When a contract is breached, it can feel like a huge setback, especially when you’ve invested time, money, or effort into the agreement. But the law provides a way to help you recover from these losses: expectation damages. In simple terms, expectation damages are designed to put you back in the position you would have been in if the contract had been performed as promised. Let’s break this concept down in a way that’s easy to understand and shows you how it works in real life.
What Are Expectation Damages?
Expectation damages are a type of compensation awarded when a contract is breached. These damages aim to fulfill the promise made by the breaching party, even if the contract wasn’t completed. The purpose of expectation damages is simple: it’s meant to give you, the non-breaching party, the benefit of the bargain. In other words, you should be compensated for what you expected to receive from the contract.
Imagine you entered into a contract with a builder to renovate your house. If the builder fails to finish the job, you would be entitled to expectation damages. These would cover the cost of hiring another contractor to complete the renovation, plus any extra expenses incurred because of the delay. Expectation damages are essentially designed to make you “whole” again, as if the contract had been fulfilled as agreed.
Why Do Expectation Damages Matter?
Expectation damages are important because they give you a clear path to recovery after a breach of contract. Instead of leaving you in a worse position due to someone else’s failure to deliver on their promises, the law provides a remedy that restores the value of the contract to you. Without expectation damages, you would be left with no way to make up for your losses.
Think about this: when you enter into a contract, you’re expecting to get something of value in return. If the other party doesn’t deliver, you shouldn’t have to bear the financial burden of their failure. Expectation damages ensure that you are compensated for what you were supposed to receive, making sure that the breach doesn’t put you at a disadvantage.
How Are Expectation Damages Calculated?
Calculating expectation damages can be complex, but at its core, it’s about comparing what you were promised with what you actually received. Here’s how it works:
- What Was Promised: This is the value of the performance or product you expected to receive from the contract.
- What Was Delivered: This is the actual value of what you received (or the lack thereof).
- The Difference: Expectation damages are the difference between the two values.
For example, let’s say you hired a contractor to build a house, and the cost of the project was $200,000. However, the contractor didn’t complete the work. You had to hire someone else to finish the job at a cost of $250,000. In this case, your expectation damages would be $50,000 ($250,000 minus $200,000), plus any other expenses caused by the delay, like additional living costs.
Examples of Expectation Damages
Let’s look at a few more examples to see how expectation damages play out in different situations.
Example 1: The Landscaping Contract
Imagine you sign a contract with a landscaping company to mow your lawn once a month for a year at $100 per visit. If the company fails to show up, you could seek expectation damages. You would be entitled to $1,200 (the amount for the full year), minus any costs the landscaping company might have saved by not doing the work.
On the other hand, if the landscaping company breaches the contract and you have to hire a more expensive company at $120 per visit, your expectation damages would cover the difference in price, which would be $240 ($120 x 12 months – $100 x 12 months).
Example 2: The Subcontractor and General Contractor
Let’s say you are a subcontractor working on a construction project. You’ve agreed to complete your part of the job for $50,000, but the general contractor breaches the contract halfway through the project. You can seek expectation damages for the full amount of the contract ($50,000) plus any costs you’ve incurred so far, such as materials, storage, or penalties for late delivery.
Your expectation damages would also include anticipated profits, assuming you had planned to make a certain profit from completing the contract. The key here is that expectation damages will aim to put you in the same position you would have been in had the general contractor not breached the contract.
The Duty to Mitigate Damages
It’s important to note that you have a responsibility to minimize your losses when a contract is breached. This is called the “duty to mitigate.” In simple terms, you can’t sit back and do nothing while your damages pile up. You must take reasonable steps to reduce the impact of the breach.
For example, if a seller fails to deliver goods you ordered, and you can find a similar product at a reasonable price elsewhere, you should make the purchase. If you choose not to buy the replacement product and let the situation get worse, the breaching party may argue that you didn’t mitigate your damages, and you may lose some or all of your right to recover damages.
However, you are not required to take unreasonable steps to mitigate damages. If it would be too expensive, burdensome, or unreasonable to try to fix the situation, you are not obligated to do so.
Limitations and Exceptions
While expectation damages are a powerful tool for recovery, they aren’t unlimited. There are certain limitations and exceptions that can affect how much you can recover. Let’s look at some of these exceptions:
- Reasonable Certainty: Expectation damages must be based on reasonably certain facts or similar situations. You can’t claim damages based on guesses or speculative losses. Courts will look at past experience, market trends, and other factors to determine the reasonable amount of damages.
- Foreseeability: You can only recover damages that were foreseeable at the time the contract was made. This means that you can’t claim for damages that weren’t predictable or that arose due to special circumstances you didn’t discuss with the other party. For instance, if you are expecting to make a profit from reselling an item, but the item is delayed and you lose a potential sale, you can’t claim that loss unless the other party was aware of your specific circumstances.
- Market Value vs. Cost of Performance: In some cases, the cost of performance may far exceed the market value of the contract. If this happens, courts may not award expectation damages based on the cost of performance, especially if it seems unreasonable. For example, if a coal company refuses to restore land after mining, but the cost of restoration is vastly higher than the property’s value, a court might not award the full cost of restoration as expectation damages.
Why Expectation Damages Are Preferred
Expectation damages are often preferred because they are easier to prove than other types of damages, such as reliance damages. Reliance damages compensate you for expenses incurred in reliance on the contract, but they don’t account for any profit you might have made from the contract. Expectation damages, on the other hand, cover both the costs and the anticipated profit, making them a more complete remedy.
In many cases, courts will automatically choose expectation damages unless it is impossible to prove them. This makes expectation damages the norm in breach of contract cases.
Conclusion
Understanding expectation damages is crucial if you’re involved in any contract, whether you’re the buyer, the seller, the contractor, or the subcontractor. These damages ensure that you are compensated for what you were promised, helping to restore your financial position in the event of a breach. However, it’s essential to be aware of the limitations and exceptions, such as the duty to mitigate and the need for reasonable certainty.
Remember, expectation damages aren’t meant to punish the breaching party; they are meant to put you in the position you would have been in if the contract had been honored. By understanding how expectation damages work, you can protect your interests and ensure that you’re compensated fairly in case a contract is breached.