Reliance as Proxy

Abstract American and German contract law give the victim of a contract breach the presumptive right to recover reliance damages when expectation damages cannot be measured directly. Using reliance damages as proxy, however, introduces a potential distortion. A promisee, suffering no harm, may nevertheless seek reliance damages. A breaching party can avoid this by proving that the contract would be a losing one, but she typically is in a poor evidentiary position. The result is awarding reliance damages, which have long been thought as less efficient than expectation damages. This paper shows that using reliance damages as a proxy for expectation damages does introduce an inefficiency, but not always the one usually thought. The prospect of paying reliance damages gives a potentially breaching party an incentive to perform when there is a losing contract. This can introduce an underreliance problem. The promisee invests too little in the contract to ensure that the promisor does not perform inefficiently. In fact, this effect is in force under reliance damages regime in general. Furthermore, introducing a possibility of losing contract shows that expectation damages in general is not as inefficient as usually thought in terms of reliance decision.