Remedies for Breach of Contract: Formula for Expectation Damages

Remedies for Breach of Contract: Formula for Expectation Damages
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  • 0:05 Damages
  • 1:12 Expectation Damages
  • 3:09 Rule of the Expectancy
  • 4:04 Calculation of Damages
  • 5:44 Duty to Mitigate
  • 6:40 The Hairy Hand
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Lesson Transcript
Instructor: Ashley Dugger

Ashley is an attorney. She has taught and written various introductory law courses.

When a party breaches a contract, a court will often award damages to the other party. Expectation damages are a common form of legal remedy for a breach of contract. This lesson explains expectation damages, and the formula for calculating expectation damages.

Damages

Contracts are common in everyday business practice. Unfortunately, many business contracts are unsuccessful. Frequently, a contracting party fails to fulfill, or completely perform, the contract.

A breach of contract claim is a common type of civil lawsuit. This type of lawsuit will arise when one contracting party fails to uphold the obligations due under the contract. When one party breaches the contract, the other party is often referred to as the innocent party. The innocent party can file a lawsuit and seek a legal remedy. A legal remedy is the method by which the court attempts to bring justice to, or compensate, the innocent party.

Often, the legal remedy for a breach of contract claim will include an award of damages. A damage award is money ordered to be paid as compensation for the injury or loss. There are several different types of money damages, and several different methods that the courts use to calculate damages.

Expectation Damages

The type of damages awarded in a lawsuit depends on the type of claim. For a breach of contract claim, the court will normally award expectation damages. These are damages awarded to compensate the loss of future income. This is a different type of damage award than money that is awarded for an actual, concrete and definite loss. Expectation damages are awarded to cover the amount that the innocent party reasonably anticipated under the contract. This amount is often speculative.

For example, let's say that you and I make a contract. I'm an accountant and you hire me to conduct an audit of your business finances. I'm scheduled to be in your office, reviewing your records, for an entire week. You're going to pay me $4,000. We schedule the audit to start next Monday.

On Monday morning, just as I'm leaving for your office, you call me to cancel. I now have a breach of contract claim against you. I expected to make $4,000 this week, and now I don't have any work scheduled for the week. My expectation damages for your breach of contract are, therefore, $4,000.

My damages are simple to calculate, because we had a contract for a definite fee. I reasonably anticipated $4,000, but sometimes the damages aren't that easy to calculate.

Let's say that our contract is, instead, for $100 an hour. We don't know for sure how many hours it will take me to complete the audit. In this case, I could provide expert testimony to determine my expectation damages. Another accountant will be allowed to testify as an expert, and provide the court with a reasonable estimation of how long the audit would take and just how much an accountant like me would normally be paid for the job.

Rule of the Expectancy

Expectation damages are customary in breach of contract cases. Once the court determines that a breach has occurred, the court will usually determine that expectation damages should be awarded. Next, the court must determine the proper amount to be awarded to the innocent party.

The court will use the rule of the expectancy to determine the appropriate award. This legal doctrine states that the innocent party is entitled to damages that will put the innocent party in the position that party would have been in had the contract not been breached.

In our example, we know that I would have earned $4,000 under our contract. In order to be in the position I would have been in if the contract hadn't been breached, I should be awarded $4,000.

Calculation of Damages

The court will use the rule of the expectancy to calculate the innocent party's expectation damages.

This calculation has three steps:

  1. First, the court will determine what the innocent party would have gained had the contract not been breached.
  2. Second, the court will determine where the innocent party now stands. In other words, the court will determine what the innocent party lost and has not yet regained.
  3. Third, the court will calculate what it would now take to bring the innocent party from where the party now stands, to where that party would be had the contract not been breached.

In our example, we know that I would have gained $4,000 had the contract not been breached. Instead, I now stand at zero. It will take the full $4,000 to bring me from where I now stand to where I would be if the contract hadn't been breached.

Let's change our scenario a little bit. Let's say that I expected to pay $100 in bus fare this week, because that's how much it would cost me to get to and from your office each day. Since you've canceled my services, I won't have this expense. Does this change my expectation damages?

Yes. I would have gained $4,000 under our contract, but I would have expenses of $100 that I no longer have. This means that it will take $3,900 to bring me from where I now stand to where I would be if the contract hadn't been breached.

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