Author: Vince Louwagie (co-authored with Andrea Davenport)
Victims of fraud have traditionally been advised that their recovery is determined by the “out-of-pocket” measure. With increasing regularity, however, Minnesota courts have used an alternative measure in fraud cases where the out-of-pocket measure does not accomplish justice.
One such alternative measure is “benefit-of-the-bargain” damages, a measure akin to a typical measure of damages in contract cases. In Minnesota, the measure of damages recoverable for fraud has generally been limited to out-of-pocket damages. “The out-of-pocket rule allows damages to be recovered which are the natural and proximate loss sustained by a party because of reliance on a misrepresentation.”1 In other words, this measure of damages allows a plaintiff to recover, as suggested by its name, what he or she has spent “out of pocket,” or what he or she has actually lost, in reliance on a misrepresentation. However, the out-of-pocket rule does not allow a plaintiff to recover what he or she might have gained through a transaction had it not been fraudulent. Out-of-pocket damages aim only to reimburse the plaintiff, and therefore they do not give the plaintiff any more than what they actually lost in reliance on the misrepresentation.
The out-of-pocket measure is typically the default for fraud damages. This promotes the goal of awarding damages in fraud cases to restore the status quo ante. The court aims to put the plaintiff back in the position he or she was in before reliance on the misrepresentation. Usually, this is accomplished by reimbursing the plaintiff for money spent or otherwise lost in reliance on the misrepresentation. Awarding more than out-of-pocket damages puts the plaintiff in a better position than he was in before the misrepresentation. In addition, out-of-pocket damages are often less speculative than other forms of damages. This is because it is generally easier to compute losses that have already been realized than it is to compute damages based on what a plaintiff may have gained had a misrepresentation been true. Tort law disfavors speculative damage awards. Therefore, out-of-pocket damages are the general measure of damages in fraud cases.