Courts have a strong preference for awarding damages measured by the expected value of the promise/contract. The object is to put the party in the same position he would be in if the contract were performed as expected. This includes both the value of expenses incurred and expected profits.
Professor Farnsworth’s formula for calculating expectation damages is:
General Damages = Loss in Value + Other Loss – Cost Avoided – Loss Avoided
1. Loss in Value
a. The difference between the value to the injured party of the performance he should have received and that of any performance he did receive. Example: If the defendant paid the plaintiff $100 of a $1,000 debt, the loss in value is $900.
b. If defective service was rendered, then loss in value is value of flawless service less value of the defective service. This is a subjective standard (the value is the value to the plaintiff).
2. Other Loss
Other loss involves two types of damages, incidental and consequential.
a. Incidental Costs incurred in a reasonable attempt to avoid loss, even if unsuccessful.
b. Consequential Costs or injury to persons or property resulting from breach.
3. Cost Avoided
Savings to the plaintiff from not having to perform further.
4. Loss Avoided
Any loss avoided by the salvaging or reallocation of resources that would have been devoted to performance.
A contracts to build B a home for $100,000, payable as work progresses. A’s cost would be $60,000. A does half the work ($50,000 due) incurring $30,000 in expenses. B refuses to pay. A uses the unused lumber and materials, worth $10,000, on another job. A’s loss in value is $100,000 (what is due to him overall less what he has actually received). He has incurred no other loss. By stopping work midway, A avoids spending an additional $30,000. Therefore, A’s expectation damages award is $100,000 – 30,000 -10,000 = $60,000.