Examining the Foundations of Contract Law: A Précis of Fuller and Purdue's Reliance Interest Framework - Part I

Kedar Manoj Ammanji |

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Introduction

This piece opens a series of précis on foundational works in private law. This and the next précis analyse the Reliance Interest framework developed by Lon L. Fuller and William R. Purdue in their seminal two-part articles - Reliance Interest in Contract Damages I and II, in two-parts.

Fuller and Purdue articulate three key purposes which are pursued while awarding contract damages - (a) restitution interest; (b) reliance interest; and (c) expectation interest; Restitution interest can be termed as the prevention of unjust enrichment, where the object is to prevent gain by the defaulting promisor at the promisee’s expense. Reliance Interest is awarded to a plaintiff to undo the harm caused to him by undertaking actions relying on the defendant’s promise, where the object is to put the plaintiff in the position he was in before the promise was made. Expectation Interest may be awarded to put the plaintiff in as good a position as he would have occupied had the defendant honoured his promise, with the object of giving the promisee the expected value of the promise so created. 

Fuller and Purdue make two-central claims. The first, an analytical and comparative claim that common law courts, despite doctrinally focusing on, and claiming to protect people’s expectations were in fact safeguarding people’s reliance expenditure. The second, a related and normative claim, that reliance interest is the appropriate object of judicial protection, and not expectation interest.[1] This and the following precis examine both these claims through Fuller & Perdue’s Part I and Part II.

Why Should the Law ever Protect Expectation Interest?

Unlike reliance or restitution, which are anchored in actual losses suffered or benefits conferred, the expectation interest concerns a projected gain—the value the promisee would have received had the contract been performed. Because it is tied to a hypothetical advantage rather than a concrete detriment, its justification is less straightforward and demands closer scrutiny.

Fuller and Purdue argue that at first glance, protecting expectation may appear to compel performance of a promise even where the promisee has sustained no measurable loss. This gives rise to the concern that the law may be enforcing what are essentially gratuitous transfers. Such a result would be difficult to justify unless the act of promising itself were regarded as sufficient grounds for legal enforcement. That position, however, is rejected. Not every promise warrants enforcement simply by virtue of having been made; the role of contract law is not to mirror moral obligation without regard to context.

Instead, support for protecting the expectation interest is found in commercial settings where promises are integrated into broader economic plans. While formally distinct from reliance, the expectation interest often reflects structured investment, coordination, and planning. In such environments, expectations are not idle hopes but practical tools that underpin business relationships and market activity. Enforcement in these cases serves to preserve predictability, enable long-term cooperation, and ensure transactional efficiency. The idea that the expectation interest should be protected because of a moral duty to keep promises is also considered and set aside. The law is not seen as an instrument for enforcing moral norms per se but as a framework that facilitates economic exchange and legal stability. The objective is not to penalise breach in moral terms but to uphold the reliability of contractual arrangements in a functioning market. In conclusion, the protection of the expectation interest is justified not on moral grounds but because it advances essential legal and economic purposes. In particular, it is argued that expectation damages are often the most effective means of supporting the integrity of contracts in complex systems, where reliance or restitution alone may fail to capture the full value of performance.

Fuller and Purdue advance a two-part justification for preferring expectation interest over reliance interest as the operative measure in contract law. First, that requiring plaintiffs to prove reliance in every case would often impose an unmanageable evidentiary burden. Reliance may be indirect, widely distributed over time or entangled with other decisions making it difficult to isolate and quantify with precision. In such cases, strict reliance as a standard could lead to either under compensation or speculative and inconsistent outcomes. Second, that expectation interest often serves as a practical substitute for reliance interest especially in commercial contexts where the value of the promise reflects the underlying reliance that prompted the contract. Expectation interest must be protected not because it guarantees a gain, but because it allows courts to dispense with complex and uncertain inquiries into reliance while still safeguarding the parties’ economic positions.

The Divergence of Measure and Motive and the Problem of Mixed Motives

Courts do not always enforce contracts with a single purpose or interest in mind. They may protect multiple interests—expectation, reliance, or restitution—depending on the case. Even when one interest is the main reason for intervention, courts might choose a different measure of recovery for practical reasons like certainty and ease of application. This is not incidental, but often a deliberate and necessary compromise within the structure of contract law. This challenge of identifying the true motive behind contract enforcement has existed since early legal history. When a plaintiff provides a benefit to the defendant based on a promise of payment, but the defendant fails to pay, the plaintiff can sue for the agreed price. Courts have historically intervened in such cases to prevent unjust enrichment, as the defendant’s enrichment at the plaintiff’s expense is the sine qua non for judicial interference. However, while the rationale for intervention is to prevent unfair gain, the law has always measured recovery based on the promised price, aligning with expectation damages. The use of expectation as a remedial proxy allows courts to avoid the often-intractable difficulties of proving reliance with precision especially in complex or long term transactions. [2]

For instance, a plaintiff may undertake performance partly in reliance on a contract and partly for independent, self-interested reasons. In such cases, identifying the ‘real’ motive behind the action becomes indeterminable. Thus, courts are reluctant to disentangle these motives and adopt a default rule - awarding expectation damages. Fuller & Perdue argue that this conflict is not a flaw in the system, but a structural feature of contract law, for ease of application and coherence in adjudication. Thus, the divergence of measure from the motive is a conscious decision to ensure workability and substantive fairness. They illustrate this further with reference to quasi-contract and restitution cases, where recovery is granted to prevent unjust enrichment, yet the damages awarded correspond to the contract’s terms rather than the actual enrichment conferred.[3] This practice reflects the courts’ preference for certainty and standardised outcomes even at the cost of conceptual clarity. While the measure of expectation interest may obscure the rationale for recovery, it reflects a judicial preference for rules that are both intelligible and easy to apply across cases.  Thus, this divergence between the measure and motive is not an oversight, but a deliberate accommodation of mixed motives, evidentiary limitations and institutional constraints.

Reliance Interests vis-a-vis Other Interests

Fuller and Perdue reiterate that reliance interest is not always coterminous with actual expenditures made by the promisee in anticipation of performance. Rather, it encompasses any detriment suffered by the promisee as a result of changing their position in reliance on the promise. In some cases, recovery based on reliance may exceed or fall short of the expected interest depending on the loss suffered. For instance, a plaintiff may spend more in reliance of the promise than the value promised in return. In such cases, enforcing the expectation interest alone would undercompensate the promisee. On the contrary, a plaintiff may suffer minor reliance losses while having expected substantial gains from performance. While the two interests may sometimes converge in practice, they are analytically distinct both in its theorisation and application. They argue that reliance interest operates as a middle ground, both remedially and conceptually, between restitution and expectation. It captures more than restitution which is limited to the benefits conferred on the promisor, but less than the full benefit of the bargain protected under expectation. Enforcing reliance interest becomes particularly useful in cases where courts are reluctant to enforce the full expectation interest, either because the contract is incomplete or otherwise defective, but where the promisee has nonetheless altered their position in reliance.

In this context, Fuller and Perdue argue that reliance interest often provides the underlying justification for judicial intervention, even in cases where the measure of recovery is based on expectation. That is - courts may intervene to protect reliance of the promisee, but use the expectation as the measure. In such cases, reliance interests function not only as a remedial tool, but also as the underlying doctrinal rationale - a way of explaining why intervention is appropriate in the first place. Reliance interest is not a residual category, but has independent legal significance, especially in areas like promissory estoppel, where formal contract elements are absent but reliance renders the promise enforceable. In such cases, reliance does not merely supplement other interests, but is the primary basis for liability.

Should the Expectation Interest Set the Limit for Recovery?

Fuller and Perdue consider whether a plaintiff’s recovery based on reliance interest should be permitted to exceed the value of the promised performance i.e, the expectation interest. In most cases, the expectation interest will exceed the reliance interest, but situations may arise where reliance losses surpass the gain the promisee would have made had the contract been performed. Thus, should excess recovery be allowed? Fuller and Perdue draw a distinction between two forms of reliance: essential reliance and incidental reliance. Essential reliance includes performance or necessary preparations to perform the contract; Incidental reliance encompasses all the acts undertaken in anticipation of the performance but not required for enforcement.

It is contended that allowing recovery for essential reliance beyond expectation interest would, in effect, shift the plaintiff’s contractual losses to the defendant - a result viewed as unjustified unless the breach is particularly exceptional.[4] Thus, limitation by the objective value of the promised performance is regarded as appropriate. At the same time, incidental reliance is not limited.  It is not the price of performance. It is contended that even in such cases, recovery should be limited by the expectation interest - to prevent windfalls. The overarching principle can thus be articulated as - the promisee should not, through recovery, be placed in a better position than the performance would have yielded.

The Problem of Overlapping Items of Damage

Fuller and Perdue consider whether a plaintiff can recover for the same injury under different heads - i.e, claim both reliance based losses and expectation interest? The discussion between essential reliance and incidental reliance in the previous section is important to answer this question. Where a plaintiff seeks both gross expectation interest (contract price) and reimbursement for essential reliance - such a claim must be rejected as duplicative, since the reliance component is already embedded within the expectation measure. However, where only net expectation interest (lost profits) is claimed and reliance expenditures are separately identified, no duplication is said to occur, as reliance and profit are then distinct and non-overlapping.

In case of incidental reliance, the danger of overlapping is more subtle. Where damages are assessed with reference to the promisee’s gross receipts or anticipated returns, certain expenditures may already be implicitly included in the valuation of the contract price (expected benefit). If the same costs are then independently claimed, duplication results. Therefore, courts must assess whethe the value assigned to the performance already reflects the promisee’s expenditures. If so, additional reimbursement would unjustly allow the promisee to recover the same loss twice. Thus, while reliance and expectation interest may co-exist, courts must take care to prevent that there is no duplication through improper aggregation.

Reliance Interest and Hadley v. Baxendale

Fuller and Perdue analyse the relationship between reliance interest and the rules laid down in Hadley v. Baxendale. Fuller & Purdue cull out two propositions from this case -  first - not all losses caused by breach should be recoverable; second, that foreseeability serves as the standard for determining which losses are compensable. The test of foreseeability is not a fixed formula, but a principle that allows considerable flexibility. The “reasonable man” employed in the test is a judicial fiction often shaped by normative choices which courts recognise.

Then the question arises - where foreseeability would otherwise exclude damages, can reliance interest serve as a substitute limitation on recovery? Ihering’s theory of culpa in contrahendo (fault in the conclusion of a contract) is invoked to demonstrate cases where reliance damages are awarded despite the absence of a fully formed contract, or in cases of defective assent. In such cases, reliance is said to function as a moderate remedial device, falling short of full expectation interest but preserving justice by compensating the detrimental change in position.

Applying the propositions laid down in Hadley v. Baxendale to reliance interest - Fuller & Perdue argue that essential reliance is ordinarily foreseeable and need not be excluded on grounds of proximity or notice. However, incidental reliance includes acts undertaken outside the scope of performance and may require courts to limit recovery for such reliance on the ground of foreseeability. Courts tend to exclude categories of incidental loss - such as pre-contractual business reorganisation or hiring commitments, where they appear excessive in light of the scope of the impugned contract.

Thus, reliance interest, while narrower than expectation interest, is subject to conceptual constraints such as causation and foreseeability.

The Reliance Interest and the Restatement of Contracts

Fuller and Perdue critique the articulation of reliance interest in the Restatement of Contracts. It is argued that the Restatement fails to acknowledge reliance as a distinct and autonomous basis for recovery and limit the remedial framework bases to just restitution and expectation. Such an omission is both conceptually and doctrinally misleading in light of the extensive recognition of reliance based recovery in case law. Particularly, section 333 of the Restatement discusses “recovery for expenditures reasonably made in performance or in necessary preparation thereof”. This formulation is narrow and excludes incidental reliance. Numerous cases have granted damages that fall under incidental reliance. These fall outside the scope of what the Restatement has articulated, but has been treated by courts as recoverable.

Fuller and Perdue particularly argue against the formalist tendencies to subsume reliance under expectation and limit recovery to performance-related expenditures. The Restatement framework fails to accommodate the full scope of reliance-baeed claims and a more accurate articulation would treat reliance as an independent ground for recovery, especially in cases where expectation cannot be awarded - such as promissory estoppel or informal arrangements. Thus, reliance interest is a necessary and doctrinally independent and sound basis for recovery that has been consistently granted by courts.

Conclusion

Fuller and Perdue set out to reconsider the prominence of expectation interest in the law of damages by focusing and analysing the role played by reliance interest. While expectation damages remain the standard measure, their justification is not self-evident and, in many cases, recovery based on reliance may be more appropriate, both in principle and in practice. Through a careful distinction between restitution, reliance and expectation interests, Fuller and Perdue demonstrate that courts do not always intervene with a single remedial purpose and often adopt measures of recovery that diverge from the actual rationale for enforcement. Reliance interest, doctrinally situated between restitution interest and expectation interest is a flexible and often overlooked basis of recovery that captures actual economic loss without depending on the alleged benefit of the contract.

While exploring the relationship between the Hadley v. Baxendale principle of foreseeability; and reliance interest, Fuller and Purdue articulate the practical and doctrinal utility of using reliance interest as a measure of damages. In sum, Fuller and Perdue call for an explicit recognition of reliance interest as an independent and justifiable measure of damages, along with restitution and expectation.

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[1] Avery W. Katz, Reflections on Fuller and Purdue’s The Reliance Interest in Contract Damages: A Positive Economic Framework, 21 U. Mich. J. L. Reform 541 (1988) 541.

[2] ibid (543).

[3] See also - Robert E. Hudec, 'Restating the Reliance Interest' (1981-82) 67 Cornell L Rev 704, 708.

[4] ibid (n 1).