Contracts questions on the MBE® fall into one of three categories: formation, breach, or remedies. When a contract has been breached, the default remedy is damages. Damages are awarded based on the fundamental principle of compensation in an amount reasonably calculated to make the nonbreaching party whole. As a result, compensatory damages seek to protect the nonbreaching party’s:
- expectation interests – the interest in having the benefit that the nonbreaching party would have received had the contract been performed
- reliance interests – the interest in being reimbursed for loss reasonably incurred by relying on the contract or
- restitution interests – the interest in having any benefit conferred on one party restored to the other party
Expectation interests are most frequently used to calculate contract damages and have three components:
- general expectation damages = the value of performance without the breach (what was promised) minus the value of performance with the breach (what was received)
- consequential damages = reasonably foreseeable losses that arose from special circumstances unique to the parties to the contract
- incidental damages = commercially reasonable expenses incurred as a result of the other party’s breach
When expectation interests are too speculative, the nonbreaching party’s reliance or restitution interests may instead be used to calculate damages. Both seek to return the nonbreaching party to the position he/she held before the contract was formed. And remember, it is always necessary to consider if there is a valid liquidated damages provision in the contract. If such a provision exists, it limits recovery to the stated amount.
|Purpose of compensatory damages|
|Places nonbreaching party in same position as if contract had been performed Includes general expectation, consequential & incidental damages|
|When expectation measure is too speculative, places nonbreaching party in same position as if no contract had been formed Includes reliance, restitution & liquidated damages|
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