Key Takeaways

  • Expectation interest represents the value a party expected to receive from a contract, usually measured as lost profits or benefits.
  • Courts award expectation damages to place the injured party in the same position as if the contract had been performed.
  • These damages differ from reliance (compensating for expenses incurred) and restitution (returning benefits unjustly received).
  • General damages compensate foreseeable losses, while special damages address unique, foreseeable consequences known to both parties.
  • Courts may limit expectation damages due to uncertainty, foreseeability, or mitigation duties.
  • Additional doctrines like Hadley v. Baxendale foreseeability rule and statutory frameworks (e.g., UCC for sales of goods) guide damage awards.

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:

Historical and Legal Foundations of Expectation Interest

The doctrine of expectation interest is rooted in common law principles of contract remedies. Courts have long recognized that when one party breaches, the injured party should be compensated not just for out-of-pocket expenses, but for the benefit of the bargain. This concept was firmly established in the landmark case Hadley v. Baxendale, which set the precedent that damages are limited to those that are foreseeable at the time the contract was made.

Expectation interest is often contrasted with reliance and restitution interests. While reliance reimburses wasted expenditures and restitution prevents unjust enrichment, expectation interest seeks to enforce the promise itself by ensuring the non-breaching party gains the economic value they anticipated.

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.

Calculating Expectation Interest in Practice

Calculating expectation interest typically involves three steps:

  1. Determine the contract value – What would the injured party have received if the contract had been fully performed?
  2. Subtract avoided costs – Deduct expenses the injured party saved because of the breach.
  3. Adjust for mitigation and foreseeability – Consider whether the injured party took reasonable steps to reduce losses and whether the damages were foreseeable at the time of contracting.

For example, in employment contracts, an employee wrongfully terminated may recover lost wages, but those damages will be reduced by any new income earned from comparable employment. In sales contracts under the UCC, the expectation interest is often calculated by comparing the market price at the time of breach with the contract price.

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.

Expectation Interest Across Different Contract Types

The application of expectation interest varies depending on the nature of the contract:

  • Sales of Goods: Governed by the Uniform Commercial Code (UCC), damages are often based on the difference between the contract price and the market price at the time of breach.
  • Construction Contracts: The injured party may claim costs to complete or repair the work, or lost profits if the project is abandoned.
  • Employment Contracts: Wrongfully discharged employees can recover wages and benefits they would have earned during the contract term, less any income earned from new employment.
  • Service Agreements: Expectation damages may cover lost profits or the value of replacement services.

This adaptability ensures that expectation interest reflects the type of bargain made in each contractual relationship

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:

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.

Foreseeability and Certainty in Expectation Interest

Courts impose two major limitations on awarding expectation damages:

  • Foreseeability: Damages must have been foreseeable to both parties at the time of contracting. This principle, from Hadley v. Baxendale, prevents parties from being liable for highly unusual or unexpected consequences.
  • Reasonable Certainty: Damages cannot be speculative. Courts require credible evidence of lost profits or benefits. Established businesses with track records can usually meet this requirement, while new ventures face higher scrutiny

Policy Considerations Behind Expectation Interest

Expectation interest serves important policy goals in contract law:

  • It encourages performance by making breach costly.
  • It protects reliance on promises, promoting trust in business and commercial relationships.
  • It balances fairness and efficiency, ensuring injured parties are compensated without excessively punishing the breaching party.

These principles ensure that the remedy is compensatory, not punitive, and reinforce the integrity of contractual agreements

Frequently Asked Questions

1. What is expectation interest in contract law?

Expectation interest is the value a party expected to receive under a contract, usually measured as lost profits or benefits when the other party breaches.

2. How is expectation interest different from reliance and restitution?

Reliance interest covers expenses incurred, restitution prevents unjust enrichment, while expectation interest ensures the injured party gains the economic value they were promised.

3. Can new businesses claim expectation damages for lost profits?

Courts often find projected profits for new businesses too speculative, making it harder for startups to recover expectation damages.

4. What limits the recovery of expectation damages?

Courts apply rules of foreseeability, certainty, and mitigation, meaning only reasonably predictable and provable losses can be recovered.

5. Does expectation interest apply to all contracts?

Yes, it applies broadly—from sales of goods and construction contracts to employment and service agreements—but the method of calculation varies.

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