Many individual entrepreneurs and small businesses may not earn profits in the first or second year of business. And they may not have a steady stream of profits, or an expected amount of profits, in the first five or so years in business. If such a business is forced to file a lawsuit because a parts supplier or other vendor or customer breaches its contract, the business cannot recover lost profits. The courts require that the amount of any claimed lost profits must be proven with reasonable certainty. If the business did not have an established history of profits in a certain amount, the business will lose its breach of contract claim.
However, a person or business in this situation is not necessarily left with no recourse or remedy whatsoever. If the business has incurred expenses related to the contract, and the other party has breached the contract in some manner, the court can award what it calls “reliance damages.” Reliance damages are any expenses paid by the non-breaching party in preparation of performing the contract or actually performing the parties’ contractual obligations. For example, if you are in the home remodeling business and you purchase custom made drapes as requested by the homeowner who then changes his or her mind, you can recover all of your expenses related to the custom made drapes.
The reliance damages doctrine is intended to return the plaintiff in its pre-contract position, as if there had been no contract in the first place. This means that the plaintiff is not put into a better position, but instead is restored to his or her prior position minus any contract benefits. In the custom made drapes example, if the home remodeler is able to use the drapes for another customer, the courts will not permit a double recovery. The remodeler cannot recover the cost from the initial homeowner and then sell the drapes to another customer. The amount of the sale price to the second customer will reduce the amount of reliance damages recoverable from the first customer.
To receive an award of reliance damages, it will be necessary to prove that your expenses were reasonably related to preparing for or performing the contract. If your expenses were not incurred in reasonable reliance on your contract obligations, the courts will not allow you to seek repayment of such expenses. This means that your obligations under the contract should be spelled out with sufficient details. The more detailed your contract, the better your chances of recovering reliance damages. Paying an attorney to prepare or review your contract may save you money in the long run. A detailed contract will make it obvious to the court that your expenses were incurred in reliance upon the terms of the contract. If your contract is not sufficiently detailed, the court will not presume or guess that you incurred expenses in reliance upon vague or undefined contract terms. The very existence of your new business venture may well depend on your ability to recover expenses from a defaulting vendor or customer.
Richard Meyer is a Northern Kentucky attorney practicing at Dressman Benzinger LaVelle psc.
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