Key Takeaways:

  • Expectation damages compensate the non-breaching party to put them in the position they would have been in had the contract been fulfilled.
  • Calculating expectation damages often involves subtracting what the injured party saved (or mitigated) from the total expected benefit of the contract.
  • Recoverable damages must be reasonably certain, foreseeable, and directly caused by the breach.
  • Special damages are only awarded if the breaching party knew or should have known about the special circumstances.
  • Formulas for expectation damages vary depending on whether the case involves goods, services, or lost profits.
  • Courts may reduce damages if the non-breaching party fails to mitigate losses.

Expectation damages are given to someone who was injured by a broken contract in order to compensate the loss. The amount of the damages will generally be what the damaged party expected to receive had the contract been fulfilled.

What Are Expectation Damages

When a contract is broken, it is common for one of the parties to suffer financial harm. If the injured party sues the party that broke the contract, they may be awarded expectation damages to cover what they lost from the contract not being upheld. After the court decides that a contract was legal and that a breach occurred, they need to decide the appropriate remedy for the injured party. If no formal contract is in place, however, the court must decide if one party has received any benefit and if the party that offered the benefit deserves compensation for their losses.

In contract law, two remedies exist when a contract is broken. The first remedy is damages, which is monetary compensation. Second, the court can enforce the terms of the contract, meaning the party who broke the contract will need to fulfill their contractual obligations. This remedy is known as specific performance.

If the court decides that damages are the proper remedy, three types of damages are available:

  • Expectation damages.
  • Reliance damages.
  • Restitution.

How to Calculate Expectation Damages

To understand how to calculate expectation damages, courts focus on placing the injured party in the position they would have occupied if the contract had been fully performed. The general formula is:

Expectation Damages = (Value of Contractual Performance) – (Costs Saved or Avoided)

Key considerations in this calculation include:

  1. Direct Losses:
    The difference between the contract price and the market value at the time of the breach.
    Example: If you agreed to buy machinery for $20,000 and the market price rises to $30,000 after the seller breaches, your expectation damages are $10,000.
  2. Incidental and Consequential Losses:
    Any additional costs directly caused by the breach, such as expedited shipping for replacement goods or temporary production stoppages.
  3. Mitigation:
    Damages are reduced if the non-breaching party could reasonably avoid some losses. Courts expect proactive mitigation.
  4. Certainty and Foreseeability:
    Damages must be provable with reasonable certainty and must have been foreseeable at the time the contract was formed, following the rule from Hadley v. Baxendale.
  5. Common Methods:
    • Contract vs. Market Price: For goods, use the difference between the contract price and the market price at the time of breach.
    • Lost Profits: If the breach caused lost sales or production delays, profits that would have been earned may be included.
    • Cost to Complete or Replace: For construction or service contracts, damages can be the cost to finish the work elsewhere.

Expectation Damages Example

Expectation damages are meant to both compensate the victim of a broken contract for their losses and to place them in the position they would have been in if the contract were completed.

Assume, for instance, that you enter a contract to purchase oranges, whose current market value is $10 per bushel. Your supplier charges $5 per bushel. Later, the company that agreed to sell you the oranges refuses to deliver your produce, meaning a breach of contract has occurred.

The court can award you expectation damages to put you in the state you were in before the breach. For example, let's imagine you ordered 100 bushels, meaning you would have had $1,000 worth of oranges had the contract been fulfilled. The court would calculate your expectation damages by subtracting the price you paid – $500 – from the value you expected to receive, resulting in $500 of damages. Some restrictions are related to expectation damages, which were created in the Hadley v. Baxendale court case.

Factors That Can Limit Expectation Damages

Even when a breach occurs, the amount recoverable as expectation damages may be limited by several legal principles:

  1. Duty to Mitigate
    The injured party must take reasonable steps to minimize losses. Failing to find replacement goods, services, or clients may reduce damages awarded.
  2. Reasonable Certainty
    Damages based on speculation or uncertain future profits are often rejected. Courts look for clear evidence such as prior sales history or industry averages.
  3. Foreseeability
    Only losses that were foreseeable to the breaching party at the time the contract was formed can be recovered. This prevents “surprise” liability.
  4. Contractual Limitations
    Some contracts include limitation of liability clauses, capping recoverable damages to a fixed amount or excluding certain consequential losses.

Special Damages vs. General Damages

Essentially, only damages that were specifically related to the breach can be awarded in a court case. In the Hadley case, for instance, a mill owner attempted to sue for lost profits after a crankshaft was not delivered as promised. The court ruled that the mill owner could only sue for the lost crankshaft, and that the lost profits would be considered special damages.

After a breach of contract occurs, only general damages can be awarded. Special damages are usually not available. Special damages are created under special circumstances that are unique to the injured party and can only be awarded after certain conditions are met. If the breaching party knew that these damages could occur when the contract was written, then it may be possible for the injured party to receive special damages. 

Imagine that you own and operate a juicing company and that you order a special juicer to help you fulfill your orders. You order the machine from a company that specializes in industrial juicers, and they agree to deliver your order on April 1st. A month after the agreed upon date, your juicer is finally delivered.

In the month you were waiting for your delivery, you missed your important orders and lost major clients. No other comparable juicer was available, meaning there was no way for you to find another solution for fulfilling your orders. If the company that you ordered your juicer from knew that failure to deliver your machine would result in these losses, then you can pursue special damages in a court case. On the other hand, if the company did not know or had no way of knowing these damages would occur from the breach of contract, then only general damages would be available. 

Expectation damages can only be awarded if they can be reasonably calculated. If this is not possible, then only nominal damages can be awarded. This issue commonly occurs if lost profits are caused by a contract breach.

Practical Tips for Documenting and Claiming Expectation Damages

Effectively claiming expectation damages requires organized evidence and proactive action:

  • Maintain Detailed Records:
    Keep contracts, invoices, purchase orders, communications, and financial statements to show expected performance and resulting losses.
  • Document Market Conditions:
    Demonstrate market prices at the time of breach to support your calculation.
  • Track Mitigation Efforts:
    Record attempts to source alternative suppliers, resell goods, or otherwise reduce losses.
  • Use Expert Testimony for Lost Profits:
    Courts often rely on accountants or industry experts to establish reasonable profit expectations.
  • Review Contract Clauses:
    Understand any damage caps or waivers that could limit your recovery.

Frequently Asked Questions

1. What are expectation damages in contract law? Expectation damages compensate the non-breaching party for what they would have received if the contract had been fully performed.

2. How do you calculate expectation damages? Generally, subtract the costs saved from the total value the contract would have provided. Lost profits, incidental costs, and replacement expenses may also be included.

3. Can I recover lost profits as expectation damages? Yes, if the profits are reasonably certain, foreseeable, and directly caused by the breach.

4. Do I have to mitigate my damages? Yes. Failing to take reasonable steps to reduce losses can reduce or eliminate your recovery.

5. When are special damages available? Special damages are awarded only if the breaching party knew about the unique circumstances that would lead to extra losses.

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