Legal Definitions - Reliance damages

Reliance damages are a type of financial compensation awarded to a party who has suffered a loss because they reasonably trusted and acted upon a promise made by another party, and that promise was later broken.

The primary goal of reliance damages is to restore the injured party to the economic position they were in before they relied on the broken promise. It aims to cover the expenses or losses directly incurred as a result of acting on that promise, rather than compensating for the profits they might have gained if the promise had been kept.

These damages can be awarded in situations involving a breach of contract or under a legal principle known as promissory estoppel, where a promise is enforceable even without a formal contract because one party reasonably relied on it to their detriment.

• Example 1: Business Investment Based on a Promised Contract

  Imagine a small graphic design studio is promised a major contract to create all the branding for a new restaurant chain. Based on this firm promise, the studio invests in new, specialized software licenses and hires two temporary designers to handle the anticipated workload. A week before the project is set to begin, the restaurant chain unexpectedly cancels the contract, stating they decided to go with an in-house team instead.

  How it illustrates reliance damages: The graphic design studio could seek reliance damages to recover the money spent on the specialized software and the wages paid to the temporary designers. These were direct expenses incurred because the studio reasonably relied on the promise of the contract. The damages would aim to put the studio back in the financial position it was in before it made these investments, not to compensate for the potential profit it would have made from the branding project itself.

• Example 2: Relocation for a Promised Job Offer

  Consider a professional who receives a written job offer for a senior position at a company in a different state. Trusting this offer, they resign from their current job, break their apartment lease (incurring a penalty fee), and pay for a moving company to transport their belongings to the new city. Just days before their start date, the new company retracts the job offer, citing a sudden change in budget.

  How it illustrates reliance damages: The individual could claim reliance damages to cover the costs of breaking their lease, the moving expenses, and potentially lost wages for a reasonable period while they search for new employment. All these expenses and losses were directly incurred because they reasonably relied on the company's promise of employment. The goal is to compensate them for the financial detriment suffered by acting on the promise, not for the salary they would have earned from the new job.