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Damages for Breach of Contract: Measurement and Limitations

Article · October 2008

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Norman Otto Stockmeyer

Thomas M. Cooley Law School
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 The following article is an edited abridgement of By N. O. Stockmeyer
Chapter 13, “General Principles of Contract Damages,” from
Michigan Law of Damages and Other Remedies (2002),
published by the Institute of Continuing Legal Education,
Ann Arbor, Michigan, Reprinted with permission.
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 DAMAGES for
Breach of Contract
Measurement and Limitations

ort lawsuits get more attention in the press, but contract are measured by the cost of repair or comple-

T
tion. In contracts for the sale of goods, on the
lawsuits outnumber tort lawsuits in most state courts. other hand, damages for nonconformity with
In turn, the most important aspect of most contract the contract generally are measured by the
diminution in value of the defective goods.
lawsuits is the determination of damages. Few lawsuits
The purpose of both measures is to place the
are undertaken merely for a declaration of rights or to recover plaintiff in as good a position as if the defen-
nominal damages. Yet, comparatively little has been written on the dant had performed the contract according to
its specifications.
topic of contract damages. Thus, the purpose of this article is to If the performance of a contract is merely
summarize the legal principles recognized by Michigan courts as delayed, the plaintiff may seek delay damages
to protect his or her expectation interest.
governing the measurement of, and limitations on, damages for These damages generally are measured by
breach of contract. the value of the use of the contract’s subject
(building, goods, land) that was lost during
Measures of Recovery difference-money damages. Thus, the general the period of delay. Use value commonly is
measure of damages for failing to perform a measured by the subject’s rental value. If the
The Expectation Measure construction contract is the difference be- subject of the contract has no ascertainable
In a typical contract, one party has a duty tween the contract price and the cost of con- rental value, delay damages may be measured
to perform (construct a building, deliver struction by another builder. Damages for by interest on the subject’s market value dur-
goods, convey real estate) and the other party failing to deliver goods are measured by the ing the period of delay. Similarly, if the delay
has a duty to pay money. Breach by the per- difference between the contract price and the is in the payment of money, delay damages
former may take the form of nonperform- market value of the goods (or the cost of are measured by interest on the sum due.
ance, defective performance, or delay in per- cover). Damages for failing to perform a real
formance. The primary purpose of damages estate sale contract also are measured by the The Reliance Measure
for breach of a contract is to protect the difference between the contract price and If expectation damages are unavailable
promisee’s expectation interest in the prom- market value. due to the limitations of certainty, foresee-
isor’s performance. Damages should put the In cases involving defective performance, ability, or mitigation (discussed below) the
plaintiff in as good a position as if the de- the plaintiff ’s expectation interest may be promisee may measure damages by the re-
fendant had fully performed as required by measured in one of two ways: the cost of re- liance interest. The purpose of measuring
the contract. pair or the diminution in value. In construc- damages by the reliance interest is to put the
In cases involving a failure to perform, the tion contracts, for example, damages for de- plaintiff in as good a position as if the con-
plaintiff’s expectation interest is measured by fective or incomplete construction generally tract had not been made, by compensating

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DAMAGES FOR BREACH OF CONTRACT

for losses caused by the plaintiff’s reliance on

the contract. Examples follow: Fast Facts:
• A store owner whose commission sales Damages should put the plaintiff in as good a position
contract is breached may recover the
cost of altering the store to receive the
as if the defendant had fully performed as required
defendant’s goods and of selling the old by the contract.
stock on hand at a loss, as well as the
other costs of preparing to act as the de-
Expenses incurred before entering into a contract are
fendant’s retail agent. not recoverable if they were not contemplated by the
• One who breaches an option contract parties when they made the contract.
may be held liable for expenditures
made and time spent by the plaintiff in Damages for lost profits must be based on net profits,
attempting to perform the option. not gross profits.
• A sand-and-gravel contractor who is
unable to prove lost profits resulting
from the defendant’s anticipatory repu-
diation of a supply contract may recover
reliance damages based on reasonable In an early Michigan case, in which the de- lished, the defendant bears the risk of uncer-
expenses incurred in attempting to per- fendant’s breach prevented the completion of tainty about the amount of damages.
form the contract. a contract, the plaintiff ’s restitution option The certainty limitation is often raised as
The plaintiff may not recover both expec- was described as follows: a defense to a claim for lost profits. The gen-
tation and reliance damages if the recovery eral rules regarding certainty apply to claims
The general rule is well settled that a party to a
would put the plaintiff in a better position contract where labor is to be performed, upon for lost profits. Thus, doubts about the cer-
than if the contract had been performed. For the breach of that contract by the other party, tainty of lost profits are to be resolved against
example, if a supplier breaches a sales agency has two remedies open to him. He may sue the breaching party rather than the injured
contract, the plaintiff may not recover both upon the contract, and recover damages for its party. Lost future profits may be established
commissions on lost sales and costs incurred breach, or he may ignore the contract, and sue by profits made in past years. The lack of a
OCTOBER 2003

in advertising the merchandise for sale. for services and labor expended, and expenses record of profitability has led many jurisdic-
Expenses incurred before entering into a incurred, from which he has derived no bene- tions to deny new businesses any recovery for
contract are not recoverable if they were not fit. In case he pursues the latter remedy, the lost profits, but Michigan has rejected the
contemplated by the parties when they made measure of damages as to services is not neces-
new business/interrupted business distinc-
sarily the contract price, even though the value
the contract. Nor may the plaintiff continue tion. The leading case is Fera v Village Plaza,
of the services can be measured or apportioned
to incur reliance expenses after learning of Inc (1976).
by the contract rate; but he may recover what
the breach. his services are reasonably worth, although in Damages for lost profits must be based
excess of the rate fixed by the contract. on net profits, not gross profits. Failing to
The Restitution Measure define the term lost profits in jury instruc-
In some situations the promisee may seek Because restitution is based on the benefit tions, and to distinguish between gross prof-
♦

compensation for the restitution interest in conferred on the defendant by the plaintiff’s its and net profits, is reversible error.
order to recover a benefit conferred upon the performance, restitution is measured by quan-
tum meruit (the reasonable value of services
JOURNAL

other party. Restitution commonly is sought The Foreseeability Limitation

in rescission cases. For example, a land con- rendered) rather than the contract price (as
The foreseeability limitation has its roots
tract buyer who discovers defects in the ven- in expectation damages) or the plaintiff ’s
in the landmark decision of Hadley v Baxen-
dor’s title may elect to rescind the contract costs (as in reliance damages).
dale (1854), in which an English court estab-
and seek restitution of the payments made lished the following rule for recovering dam-
rather than to recover damages measured by Limitations on Recovery ages in contract cases:
BAR

the reduction in value of the property.

Where two parties have made a contract
Restitution as a measure of recovery for The Certainty Limitation
which one of them has broken, the damages
breach of a contract is not limited to cases Although damages need not be mathe-
MICHIGAN

which the other party ought to receive in re-

involving rescission, however. More gener- matically precise, they may not be based on spect of such breach of contract should be such
ally, the restitution measure permits recovery mere speculation. The evidence need only as may fairly and reasonably be considered
based on the value of the plaintiff’s perform- provide a reasonable basis for computing either arising naturally, i.e., according to the
ance under the contract, rather than the loss damages, which may be approximate. If the usual course of things, from such breach of
sustained as a result of the defendant’s breach. existence of some damages has been estab- contract itself, or such as may reasonably be

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 supposed to have been in the contemplation of before and after Kewin, Michigan courts tiff to mitigate the ‘‘damage’’ of the

DAMAGES FOR BREACH OF CONTRACT

both parties, at the time they made the con- have barred recovery of mental distress dam- unwanted pregnancy by undergoing
tract, as the probable result of the breach of it. ages in actions for breach of an employment an abortion or putting the child up
The decision in Hadley v Baxendale actu- contract. Likewise, construction contracts for adoption.
ally established two rules. The first Hadley have been held to be commercial contracts; • In a case involving a sales agency con-
rule limits contract damages to those gener- thus, mental distress damages are not recov- tract, plaintiff was not required to use
ally available to protect the prevailing party’s erable for breach of a construction contract another manufacturer to complete a
expectation interest, as described above. The unless these damages are proved to have been contract because it would take three to
second Hadley rule permits recovery of addi- within the contemplation of the parties when five years to complete the contract, and
tional damages based on the special circum- the contract was made. the additional spending would not be
stances of a particular case, if the special cir- The Kewin court recognized certain ex- recouped until years later.
cumstances were within the contemplation ceptions to the general rule denying mental • In an employment case, the court held
of the parties when the contract was made. distress damages for breach of contract. One that the plaintiff need not have accepted
Recent cases involving the foreseeability example is breach of an agreement to deliver work that was part-time, at lower wages,
limitation have clustered around the recover- the plaintiff’s child by Cesarean section, re- of undetermined tenure, or that had
ability of lost profits and damages for mental sulting in the child being stillborn. An agree- fewer supervisory duties.
distress. In regard to claims for lost profits, it ment to perform a tubal ligation was held Failure to mitigate damages is an affirma-
is important to distinguish between profits to be ‘‘intensely personal in nature.’’ Thus, a tive defense. Thus, while the plaintiff has the
lost directly from the nonperformance of a damages award for mental anguish was ap- duty to mitigate damages, it is the defendant

Reasonable expenses incurred in an effort to mitigate damages,

even if the effort is unsuccessful, are recoverable as damages.
contract and profits lost in a collateral trans- propriate because the failure to perform the who has the burden of proving the plaintiff’s

OCTOBER 2003
action. To recover lost profits when the de- contract could foreseeably cause great mental failure to mitigate. If the defendant does not
fendant’s breach of contract prevents the pain and suffering. Another example of a plead and prove a failure to mitigate and,
plaintiff from profiting from a collateral contract held to be personal rather than com- further, does not request a jury instruction
transaction, the plaintiff must show that the mercial is a contract for the care and burial on mitigation, the defendant may not argue
parties contemplated the plaintiff ’s entry of a deceased person’s body. Another is a con- in closing that the plaintiff failed to mitigate.
into the collateral transaction. Only if the tract for child care, where it was recognized Moreover, if there is evidence that the plain-
defendant was aware of the plaintiff’s collat- as foreseeable that a breach would cause men- tiff did comply with the duty to mitigate
eral enterprise when the contract was made tal distress to the parents. and no evidence that the plaintiff failed in
would those lost profits be recoverable. this duty, a jury instruction on mitigation is
In Kewin v Massachusetts Mut Life Ins Co The Mitigation Limitation not proper.

♦
(1980), the Michigan Supreme Court reaf- The Michigan Supreme Court has de- Here’s a final tip: Although the doctrine
firmed the view that under Hadley v Baxen- scribed the duty to mitigate as follows: of mitigation generally is thought of as a
dale damages in commercial contract cases

MICHIGAN
Where one person has committed a tort, breach ‘‘negative’’ rule that limits damages, it has an
are limited to the monetary value of the of contract, or other legal wrong against an- ‘‘affirmative’’ side as well. Reasonable ex-
breaching party’s performance and cannot in- other, it is incumbent upon the latter to use penses incurred in an effort to mitigate dam-
clude damages for mental distress. The court such means as are reasonable under the cir- ages, even if the effort is unsuccessful, are
held that a disability insurance policy was cumstances to avoid or minimize the dam- recoverable as damages. Such mitigation ex-
such a commercial contract. Therefore, an in- ages. The person wronged cannot recover for penses should be regarded as special damages
surer’s breach does not give rise to a right to any item of damage which could thus have
for purposes of pleading and proof. ♦
BAR

been avoided.
recover compensation for mental distress, ab-
sent proof that mental distress was within the The critical word that defines the duty to N. O. Stockmeyer is a member of the faculty of
JOURNAL

contemplation of the parties when the con- mitigate is reasonable. Thomas M. Cooley Law School where his teaching
tract was made. • In a medical breach-of-contract case and research interests center on contracts and reme-
dies. He can be contacted at stockmen@cooley.edu.
The courts have used the Kewin decision for an ineffectively-performed steril- An annotated version of this article, with citations to
to deny mental distress damages for breaches ization procedure, the court held that supporting cases, can be found at www.michbar.org/
of other forms of insurance contracts. Both it was not reasonable to expect plain- journal/home.cfm.

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