Thus far in contracts (I and II), we have discussed the formation, interpretation, and when a breach occurs. Now, we turn to remedies available for a breach, specifically damages. Although nominal damages are available, most plaintiffs find them inadequate and wish for additional compensatory damages. These damages may be awarded in three ways:
- Restitution interest (to repay for unjust enrichment)
- Reliance interest (to repay for reliance on a promise)
- Expectation interest (to pay for the expected fulfillment (gain) value of the promise)
This article, and the next article will discuss expectation damages. Here, we discuss how to compute these damages and later will discuss some of the limitations.
The Formula
Exception damages are the damages referred to when the court wants to put the injured party in as good as a position they would have been if the contract was met. There are four considerations that go into that determination.
- Loss in value – If the breach of the contract means that goods were not shipped or services rendered, a lot of the time the loss in value is calculated by subtracting what was received by that not received.
- Other loss – These are indirect or consequential damages that may be faced, such as failure to meet other contracts due to the nonperformance of the breaching party.
- Cost avoided – The first two principles apply whenever a breach occurs. However, when there is a total breach resulting in an early termination, the next two principles are examined. Cost avoided are costs that would have been incurred if the injured party continued performing (e.g. cost of materials to continue building a home).
- Loss avoided – These are instances where the plaintiff saves money by reallocating saved resources into other good contracts (e.g. a builder who uses left over materials on a new contracts).
The formula in every case: Loss of value + other loss = expectation damages. The formula for total breach resulting in terminated contract: Loss of value + other loss – costs avoided – losses avoided = expectation damages.
Crabby’s Inc. v. Hamilton
244 S.W.3d 269 (Missouri App. 2008).
Crabby’s Inc is the plaintiff. They won in trial court and Hamilton appealed.
Question
First was there a breach? Second, what are the damages associated with that breach?
Rule
Damages are to be collected by taking the original sell price and subtracting the fair market value of an actual purchase.
Holding
There was a breach and the analysis provided by Hamilton is not sufficient to overturn the ruling. Affirmed.
Facts
Crabby’s attempted to sell the a building to Hamilton who wished to use the building to open a restaurant. Hamilton offered to purchase the building for 295,000. The date was set and financing was obtained. Other repairs pushed the date back further. Shortly before the closing date, Hamilton sent a letter saying that he would not be going through with the purchase. As such, Hamilton failed to show up to the closing meeting.
Nearly a year later, Crabby’s sold the building for 235,000. Consequently, they sued Hamilton for the difference of the sell, and what should have been the sale (plus interest). The trial court awarded damages around 95,000.
Analysis
Hamilton first argues that the contract was not breached, but terminated because a certain financing provision was not met. However, the court said that Hamilton waived that clause because of continued actions signaling the intention to go forward with the deal.
Second, Hamilton argues that the damages was not allowed because 1) Crabby’s sold the property nearly a year later (too late for the same market value) and 2) that they did not sale at the “fair market value.”
In response, the court said that the timeline of the actual sale was not too remote. The buyers failed to provide mandatory sources showing a year was too late and the sellers provided ample mandatory sources saying that a year was sufficient.
Additionally, the court argues that the actual sale was the fair market value. The fair market value is based on someone being compelled to sell. Although the sellers wished to “sell bad,” they were not forced to sell. As such, the decreased price can be seen as a fair market value. Thus, the trial court’s determination of damages was fair and reasonable.
Additional Notes
The plaintiff claims that damages included:
- The difference between the original agreement and the actual sale 290,000 – 235,000 = 55,000.
- Additional real estate costs, property taxes, utilities, etc. (incidental costs).
The 235,000 was a valid market price because this was a reasonable way of selling a home (e.g. listing and having carrying charges are commercially reasonable). The factors that go into the fair market value considers time between the two contracts and the reason for the sale.
So, the jury awarded damages for around 95,000 which was reasonable.
Note that what is reasonable is considered on a case-by-case basis. In this case, it would have been better to sell earlier, but the fact that it was almost a year did not harm the case because of other reasonable searches for a buyer.
Handicapped Children’s Education Board v. Lukaszewski
332 N.W.2d 774 (Wis. 1983).
The Board is the plaintiff who won in trial court. In the appeal, the court determined that Lukaszewski had breached, but no damage was made. Thus, the appellate court affirmed in part and reversed in part. This appeal followed.
Question
Was there a breach? If so, are there compensable damages?
Rule
Holding
There was a breach and damages are appropriate. The court of appeals is affirmed in regards to the breach and reversed regarding the damages.
Facts
Lukaszewski was hired by the Board to be a special education teacher at a school 45 minutes away (she commuted to work). According to the contract, her salary was around 10,000. Later, before the start of the school year, she was interviewed for and hired to work at a day care for 13,000. She sent a letter of resignation to the Board who denied the resignation. Thus, Lukaszewski went to work at the Board (very unhappily). One day, she was distressed and went to her doctor who said that she had health problems keeping her from coming to work. So, Lukaszewski quit and went to work at the Day Care.
The school then had to hire a new teacher to fill the position. The new teacher had less education, but more teaching experience. Consequently, the school had to pay her 11,000, about 1,000 more than they were paying Lukaszewski. Thus, the school sued Lukaszewski for the additional pay.
Analysis
First, was there a breach? There is no doubt that she left her employment with the Board early. So, was she excused? Lukaszewski cited her health as the excuse. The majority argues that the trial court did not go against the great weight of the evidence and thus that holding must be upheld. However, the dissent argues that he health was at stake and should be a good reason to be left out of the contract, whether self-induced or induced by the Board.
Second, because there was a breach, were the damages appropriate? Damages are appropriate because an employer is entitled to the labor bargained for with the employee. The two parties bargained for a lower price employee and therefore cannot be required to accept a higher priced employee. In other words, we look at what the parties expected when they made the bargain instead of the objective value of that bargain. Thus, because the Board was forced to take a higher qualified individual, and because that individual was the only one qualified for the job (had no opportunity to mitigate the damages), the damages issued by the trial court should be upheld.
Additional Notes
The takeaway:
- Even if the new person is better than the old person, the Board had bargained for the first person (didn’t want to be in a better position, the first person was good enough). There was no opportunity to mitigate the damages and so the damages are adequate.
Pre and Post judgment interest. You get interest after the judgment is entered (post). This includes time waited when appeals are pending. The interest rate is set by the court. Sometimes you receive interest for the time before the judgment is entered.
American Standard, Inc. v. Schectman
427 N.E.2d 512 (N.Y. Supp. Ct. App. Denied 1981).
American Standard is the plaintiff who obtained a judgment against Schectman. Schectman appeals.
Question
What is the standard used to measure damages: diminished value or cost-of-completion?
Rule
Cost of completion is the standard to be applied to measure damages unless there is some form of economic waste present. Economic waste is when a party needs to spend a lot of money to repair a defect. This doctrine applies when there is at least some partial performance.
Holding
There was no economic waste, and fulfilling the contract would not result in economic waste. The damages are to be for the completion of the project. Affirmed.
Facts
American Standard sold a ton of equipment to Schectman for 270,00 and a promise that he would grade the land for resale. The grading was to remove any buildings and foundations to at least 1 foot below the grade level. A result of the grading would be to make the land look attractive for resale.
However, Schectman failed to remove foundations to 1 foot below the grade line. Then the land was sold without the contract being completed.
So, American Standard sued because the grading had not been completed as specified. The damages afforded by the jury were about 90,000, the cost it would have taken Schectman to complete the work. However, Schectman is arguing that the damages should be only for the diminished value of the property, which sold for only 3,000 less than market value.
In summary:
- Schectman breached the contract
- It would have cost him 90,000 to complete (Amount American Standard is suing for)
- The lack of completion diminished the property value by 3,000 (Amount Schectman wishes the damages to be limited to)
Analysis
According to the rule stated above, the amount of damages will be based on the cost of completion rather than diminished value unless there is economic waste for the completion. Here, there was no economic waste. No substantial or even part performance was completed. As such, there is no minimal defect left to be restored but instead the whole value of the property is left to be restored. Thus, the damages for 90,000 are necessary to American Standard in a place where they had contracted for. A good case to review to understand the concept of economic was would be Jacob & Youngs, Inc. v. Kent (the case discussed in another article about the brand of plumbing to be used in a home).
Two other things to note: First, notice the intention of the parties when they contract. American Standard contracted for the work to be completed, so that is what they should get (according to the court). Second, there are policy reasons for the cost-to-complete standard. For instance, we want the injured party to have the benefit of the bargain (here, the grading to occur).
Additional Notes
Three sections of the restatement focus on how to award damages. First, restitution is described in § 344(c). This section applies when there is unjust enrichment. Second, reliance is described in § 344(b). To reimburse to put the person in as good a position if the contract had not been made. For example, a person purchases a sculpture, and makes a separate purchase to display it (the purpose is to repay for the additional payment). Finally, expectation interest §344(a). Although the others may be available, expectation is where we always want to start out.
347 Exception Damages
What was the value of what actually happened v. what is the value of the promise + incidental or consequential loss – any cost or other loss that he has avoided.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
