If there has been a breach of a contractual obligation, under California law, the non-breaching party is entitled to recover damages. Among the several types of recoverable damages are “reliance damages.” These are monetary amounts or their equivalents that have been paid by the nonbreaching party in preparation for honoring the contract; amounts expended “on the faith of the contract” as the judges phrase the legal issue. These reliance damages also go by the name “out-of-pocket” damages and are provided for by California Civil Code, §3300. During a jury trial, juries are provided instruction with respect to these reliance damages. For example, California Civil Jury Instruction Number 361 instructs a jury that:

“If you decide that [name of defendant] breached the contract, [name of plaintiff] may recover the reasonable amount of money that [he/she/it] spent in preparing for contract performance. These amounts are called “reliance damages.” [Name of plaintiff] must prove the amount that [he/she/it] was induced to spend in reliance on the contract.”

As an example, assume a contract is entered into for 100,000 bottles of freshly-brewed craft beer. In preparation to deliver the bottles of beer, the brewery purchases empty bottles, shipping boxes, hops and grains, and various other ingredients necessary to brew the beer. If there is a breach of the contract by the customer, the brewery will be able to assert all of these costs as reliance damages.

During the lawsuit and the trial, the breaching party may defend against these reliance damages by arguing, among other things, that any given expenditure was not necessary or that it was really for something else or that the nonbreaching party would have suffered that particular loss for reasons not related to the contract. Thus, in our brewery example, maybe the customer – let’s call them San Diego Gaslamp Bar & Tavern — can “knock down” some of the claimed damages by arguing that the bottles and shipping boxes did not need to be purchased or purchased at that particular time. Such issues generally require a jury’s factual determination.

A good case example illustrating these legal points is the old case of Buxbom v. Smith, 23 Cal. 2d 535 (Cal. Supreme Court 1944). That case involved a pair of contracts whereby Smith, the owner of a chain of grocery stores, engaged Buxbom to publish and distribute a small newspaper similar to a “shopping news” handbill. Under the contracts — one for publishing and one for distribution — Smith was to receive free advertising for his stores but the paper could charge other merchants for advertising. Smith was to pay various agreed-to prices per paper published and distributed.

Shortly after making the contracts, Smith back out and hired a different company. Smith and the other company ended up hiring away Buxbom’s staff to a rival newspaper publisher.

Buxbom eventually sued for breach of contract and other causes of action. At trial, Buxbom claimed that was entitled to $4,000 “… for the loss of plaintiff’s trained organization, supervisors, good will and for general damages to plaintiff’s business.” The facts showed that, when the contracts were made, Buxbom was the owner of a publishing and distributing business that distributing handbills, newspapers, and advertising sheets. In other words, Buxbom was already in business. Supposedly, after making the contracts with Smith, Buxbom began soliciting advertising from other merchants in the designated area, made arrangements to enlarge his distributing crews (high school students), employed additional supervisors, mapped out districts and routes for circulation, and began preparations to handle the distribution of 40,000 copies of the Smith-contracted newspaper. Smith challenged the evidence arguing that these were not proper damages because Buxbom did not make expenditures specifically related to the Smith contracts. The trial court awarded victory to Buxbom.

When reviewing the case on appeal, the California Supreme Court agreed that reliance damages are normally allowed in a breach of contract case. However, here the court rejected the breach of contract claim for the reasons argued by Smith. Since Buxbom already had trained staff, supervisors, and employees in place for the publishing portion of the deal, Buxbom did not prove that those expenditures were related specifically to the Smith contracts. The same was true with respect to the distribution contract. Buxbom already had high school students available to distribute his other papers and advertising sheets and, in any event, having students available for delivery involved no cost. In other words, Buxbom did not provide any evidence that he actually hired new staff under either contract or otherwise expended identifiable amounts of money. As such, the Court rejected Buxbom’s damage claim based on breach of contract. Note, that the court did affirm the judgment in favor of Buxbom on other grounds.

Contact San Diego Corporate Law

For more information, contact experienced and skilled business attorney Michael Leonard, Esq. at San Diego Corporate Law. Mr. Leonard has the experience to draft your contracts properly and to review contracts you are being asked to sign. Legal counsel is essential to protect your business from predatory and dangerous contracts that are prepared by others. Contact Mr. Leonard by email or by calling (858) 483-9200. Like us on Facebook.

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