expectation damages

Distinction Between Contract Breach and Damages

The question of whether a party has breached a contract and is liable for damages is clearly separate from the determination of the specific amount of damages that the breaching party should pay.

Overview of Damages in Contract Law

The Second Restatement of Contracts

The Second Restatement outlines the three basic measures of damages in section 347: expectation, reliance, and restitution. This module focuses specifically on expectation damages, while subsequent modules will cover reliance and restitution.

Purpose of Expectation Damages

Expectation damages are regarded as the gold standard for measuring contract damages. The primary goal of expectation damages is to restore the non-breaching party to the position they would have been in had the contract been fully performed. In other words, expectation damages aim to provide the non-breaching party with the benefit of their bargain.

Components of Expectation Damages

Basic Formula for Computing Expectation Damages

According to Section 347 of the Second Restatement, expectation damages are computed using a formula comprising four elements:

  1. Loss in Value: The reduction in the value of what was promised compared to what was received due to the breach.
  2. Other Losses: Any other financial impacts directly resulting from the breach.
  3. Cost Avoided: This refers to the costs that the non-breaching party is not required to incur due to the breach, such as completion of the contract.
  4. Loss Avoided: Any losses avoided due to the non-breaching party not having to complete their performance of the contract after the breach.

Determining the loss in value is highly fact-specific, and the Restatement does not provide a singular formula for computing it.

Examples of Expectation Damages

Alternatives to Loss in Value

Section 348 of the Restatement introduces two alternatives regarding loss in value, though it can be misleading, as these are specialized cases rather than a general formula.

Example 1: Delay in Use of Property

When a breach causes a delay in the use of a property, the loss in value can be estimated based on rental value during that period.

Example 2: Defective or Unfinished Construction

In cases where the breach involves defective or incomplete construction, the loss in value can be determined either by:

  • The diminution in value of the property, or
  • The cost of completing the construction.

Most courts prefer the cost of completion as the measure of damages.

Jacob and Young's v. Kent Case

In this landmark case, the court determined the loss to a homeowner caused by the contractor's failure to use Reading pipe (as specified in the contract). The court held that:

  • The property did not experience a diminution in market value as the difference in pipe types had no significant economic impact.
  • On the alternative measure, the cost of replacing the wrong pipe would have been prohibitively expensive. The court ultimately chose to award based on the diminution in value.

UCC Application on Breach by Refusal to Convey

When a seller breaches a contract by refusing to convey goods, UCC Section 2-713 generally calculates damages based on the difference between the contract price and the market price at the time of breach, plus any additional losses while subtracting saved expenses.

Numerical Example

  • If the contract price for a widget is $100,000 and the market price at the time of the breach is $110,000, the buyer would receive:
    • Loss: $110,000 (market price) - $100,000 (contract price) = $10,000.

Additional Incidental and Consequential Damages

If the breaching seller was local and the buyer intended to pick the widget up, but instead had to pay shipping costs from out of state due to the breach, the buyer could recover this additional cost.

Hypothetical Situations

Even if the buyer does not purchase another widget, the legal framework ensures the buyer receives the profit they would have made. For example:

  • If the contract price is $100,000 and the expected market value of the widget was $110,000, the buyer should be compensated for that $10,000 potential profit.

Market Price Scenarios

  • If the contract price exceeds the market price at the time of breach (e.g., contract price of $110,000 vs. market price of $100,000), the buyer suffers no damages. They may even express gratitude to the seller.
  • Conversely, when the seller suffers due to a buyer's breach (e.g., contract price of $110,000 but market price falls to $100,000), the seller is entitled to recover the difference ($10,000) as compensation for lost profits from the sale.

Real Estate Example: Ray v. Urus Brothers

In the case of Ray v. Urus Brothers, the Rays contracted with Urus Brothers to build a house for $16,300, but Urus Brothers failed to fulfill the contract. The Rays then spent $22,293.40 for another company to complete the house. Therefore, the court awarded the Rays:

  • Damages = Actual expenses incurred ($22,293.40) - Contract Price ($16,300) = $5,993.40.

Damages for Builders

In construction contracts, if the builder is the aggrieved party due to wrongful termination by the owner, the expectation measure often considers:

  • Builder's net profit plus unreimbursed costs.

Hypothetical Calculation

If a builder was set to be paid $150,000 and incurred $130,000 in total costs:

  • If the owner terminates when the builder has already incurred $90,000 in costs and has received $75,000, the recovery should consist of:
    • Net profit ($20,000) + Unreimbursed costs: ($130,000 - 90,000 = $40,000).
  • The expected recovery would amount to $20,000 (profit) + $35,000 (unreimbursed costs) = $55,000.

Verification of Damages

It is advisable for students to use multiple formulas to verify the understanding of expectation damages, as all formulas should yield the same damages, regardless of the method of computation.

Summary of the Restatement Formula

For clarity, to summarize the Restatement formula in a hypothetical scenario:

  • Calculate Loss in Value: Contract Price ($150,000) - Payments Already Received ($75,000) = $75,000.
  • Add Other Losses: Assuming no consequential damages.
  • Subtract Cost Avoided: Total Costs ($130,000) - Costs Incurred ($90,000) = $40,000.
  • Determine Loss Avoided: Assuming zero in this scenario since it is profitable.
  • Final damages calculated using the Restatement framework would yield $75,000 - $40,000 = $35,000.

Considerations for Expectation Damages

Expectation damages serve to compensate the non-breaching party for the expected lost profits that the contract would have generated. However, complications arise if:

  • The non-breaching party cannot prove their lost profits with the requisite degree of certainty.
  • At the end of the contract, the non-breaching party finds they either broke even or incurred a loss.

Conclusion

In conclusion, the next two modules will shift the focus from expectation damages to exploring alternative measurements such as reliance damages and restitution, particularly in instances where expectation damages are deemed unavailable or unsuitable for the situation at hand.