Expectation damages

Expectation damages are damages recoverable from a breach of contract by the non-breaching party. An award of expectation damages protects the injured party's interest in realizing the value of the expectancy that was created by the promise of the other party.

Contract law
Part of the common law series
Contract formation
Defenses against formation
Contract interpretation
Excuses for non-performance
Rights of third parties
Breach of contract
Remedies
Quasi-contractual obligations
Related areas of law
Other common law areas

The purpose of expectation damages is to put the non-breaching party in the position it would have occupied had the contract been fulfilled. Expectation damages can be contrasted to reliance damages and restitution damages, which are remedies that address other types of interests of parties involved in enforceable promises.

The default for expectation damages are monetary damages which are subject to limitations or exceptions (see below)

Expectation damages are measured by the diminution in value, coupled with consequential and incidental damages.

Measuring expectation damages

In expectation damages, the measure of damages is the difference between what was given and what was promised, along with consequential and incidental expenses minus any payments received from the breaching party and any costs saved as a result of the breach.[1] The proper amount is that which gives the non-breaching party the "benefit of the bargain." However, it is important to note that expectation damages are not punitive; its theoretical purpose is to place the injured, non-breaching party in the same position that they would have occupied had there been full performance of the contract.[2] In other words, it is the amount that makes the injured party indifferent to the breach.

Examples:

  • General contractor accepts an offer from a subcontractor and enters into a contract. The general contractor breaches / repudiates their contract part way through the subcontractor's performance. Generally, the subcontractor is entitled to seek an amount equal to the contract price or unrealized value of the promised performance plus costs incurred in preparing or performing under the contract (and costs incidental to the breach e.g., storage costs, restocking fees for returns; penalties or costs for canceling contracts, supply orders etc.) minus any progress payments made by the general contractor and minus costs saved by the breach; can include anticipated profit.
  • Neal signs a contract agreeing to buy 10 hours of landscaping services from John's Landscaping for $50 an hour. If Neal breaks the contract and doesn't use any of John's Landscaping's services, expectation damages paid to John's Landscaping would be $500 minus any costs John's Landscaping may have saved, which is the economic loss they suffered. If John's Landscaping breaks the contract, and Neal is forced to hire another service for $60 an hour, expectation (direct) damages paid to Neal would equal $100 ($10 an hour, the difference in price between the original contract and the new contract).

Potential exceptions or limitations
  • Duty to mitigate - the aggrieved party has a duty to take reasonable steps to mitigate damages. Failure to take such steps can cut off damages which arose from such a failure to take reasonable steps to mitigate. This is a duty of reasonable care thus no duty to take steps which are unreasonably burdensome. Example - buyer breaches contract to purchase produce; seller is expected to mitigate e.g., "cover" under the U.S. Uniform Commercial Code or resale; failure to make reasonable attempts to resell can be a ground to deny damages arising from breach e.g., spoilage. Breaching party is liable for costs which arise from an effort to take reasonable steps to mitigate. E.g., party continues to work after being notified of a breach and running up the bill. (however, this might be reasonable if the aggrieved party reasonably believed they had a better chance of selling a completed product to an alternative buyer).
  • Reasonable certainty - must be able to calculate the damages based on reasonably certain facts or comparable situations. Cannot have a calculation based wholly on guesses. In cases of doubt, many jurisdictions have adopted a view that the breaching party should bear the risk of doubt rather than the aggrieved party.
  • Foreseeability - Generally, no consequential damages unless they are known or foreseeable. e.g., No lost profits for third party transactions (e.g., Hadley v. Baxendale case below), holding that Baxendale could only be held liable for losses that were generally foreseeable, or if Hadley had mentioned his special circumstances in advance. The mere fact that a party is sending something to be repaired does not indicate that they would lose profits if it were not delivered on time. The court suggested various other circumstances under which Hadley could have entered into this contract that would not have presented such dire circumstances, and noted that where special circumstances exist, provisions can be made in the contract voluntarily entered into by the parties to impose extra damages for a breach. e.g. Hadley v Baxendale.[3]
  • Cost of performance or a proposed measure of damage greatly exceeds market value of full performance (Peevyhouse v Garland Coal & Mining Co) E.g., land owner contract with coal company promised restoration of land after mining complete - coal company refused to comply; court found the cost of restoration (~$30k) grossly exceeded value of the property in unrestored condition ($300 price difference between condition before and after coal mining). However, this case has been widely criticized; 2nd Restatement of the Law criticized it; many courts will not follow this rule thus would decline to award damages based on market value based on view that damages should be awarded based on actual harm to injured party versus hypothetical market value - dependent on jurisdiction)

See also

References
  1. Bellgrove v Eldridge [1954] HCA 36, (1954) 90 CLR 613, High Court (Australia).
  2. Clark v Macourt [2013] HCA 56, (2013) 253 CLR 1, High Court (Australia).
  3. Hadley v Baxendale [1854] EWHC J70 (Exch).
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