IV. EXPECTATION DAMAGES

A. Defined: Expectation damages are the usual measure of damages for breach of contract. The court tries to put the plaintiff in the position he would have been in had the contract been performed by the defendant. The plaintiff should end up with a sum equal to his costs already incurred, plus the profit he would have made had the contract been completed. (Example: P's hand is scarred from a severe burn. P contracts with D, a surgeon, for a skin graft operation which D promises will make P's hand completely normal. In fact, the operation fails to correct the scar and also causes P's hand to become covered with hair. P may recover the difference between the value of a perfect hand and the value of his present scarred and hairy hand. That is, P gets expectation damages — the difference between what he would have received had the contract been performed (a perfect hand) and the position he has been left in after D's breach (a scarred and hairy hand). [Hawkins v. McGee]

B. Formula for calculating: P's expectation damages are equal to the value of D's promised performance (generally the contract price), minus whatever benefits P has received from not having to complete his own performance.

Example: Contractor agrees to build a house for Owner for $30,000. The contract says that after Contractor has done half the work, he shall receive $15,000. Contractor does half the work, and demands payment. Owner wrongfully refuses. At this point, assume that it would cost Contractor $10,000 to complete the house (for materials, labor, etc.). Contractor's expectation damages are equal to the contract price ($30,000), minus what would have been Contractor's cost of completion ($10,000). Thus Contractor will recover $20,000.

1. Overhead: The plaintiff's cost of completion (the amount he has saved by not having to finish) does not include any part of his overhead.

2. Cost of completion or decrease in value: Where defendant has defectively performed, plaintiff normally can recover the cost of remedying defendant's defective performance. But if the cost of remedying defects is clearly disproportionate to the loss in market value from the defective performance, plaintiff will only recover the loss in market value.

a. Economic waste: This principle is often applied where the defect is minor, and remedying it would involve "economic waste," such as the destruction of what has already been done. (Example: Contractor contracts to build a house for Owner, with Reading pipe to be used. After the house is completely built, it is discovered that Contractor used Cohoes pipe rather than Reading pipe; the two are of virtually the same quality. Owner will be allowed to recover (or to subtract from the unpaid contract balance) only the difference in value between the two pipes (a negligible sum), not the much greater cost of ripping out the walls and all of the existing piping to make the replacement. [Jacob & Youngs v. Kent])

C. "Reasonable certainty": The plaintiff may only recover for losses which he establishes with "reasonable certainty." Mainly, this means that a plaintiff who claims that he would have made profits had the defendant not breached must show not only that there would have been profits, but also the likely amount of those profits.

1. Profits from a new business: Courts are especially reluctant to award lost profits from a new business, that is, a business which at the time of breach was not yet in actual operation.

2. Cost of completion unknown: Also, the "reasonable certainty" requirement may fail to be met where the plaintiff cannot show accurately enough what his cost of completion would have been. (Example: Contractor contracts to build a house for Owner for $100,000. After Contractor has done about half the work, Owner repudiates. If Contractor cannot demonstrate what his cost of completion would have been, he will be unable to recover expectation damages, and will have to be content with either reliance or restitution damages.)

V. RELIANCE DAMAGES

A. Generally: Reliance damages are the damages needed to put the plaintiff in the position he would have been in had the contract never been made. Therefore, these damages usually equal the amount the plaintiff has spent in performing or in preparing to perform. They are used either where there is a contract but expectation damages cannot be accurately calculated, or where there is no contract but some relief is justifiable. The main situations where reliance damages are awarded are:

1. Profit too speculative: Where expectation damages cannot be computed because plaintiff's lost profits are too speculative or uncertain. (For instance, where defendant's breach prevents plaintiff from developing a new business, profits are probably too speculative to be computed.)

2. Vendee in land contract: Where the plaintiff is the vendee under a land contract, and the defendant fails to convey. Some states do not allow expectation damages in this situation, so plaintiff can recover his reliance damages (e.g., the down payment, plus any expenses reasonably incurred.)

3. Promissory estoppel: Where plaintiff successfully brings an action based on promissory estoppel. Here, the suit is usually not truly on the contract, but is rather in quasi-contract. The court is trying to reduce injustice, so it gives plaintiff a "half-way" measure, less than expectation damages, but better than nothing.

B. Limits on amount of reliance recovery: The plaintiff's reliance damages are sometimes limited to a sum smaller than the actual expenditures:

1. Contract price as limit: Where D's only obligation under the contract is to pay a sum of money (the contract price), reliance damages will almost always be limited to this contract price.

2. Recovery limited to profits: Also, most courts do not allow reliance damages to exceed expectation damages. However, the defendant has to bear the burden of proving what plaintiff's profit or loss would have been.

a. Subtract amount of loss: Another way to express this idea is that there will be subtracted from plaintiff's reliance recovery the amount of the loss which defendant shows plaintiff would have suffered had the contract been performed.

3. Expenditures prior to signing: The plaintiff will not normally be permitted to recover as reliance damages expenditures made before the contract was signed, since these expenditures were not made "in reliance on" the contract.

C. Cost to plaintiff, not value to defendant: When reliance damages are awarded, they are usually calculated according to the cost to the plaintiff of his performance, not the value to the defendant.

VI. RESTITUTION

A. Generally: The plaintiff's restitution interest is defined as the value to the defendant of the plaintiff's performance. Restitution's goal is to prevent unjust enrichment.

1. When used: The main uses of the restitution measure are as follows: (1) a non-breaching plaintiff who has partly performed before the other party breached may bring suit on the contract, and not be limited by the contract price (as he would be for the expectation and reliance measures); and (2) a breaching plaintiff who has not substantially performed may bring a quasi-contract suit and recover the value that he has conferred upon the defendant.

2. Market value: Restitution is based on the value rendered to the defendant, regardless of how much the conferring of that value costs the plaintiff and regardless of how much the plaintiff was injured by the defendant's breach. This value is usually the sum which the defendant would have to pay to acquire the plaintiff's performance, not the subjective value to the defendant.

B. Not limited to the contract price: The main use of the restitution measure is that, in most courts, it is not limited by the contract price. If the work done by P prior to D's breach has already enriched D in an amount greater than the contract price, this entire enrichment may be recovered by P. This makes restitution sometimes very attractive, compared with both reliance and expectation measures. (Example: Contractor agrees to build a house for Owner for $100,000. After Contractor has done 90% of the work, Owner repudiates. At trial, Contractor shows that Owner can now resell the mostly-built house for $120,000, not counting land. Contractor will be permitted to recover the whole $120,000 on a restitution theory, even though this sum is greater than the contract price (and thus greater than the expectation damages would be), and greater than the reliance measure (actual expenditures by Contractor).)

1. Not available where plaintiff has fully performed: If at the time of D's breach, P has fully performed the contract (and D only owes money, not some other kind of performance) most courts do not allow P to recover restitution damages.

C. Losing contract: Restitution may even be awarded where P has partly performed, and would have lost money had the contract been completed. (Example: On the facts of the above example, assume that Contractor would have lost $10,000 had the contract been fulfilled. Contractor may use the restitution measure to collect $120,000, thus turning a $10,000 loss into a $10,000 profit.)

VII. SUBSTANTIAL PERFORMANCE AS A BASIS FOR SUIT ON THE CONTRACT

A. Substantial performance generally: Where one party substantially performs (i.e., does not materially breach), the other is not relieved of his duties. If the latter refuses to perform, the substantially performing party has an action for breach of contract.

1. Expectation damages: Putting it more simply, a party who substantially performs may sue for ordinary (expectation) damages for breach of contract, if the other party fails to perform. The other party has a set-off or counterclaim for the damages he has suffered from the plaintiff's failure to completely perform.

Example: Contractor contracts to paint Owner's house for $10,000, with performance to be complete by April 1. There is no "time of the essence" clause, and no reason to believe that April 1 completion is especially important. Contractor finishes work on April 3. Owner refuses to pay. Contractor will be able to bring suit on the contract, and to recover expectation damages (the profit he would have made). Owner is not entitled to refuse to pay, and must simply be content with a counterclaim for damages (probably nominal ones) due to the late completion.

B. Divisible contracts: If the contract is divisible into separate pairs of "agreed equivalents," a party who has substantially performed one of the parts may recover on the contract for that part. That's true even though he has materially breached with respect to the other portions.