THE PHANTOM RELIANCE INTEREST IN CONTRACT DAMAGES

In this Article, Professor Kelly challenges the normative justification for the use of the reliance interest as a measure of damages in contract actions. Initially he identifies three different measures, each of which has been called the reliance interest: the pure reliance interest, reliance limited by expectation, and the expenditure measure. He argues that the pure reliance interest has been the focus of normative justifications, but in practice courts have applied the other two measures; as a result, no consistent normative justification exists for reliance recoveries. Therefore, Professor Kelly urges replacing the reliance interest by using the expectation interest with a rebuttable presumption of zero profit-that is, a presumption that performance would have allowed the nonbreaching party to break even on the contract. Professor Kelly asserts that this measure of contract damages explains the actual recovery in most cases, improves the law relating to precontract expenditures and unallocated overhead expenses, and reduces confusion over the choice of remedial rules.