California Appeals Court Sets Burden of Proof for Reliance Damages in Breach of Contract SuitA recent California appeals court decision in Agam v. Gavrahas imposed a “losing contract” limitation on reliance damages in a breach of contract suit and articulated the burdens of each party in such suits.

The case involved a breach of contract dispute between partners in a Los Altos Hills, California, real estate development project that failed during the housing market collapse. Eventually, the partners sold the vacant land and suffered a $1.3 million loss. The parties filed cross-claims, with Agam prevailing at trial on a breach of contract claim. Gavra appealed to California’s Sixth District Court of Appeals, arguing that the trial court misallocated the burden of proof on breach of contract reliance damages.

In its opinion, the Sixth District noted the definition of reliance damages in California:

As our Supreme Court explained in Buxbom v. Smith (1944) 23 Cal.2d 535, 541, “`[w]here, without fault on his part, one party to a contract who is willing to perform it is prevented from doing so by the other party, the primary measure of damages'” includes “`his reasonable outlay or expenditure toward performance.’ “That the nonbreaching party’s damages include his or her “outlay incurred in making preparations for the contract” has been the law in California for over a century. (Cederberg v. Robison (1893) 100 Cal. 93, 99 (Cederberg); see also United States v. Behan (1884) 110 U.S. 338, 345-346 (Behan) [nonbreaching party’s damages include “actual outlay and expenditure”].)   This measure of damages often is referred to as “reliance damages.” (US Ecology, Inc. v. State of California (2005) 129 Cal.App.4th 887, 907; Rest.2d Contracts § 349.)

The Court then cited rulings in out-of-state courts that addressed a second limitation on reliance damages: the “losing contract” limitation, which can reduce or eliminate reliance damages if it is proven that a plaintiff would have incurred a loss even if the contract had been performed. Noting that no other California court appears to have addressed this issue, the Sixth District Court articulated the burden of proof for both parties as follows:

“…the plaintiff bears the burden to establish the amount he or she expended in reliance on the contract. The burden then shifts to the defendant to show (1) the amount of plaintiff’s expenses that were unnecessary and/or (2) how much the plaintiff would have lost had the defendant fully performed (i.e., absent the breach). The plaintiff’s recovery must be reduced by those amounts.”

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