LAW 506-002 – Contracts II

Expectation Damages


Expectation damages attempt to put the aggrieved party into the position it would be in if the full performance was made.

Expectation damages are the preferred form of damages, on the theory that the aggrieved party should be given the "benefit of the bargain."

Expectation damages include both direct and indirect damages.

Direct Damages

Direct damages are equal to the difference in value between the value directly received by full performance and that actually received.

Where a seller anticipatorily repudiates a contract for the sale of goods, and the buyer does not cover, fair market value for damages is calculated at the time the buyer learns of the breach plus a commercially reasonable period of time.

Indirect Damages

Indirect damages are the amounts awarded for secondary losses resulting from a breach.

Indirect damages are classified as either incidental or consequential.

Incidental Damages

Incidental damages are extra costs incurred by an aggrieved party in dealing with a breach, such as return shipping or time spent finding a replacement.

UCC § 2-710

Seller's Incidental Damages.

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Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with return or resale of the goods or otherwise resulting from the breach.

UCC § 2-715

Buyer's Incidental and Consequential Damages.

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  1. Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.
  2. Consequential damages resulting from the seller's breach include
    1. any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and
    2. injury to person or property proximately resulting from any breach of warranty.
Although attorney's fees would conceptually be incidental damages, they are not recoverable unless they are specified as recoverable in the contract, they are granted by statute, or the lawsuit is frivolous or in bad faith.
Consequential Damages

Consequential damages are any other losses incurred as a result of a breach that are not incidental damages, such as lost profit or causing a breach of another contract.

Expectation damages are calculated as: direct loss + extra loss − cost avoided − loss avoided or mitigated

Restatement Second of Contracts § 347

Measure of Damages in General

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Subject to the limitations stated in [R2C § 350, R2C § 351, R2C § 352, & R2C § 353], the injured party has a right to damages based on his expectation interest as measured by

  1. the loss in the value to him of the other party's performance caused by its failure or deficiency, plus
  2. any other loss, including incidental or consequential loss, caused by the breach, less
  3. any cost or other loss that he has avoided by not having to perform.
Restatement Second of Contracts § 348

Alternatives to Loss in Value of Performance

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  1. If a breach delays the use of property and the loss in value to the injured party is not proved with reasonable certainty, he may recover damages based on the rental value of the property or on interest on the value of the property.
  2. If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on
    1. the diminution in the market price of the property caused by the breach, or
    2. the reasonable cost of completing performance or of remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him.
  3. If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of breach.

There are three limiting factors to recovery:

  1. Foreseeability
    Restatement Second of Contracts § 351

    Unforeseeability and Related Limitations on Damages

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    1. Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result of the breach when the contract was made.
    2. Loss may be foreseeable as a probable result of a breach because it follows from the breach
      1. in the ordinary course of events, or
      2. as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.
    3. A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in order to avoid disproportionate compensation.
    • Determined at the time the contract was entered into
  2. Certainty
    Restatement Second of Contracts § 352

    Uncertainty as a Limitation on Damages

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    Damages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.

  3. Avoidability
    Restatement Second of Contracts § 350

    Avoidability as a Limitation on Damages

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    1. Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
    2. The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Examples
9-1

Employer hires employee for two-year contract at $50,000/year, but employer wrongfully terminates him six months in. Employee looks for new job for three months unsuccessfully, then hires an employment agency for $1,000 and finds a new job paying $45,000 per year.

Employee's damages would be $31,000:

  • Direct loss: $50,000 × 1½ = $75,000
  • Extra loss: $1,000
  • Cost avoided: $0
  • Loss avoided: ($45,000 × 1) = $45,000
  • $75,000 + $1000 - $0 - $45,000 = $31,000

If the employee did not look for work, he could not recover for that time, as there is a duty to mitigate damages.

9-3

Employer hires employee for two-year contract at $50,000/year, but employee wrongfully quits six months in. Employer looks for a replacement for three months unsuccessfully, then hires an employment agency for $2,000 and finds a temp replacement for $30,000 for three months, then hires a permanent replacement for $55,000 per year.

Employer's damages would be $24,500:

  • Direct loss: $50,000 × 1½ = $75,000 (value of employee to employer)
  • Extra loss: $2,000 + $30,000 + ($55,000 × 1) = $87,000
  • Cost avoided: $50,000 × 1¾ = $75,000 (cost of paying employee)
  • Loss avoided: $50,000 × 1½ = $62,500 (value of work covered by other workers)
  • $75,000 + $87,000 - $75,000 - $62,500 = $24,500

Some damages will not fit this formula exactly though.