should put the plaintiff in as good a position as if the defendant
had fully performed as required by the contract.
Expenses incurred before entering into a contract are not recoverable
if they were not contemplated by the parties when they made the
Damages for lost profits must be based on net profits, not gross
following article is an edited abridgement of 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.
lawsuits get more attention in the press, but contract lawsuits outnumber
tort lawsuits in most state courts. In turn, the most important aspect
of most contract lawsuits is the determination of damages. Few lawsuits
are undertaken merely for a declaration of rights or to recover nominal
damages. Yet, comparatively little has been written on the topic of contract
damages. Thus, the purpose of this article is to summarize the legal principles
recognized by Michigan courts as governing the measurement of, and limitations
on, damages for breach of contract.
Measures of Recovery
a typical contract, one party has a duty to perform (construct a building,
deliver goods, convey real estate) and the other party has a duty to pay
money. Breach by the performer may take the form of nonperformance, defective
performance, or delay in performance. The primary purpose of damages for
breach of a contract is to protect the promisee’s expectation interest
in the promisor’s performance. Damages should put the plaintiff in as
good a position as if the defendant had fully performed as required by
cases involving a failure to perform, the plaintiff’s expectation interest
is measured by difference-money damages. Thus, the general measure of
damages for failing to perform a construction contract is the difference
between the contract price and the cost of construction by another builder.
Damages for failing to deliver goods are measured by the difference between
the contract price and the market value of the goods (or the cost of cover).
Damages for failing to perform a real estate sale contract also are measured
by the difference between the contract price and market value.
cases involving defective performance, the plaintiff’s expectation interest
may be measured in one of two ways: the cost of repair or the diminution
in value. In construction contracts, for example, damages for defective
or incomplete construction generally are measured by the cost of repair
or completion. In contracts for the sale of goods, on the other hand,
damages for nonconformity with the contract generally are measured by
the diminution in value of the defective goods. The purpose of both meas…res
is to place the plaintiff in as good a position as if the defendant had
performed the contract according to its specifications.
the performance of a contract is merely delayed, the plaintiff may seek
delay damages to protect his or her expectation interest. These damages
generally are measured by the value of the use of the contract’s subject
(building, goods, land) that was lost during the period of delay. Use
value commonly is measured by the subject’s rental value. If the subject
of the contract has no ascertainable rental value, delay damages may be
measured by interest on the subject’s market value during the period of
delay. Similarly, if the delay is in the payment of money, delay damages
are measured by interest on the sum due.
expectation damages are unavailable due to the limitations of certainty,
foreseeability, or mitigation (discussed below) the promisee may measure
damages by the reliance interest. The purpose of measuring damages by
the reliance interest is to put the plaintiff in as good a position as
if the contract had not been made, by compensating for losses caused by
the plaintiff’s reliance on the contract. Examples follow:
A store owner whose commission sales contract is breached may recover
the cost of altering the store to receive the defendant’s goods and
of selling the old stock on hand at a loss, as well as the other costs
of preparing to act as the defendant’s retail agent.
One who breaches an option contract may be held liable for expenditures
made and time spent by the plaintiff in attempting to perform the option.
A sand-and-gravel contractor who is unable to prove lost profits resulting
from the defendant’s anticipatory repudiation of a supply contract may
recover reliance damages based on reasonable expenses incurred in attempting
to perform the contract.
plaintiff may not recover both expectation and reliance damages if the
recovery would put the plaintiff in a better position than if the contract
had been performed. For example, if a supplier breaches a sales agency
contract, the plaintiff may not recover both commissions on lost sales
and costs incurred in advertising the merchandise for sale.
incurred before entering into a contract are not recoverable if they were
not contemplated by the parties when they made the contract. Nor may the
plaintiff continue to incur reliance expenses after learning of the breach.
some situations the promisee may seek compensation for the restitution
interest in order to recover a benefit conferred upon the other party.
Restitution commonly is sought in rescission cases. For example, a land
contract buyer who discovers defects in the vendor’s title may elect to
rescind the contract and seek restitution of the payments made rather
than to recover damages measured by the reduction in value of the property.
as a measure of recovery for breach of a contract is not limited to cases
involving rescission, however. More generally, the restitution measure
permits recovery based on the value of the plaintiff’s performance under
the contract, rather than the loss sustained as a result of the defendant’s
breach. In an early Michigan case, in which the defendant’s breach prevented
the completion of a contract, the plaintiff’s restitution option was described
general rule is well settled that a party to a contract where labor
is to be performed, upon the breach of that contract by the other party,
has two remedies open to him. He may sue upon the contract, and recover
damages for its breach, or he may ignore the contract, and sue for services
and labor expended, and expenses incurred, from which he has derived
no benefit. In case he pursues the latter remedy, the measure of damages
as to services is not necessarily the contract price, even though the
value of the services can be measured or apportioned by the contract
rate; but he may recover what his services are reasonably worth, although
in excess of the rate fixed by the contract.
restitution is based on the benefit conferred on the defendant by the
plaintiff’s performance, restitution is measured by quantum meruit (the
reasonable value of services rendered) rather than the contract price
(as in expectation damages) or the plaintiff’s costs (as in reliance damages).
damages need not be mathematically precise, they may not be based on mere
speculation. The evidence need only provide a reasonable basis for computing
damages, which may be approximate. If the existence of some damages has
been established, the defendant bears the risk of uncertainty about the
amount of damages.
certainty limitation is often raised as a defense to a claim for lost
profits. The general rules regarding certainty apply to claims for lost
profits. Thus, doubts about the certainty of lost profits are to be resolved
against the breaching party rather than the injured party. Lost future
profits may be established by profits made in past years. The lack of
a record of profitability has led many jurisdictions to deny new businesses
any recovery for lost profits, but Michigan has rejected the new business/interrupted
business distinction. The leading case is Fera v Village Plaza, Inc
for lost profits must be based on net profits, not gross profits. Failing
to define the term lost profits in jury instructions, and to distinguish
between gross profits and net profits, is reversible error.
foreseeability limitation has its roots in the landmark decision of Hadley
v Baxendale (1854), in which an English court established the following
rule for recovering damages in contract cases:
two parties have made a contract which one of them has broken, the damages
which the other party ought to receive in respect of such breach of
contract should be such as may fairly and reasonably be considered either
arising naturally, i.e., according to the usual course of things, from
such breach of contract itself, or such as may reasonably be supposed
to have been in the contemplation of both parties, at the time they
made the contract, as the probable result of the breach of it.
decision in Hadley v Baxendale actually established two rules.
The first Hadley rule limits contract damages to those generally
available to protect the prevailing party’s expectation interest, as described
above. The second Hadley rule permits recovery of additional damages
based on the special circumstances of a particular case, if the special
circumstances were within the contemplation of the parties when the contract
cases involving the foreseeability limitation have clustered around the
recoverability of lost profits and damages for mental distress. In regard
to claims for lost profits, it is important to distinguish between profits
lost directly from the nonperformance of a contract and profits lost in
a collateral transaction. To recover lost profits when the defendant’s
breach of contract prevents the plaintiff from profiting from a collateral
transaction, the plaintiff must show that the parties contemplated the
plaintiff’s entry into the collateral transaction. Only if the defendant
was aware of the plaintiff’s collateral enterprise when the contract was
made would those lost profits be recoverable.
Kewin v Massachusetts Mut Life Ins Co (1980), the Michigan Supreme
Court reaffirmed the view that under Hadley v Baxendale damages
in commercial contract cases are limited to the monetary value of the
breaching party’s performance and cannot include damages for mental distress.
The court held that a disability insurance policy was such a commercial
contract. Therefore, an insurer’s breach does not give rise to a right
to recover compensation for mental distress, absent proof that mental
distress was within the contemplation of the parties when the contract
courts have used the Kewin decision to deny mental distress damages
for breaches of other forms of insurance contracts. Both before and after
Kewin, Michigan courts have barred recovery of mental distress
damages in actions for breach of an employment contract. Likewise, construction
contracts have been held to be commercial contracts; thus, mental distress
damages are not recoverable for breach of a construction contract unless
these damages are proved to have been within the contemplation of the
parties when the contract was made.
Kewin court recognized certain exceptions to the general rule denying
mental distress damages for breach of contract. One example is breach
of an agreement to deliver the plaintiff’s child by Cesarean section,
resulting in the child being stillborn. An agreement to perform a tubal
ligation was held to be ‘‘intensely personal in nature.’’ Thus, a damages
award for mental anguish was appropriate because the failure to perform
the contract could foreseeably cause great mental pain and suffering.
Another example of a contract held to be personal rather than com.ercial
is a contract for the care and burial of a deceased person’s body. Another
is a con.ract for child care, where it was recognized as foreseeable that
a breach would cause mental distress to the parents.
Michigan Supreme Court has described the duty to mitigate as follows:
one person has committed a tort, breach of contract, or other legal
wrong against another, it is incumbent upon the latter to use such means
as are reasonable under the circumstances to avoid or minimize the damages.
The person wronged cannot recover for any item of damage which could
thus have been avoided.
critical word that defines the duty to mitigate is reasonable.
In a medical breach-of-contract case for an ineffectively-performed
sterilization procedure, the court held that it was not reasonable to
expect plaintiff to mitigate the ‘‘damage’’ of the unwanted pregnancy
by undergoing an abortion or putting the child up for adoption.
In a case involving a sales agency contract, plaintiff was not required
to use another manufacturer to complete a contract because it would
take three to five years to complete the contract, and the additional
spending would not be recouped until years later.
In an employment case, the court held that the plaintiff need not have
accepted work that was part-time, at lower wages, of undetermined tenure,
or that had fewer supervisory duties.
to mitigate damages is an affirmative defense. Thus, while the plaintiff
has the duty to mitigate damages, it is the defendant who has the burden
of proving the plaintiff’s failure to mitigate. If the defendant does
not plead and prove a failure to mitigate and, further, does not request
a jury instruction on mitigation, the defendant may not argue in closing
that the plaintiff failed to mitigate. Moreover, if there is evidence
that the plaintiff did comply with the duty to mitigate and no evidence
that the plaintiff failed in this duty, a jury instruction on mitigation
is not proper.
a final tip: Although the doctrine of mitigation generally is thought
of as a ‘‘negative’’ rule that limits damages, it has an ‘‘affirmative’’
side as well. Reasonable expenses incurred in an effort to mitigate damages,
even if the effort is unsuccessful, are recoverable as damages. Such mitigation
expenses should be regarded as special damages for purposes of pleading