C. Justifying Expectancy

Author:John D. McCamus
Profession:Professor of Law. Osgoode Hall Law School, York University

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As we have seen, the expectancy principle is well established as the determining principle for the quantification of compensatory damages in a contract damages claim. At a theoretical level, however, justification of the doctrine has proven to be a matter of some contention. The classic defence of the expectancy principle is that set out by Fuller and Perdue in a well-known law review article.52The particular problem tackled by Fuller and Perdue was to provide a justification for the granting of expectancy damages in cases where the contract between the parties remains wholly executory and neither party has detrimentally relied on the promise of the other. In such a case, although the promisee may experience a sense of disappointment at losing the advantages of the bargain, it might be argued that the promisee has experienced no actual injury other than that sense of disappointment. The promisee, it might be said, has not lost anything as a result of the breach. As Fuller and Perdue stated, this "seems on the face of things a queer kind of ‘compensation.’"53We might refer to such cases as involving a "pure" expectancy claim. The expectancy principle holds, however, that in such a case the promisee has experienced an injury in the form of a lost expectation of profit that should be the subject of compensation in a damages claim. Once the agreement has been entered, the benefits due to the promisee are secured by the expectancy principle and damages are awarded for the lost profit or benefit, regardless of whether the promisee has engaged in acts of detrimental reliance.

In defending the application of the expectancy principle, Fuller and Perdue begin by articulating the three principal purposes that might be pursued in awarding contract damages. First, a court could require the promisor to give back any value or benefit received from the promisee, such as a down payment, on the theory that otherwise the promisor would be unjustly enriched at the expense of the promisee. Such awards would protect the promisee’s restitution interest. A second ob-

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jective could be to compensate the promisee for any detrimental reliance engaged in by the promisee on the assumption that the promisor would perform the agreement. The objective of such an award would be to undo the harm resulting from the promisor’s breach and place the promisee in a position he or she was in before the contract was created. Fuller and Perdue identify such awards as achieving protection of the promisee’s reliance interest. The third alternative, which corresponds to the existing law, is to grant awards that attempt to place the promisee in the position the promisee would have been in if the contract had been performed and this, of course, constitutes protection of the expectation interest.

A critical step in the analysis that follows is the observation by Fuller and Perdue that the reliance interest may include lost opportunities to make a profit by dealing with other persons where those opportunities have been forgone in reliance on the promisor’s undertaking to perform the agreement. They illustrate the point with the example of a physician who charges a patient for a missed appointment on the theory that an opportunity to provide services to another patient has been forgone in reliance on the first patient’s promise to attend. Fuller and Perdue argue that there is nothing in the definition of the reliance interest that would preclude inclusion of this type of lost opportunity to profit as a reliance injury. Thus, protection of the reliance interest could, in principle at least, include compensation both for losses in the sense of out-of-pocket expenses and for forgone opportunities to profit or, in the authors’ terminology, "gains prevented."54The expectancy interest is broader than the reliance interest because it would include profits secured to the promisee under an agreement even though the promisee had not suffered a forgone opportunity to make a similar profit elsewhere. Returning to the example of the physician, if the physician could demonstrate that the supply of patients exceeded the physician’s ability to provide services, a forgone opportunity to profit would be established and the loss of profit on the appointment would be included in a reliance award. If the physician could not offer such proof, however, the profit that would have been secured if the first patient had attended the appointment is only compensable in an expectancy award.

Before turning to their defence of the expectancy principle, Fuller and Perdue dismiss alternative theories that might...

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