R2d § 349
Damages Based on Reliance Interest
As an alternative to the measure of damages stated in § 347, the injured party has a right to damages based on his reliance interest, including expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.
Professor's notes
Elements: (1) the injured party elects reliance instead of expectation; (2) the measure is expenditures made in preparation for or in performance; (3) the breaching party may prove with reasonable certainty that the injured party would have suffered loss had the contract been performed, and that loss offsets the recovery. The "losing-contract" offset prevents reliance from being a windfall.
Sullivan v. O'Connor operationalizes the section: where expectation damages are too speculative (the patient's lost expectancy in a perfect nose is hard to value), reliance recovers out-of-pocket and worsened-position costs.
Common misunderstanding: students treat reliance as a smaller version of expectation. It is a different interest. Reliance protects what the party gave up; expectation protects what the party expected to gain. Reliance is the fallback where expectation is too speculative to prove, and the offset rule keeps it within the limits of the bargain that was actually made.
Cases that operationalize this rule
Section 349 supplies the reliance alternative to the expectation measure of § 347. It is most useful where lost profits are too speculative to recover but out-of-pocket reliance costs are provable. The breaching party may offset losses that would have been incurred had the contract been performed, so reliance is a floor rather than a windfall.