Expectation Damages: Everything You Need to Know
Expectation damages are given to someone who was injured by a broken contract in order to compensate the loss. 3 min read
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.
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.
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.
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