Expectation Interest: Everything You Need to Know
Expectation interest shows the actual worth of a contract to an individual making any recovery limited to the loss already suffered due to a breach of contract.3 min read
2. Example of Expectation Damages
3. General Damages vs. Special Damages
4. Limitations on Expectation Damages
Expectation interest represents the actual worth of a contract to an individual making any recovery limited to the loss already suffered due to a breach of contract.
Overview of Expectation Interest
When a contract is broken by one party, it is normal for the other party to be awarded expectation damages. Expectation interest is the party's interest in being in as good a position as he or she would have been in had the contract been performed.
Expectation interest is anticipated by net profits and losses less any costs or losses, which are used to gauge the appropriate measure of damages.
Once it is determined that there was a valid contract in place and a breach of contract has occurred, it must be decided what remedy will be awarded to the damaged party.
If no contract has been formed, then the determination must be made as to whether or not one party benefited from contact with the other party. It must also be determined if the party providing the benefit should be repaid for the benefit that was provided.
Two kinds of remedies are in place in contract law:
- Monetary awards
- Specific performance awards, where the court orders the breaching party to perform the obligations of the contract
There are three types of damages:
- Expectation damages
- Reliance damages
Example of Expectation Damages
A company offers to sell to another company 1,000 bushels of produce for $5 per bushel with a set delivery date. The day before the delivery date, the price of the produce increases to $9 per bushel. On delivery day, the buying company refuses to deliver the 1,000 bushels, which puts them in a breach of contract situation.
In this situation, the court will award expectation damages, which puts the selling company in the position they would have been in prior to the breach. The expectation damages would be calculated by taking the $9,000 value of the produce and subtracting the $5,000 the selling company would have paid. The damages would come to $4,000.
General Damages vs. Special Damages
There is a distinction between general and special damages. General damages are those that result from a breach of contract but aren't linked directly to the harmed party. The purpose of the expectation damages is the compensation of general damages to the harmed party.
Special damages are limited and are those resulting from the injured party's own circumstances.
An injured party can recover special damages only if the breaching party knew or should have known that damages would result from a breach at the time the contract was formed.
Limitations on Expectation Damages
Expectation damages can be recovered if the calculation can be made with reasonable certainty. When this is not the case and damages cannot be calculated with certainty, the injured party can only recover nominal damages.
The issue of certainty typically arises where the damages suffered are in the form of lost profits.
Regarding lost profits and certainty, the general rule when calculating the damages is if the injured party is an established business, the lost profits will not be treated as speculative. This is because they can be estimated from past profits.
When the court is unable to calculate damages, the injured party is awarded nominal damages only.
The injured party does have the obligation to attempt to mitigate damages. They will not be allowed to recover for any damages that could have been mitigated.
An injured party that accumulates expenses while attempting to mitigate damages can also recover the expenses from the breaching party.
A duty to mitigate generally applies to three types of contracts:
- Construction contracts
- Employment contracts
- Contracts involving the sale of goods
With construction contracts, the injured contractor is under a duty to mitigate damages by no longer working once the contract is breached.
It is up to the employee in employment contract cases that involve the wrongful firing of an employee to mitigate damages by looking for a comparable job.
For sale of goods contracts, the buyer is required to attempt to find substitute goods when a breach of contract occurs. The requirement comes from the Uniform Code Commission.
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