One component of damages for breach of contract is the amount expended by the non-breaching party toward performance of the contract. This measure of damages is often referred to as “reliance damages.”
The courts recognize limitations on reliance damages awards, such as proof that the plaintiff would have suffered a loss even if the defendant had fully performed. Thus, when calculating reliance damages, courts allow a defendant to reduce the plaintiff’s recovery by the amount of money the plaintiff would have lost if the contract had been performed. Until recently, the appellate courts had not clearly defined the parties’ respective burdens of proof with respect to this limitation.
In Agam v. Gavra, several individuals entered into a partnership agreement to develop real property shortly before the housing market crashed. Two of the partners breached the partnership agreement, which prevented the partnership from developing the real property. Four years after the partnership purchased the real property, it resold the undeveloped lots and lost over a million dollars on the failed project.
The breaching partners argued that the non-breaching partners would have lost money on the partnership agreement even if it had not been breached. The trial court assigned the burden of establishing this claim to the breaching partners. The breaching partners appealed, arguing that the non-breaching partners had the burden of proving they would not have suffered a loss but for the breach.
The appellate court affirmed the trail court’s ruling, holding that, “in the context of reliance damages, the plaintiff bears the burden to establish the amount he or she expended in reliance on the contract. The burden then shifts to the defendant to show (1) the amount of plaintiff’s expenses that were unnecessary and/or (2) how much the plaintiff would have lost had the defendant fully performed (i.e., absent the breach). The plaintiff’s recovery must be reduced by those amounts.”
This rule requires the breaching party to prove what would have happened in a hypothetical situation, which can be a very difficult burden to meet.