, the promise to reimburse is independent. The right to recover one’s reliance costs does not depend on proving, imitating or approximating the expectation interest. It stands on its own promissory footing, alongside the primary promise to perform.

Rethinking the Expectation–Reliance Relationship

One immediate implication of this account is that the familiar hierarchy between expectation and reliance requires rethinking. Under the instrumental approach, reliance is subordinate, serving expectation. In contrast, under pure reliance, it is often treated as superior to the expectation interest. Reliance as Promise rejects both hierarchies. Expectation and reliance are parallel manifestations of the same underlying idea: contractual commitment. Each reflects a distinct promissory “expectation” – one concerning the protection of proven gains from performance, the other concerning protection against harmful and reasonably foreseeable reliance on a contract that has failed in a manner making the measurement of those gains impossible.

This perspective also sheds light on the controversial question of the limits of recovery. Why are reliance damages often capped by the expectation interest? Under our approach, the answer is not a conceptual necessity, but an interpretive default. We argue that in most cases, reasonable parties would not intend to assume liability exceeding the risks defined by their secondary (remedial) promissory obligations. Hence, a cap at the expectation level often reflects a plausible reconstruction of the parties’ hypothetical intentions. Importantly, under reliance as promise, this conclusion is not inevitable. In typical cases of unverifiable expectation – as in contracts involving speculative gains or complex contingencies – the expectation measure may yield a relatively low likelihood of suit, inadequate compensation for the promisee, or insufficient deterrence of breach. Predicting these risks ex ante, parties may well prefer granting the promisee an option to obtain reliance damages even if these may happen to exceed their expectation interest. In such cases, an uncapped reliance recovery may better reflect the parties’ shared ex-ante preferences for a more robust assurance of their reliance costs. The promise to reimburse, like any promise, is context-sensitive. The notion of reliance as promise is and should be able to accommodate both capped and uncapped reliance awards.

Initial Empirical Support

Our central claim is thus that awarding reliance damages reflects an unspoken understanding of the courts that awarding reliance damages may justified on a promissory basis. Underlying this conjecture is the belief that implying such a promise reflects a prevailing moral intuition or common sense which, in turn, has shaped the law of contract damages. To test whether our promissory account resonates with the commonsense intuitions of ordinary people, we conducted a preliminary empirical study. Participants were presented with a simple scenario involving a breached brokerage contract,and were asked whether the broker – in the hypothetical, the aggrieved promisee relying on the contract – should be allowed to recover her full reliance expenses, even when these exceeded the agreed contractual fee.

A substantial majority – over 70% – answered “yes”. More strikingly, among those respondents, roughly 80% justified their answer by reference to the parties’ ex ante understandings, rather than by reference to external principles such as fairness or deterrence. While modest in scope and complexity, these initial findings suggest that ordinary moral intuitions align more closely with a promissory account of reliance damages, than with either pure or instrumental reliance. People tend to view reimbursement as an implicit contractual understanding and, consequently, see the reliance interest as both promise-based and independent of the expectation interest.

Why This Matters

The idea of reliance as promise offers both explanatory and normative insights. It makes sense of an entrenched judicial practice that has long appeared anomalous – namely, awarding promises reliance damages as of right, independently of the expectation interest. Rather than viewing such awards as imperfect approximations or doctrinal compromises, they should be understood as a straightforward method of enforcing a distinct contractual undertaking. As the empirical evidence suggests, the commonsense moral judgements of ordinary people – which the literature indicates courts often seek to follow and enforce – provide strong normative and explanatory power for the practice of awarding reliance damages as a standalone contract remedy. 

Conclusion

Reliance damages have long occupied an uneasy place in contract theory – acknowledged in doctrine, yet inadequately explained. By reframing the protection of contractual reliance as the enforcement of an implied promise to reimburse, we aim to resolve this tension once and for all. Our proposal is intentionally modest: it does not discard the existing taxonomy of contractual interests, nor does it diminish the highly important role of the expectation interest. Our account does, however, highlight something that has been overlooked for too long: behind the practice of awarding reliance damages lies a simple, deeply ingrained promissory norm, binding contracting parties to reimburse each other, if things fall apart due to breach.

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About the Authors

Yehuda Adar is the leading remedies expert in Israeli academia. His primary areas of research include civil remedies, contract law, consumer law, tort law, comparative law and private law theory. His prior work on these subjects was published in Canadian, European, Israeli, and U.S. law journals (such as the Boston College Law Review, the Georgetown Law Journal, and the University of Illinois Law Review). He is the primary co-author of the leading Israeli treatise on contract remedies, which has been cited over 1,000 times by the judiciary. Adar served as a member of the Israeli Standard Form Tribunal, Editor-in-Chief of the Haifa Law Review, and expert witness in Arbitrations conducted under the London Court of International Arbitration and the International Chamber of Commerce. He has also acted as a referee for peer-reviewed journals, including the Yale Law Journal.

Efi Zemach is a legal scholar whose work focuses on contract law and contract theory. He holds a Ph.D. in Law from The Hebrew University of Jerusalem, and is Assistant Professor of Law at Netanya Academic College. Widely regarded as a leading expert in Israeli contract law, Efi is also the author (with Gabriela Shalev) of “The Law of Contracts”, a leading academic treatise in the field.