Contract Damages — Calculate expectation reliance and restitution damages

The law of contract damages evolved over centuries of common law jurisprudence, shaped by courts grappling with a deceptively simple question: when one party breaks a promise, what does the law owe the injured party? English courts in the medieval period relied on rigid writ-based remedies that offered little flexibility, but as commercial activity expanded during the Industrial Revolution, judges recognized the need for more nuanced measures of compensation. The development of expectation damages, reliance damages, and restitution damages reflects distinct philosophical commitments about the purpose of contractual remedies — whether to fulfill the promise, restore the status quo ante, or disgorge unjust enrichment.

Understanding this historical trajectory is essential because the bar exam frequently tests not merely which measure of damages applies, but why a plaintiff would elect one measure over another. The doctrinal question at the heart of this topic is: given that the expectation interest is the default, when does a plaintiff fare better under reliance or restitution, and what are the limits on each measure?

Contract damages serve to compensate the non-breaching party, not to punish the breaching party. The Restatement (Second) of Contracts § 344 identifies three distinct protected interests that inform how damages are calculated. Each interest captures a different dimension of the injury caused by breach, and each gives rise to a different formula for quantifying recovery. The plaintiff ordinarily has the right to elect among these measures, though the expectation interest serves as the presumptive default under modern American contract law.

Note the hierarchy: expectation ≥ reliance ≥ restitution, at least in theory. Expectation damages include the reliance interest plus any net profits; the reliance interest includes what was spent in performance (part of restitution) plus other expenditures. However, when profits are speculative or when the contract was a losing one, the reliance or restitution measures may actually yield a higher or more provable recovery, which is precisely why courts preserve the plaintiff's right to elect.

The upper row of boxes represents three snapshots in time. Before the contract, the plaintiff has not yet spent anything or earned anything from the deal — this is the baseline. At the moment of breach, the plaintiff has incurred costs in reliance on the contract but has not yet received the anticipated benefit. Had the contract been fully performed, the plaintiff would have recouped those costs and realized a profit. Each damages measure corresponds to restoring the plaintiff to one of these three positions. The bar chart at the bottom reinforces the general hierarchy: expectation encompasses reliance, which in turn encompasses restitution. However, as the note indicates, the hierarchy can invert in cases involving losing contracts or speculative profits.

While contract damages are ultimately fact-specific, the Restatement and case law supply formulas that anchor the analysis. Mastering these formulas is essential for the bar exam because multiple-choice questions frequently require you to compute a specific dollar figure. The following equations formalize the three interests introduced in Section 2.

On the bar exam, you must not only calculate each measure but also determine which measure best serves the plaintiff's interest in a given fact pattern. The plaintiff's strategic choice depends on several factors: the provability of lost profits, whether the contract was profitable or unprofitable, and the extent to which the plaintiff conferred a benefit on the defendant. The following diagram illustrates a decision tree for selecting the optimal damages measure.

Apex Construction Co. contracts with Landowner to build a commercial warehouse for a contract price of $500,000. Apex estimates total costs of $420,000, yielding an expected profit of $80,000. Apex has already spent $150,000 on materials and labor when Landowner repudiates the contract. At the time of breach, the market value of the work Apex completed and conferred on Landowner's property is $180,000. Apex has not yet purchased the remaining $270,000 in materials and labor. Calculate all three damages measures.

Each measure of damages is subject to several cross-cutting doctrinal limitations that the bar exam frequently tests. Understanding these limitations is as important as understanding the formulas themselves because an examinee who computes the correct dollar figure but ignores a limitation will still arrive at the wrong answer. The three principal limitations — foreseeability, certainty, and mitigation — each serve distinct policy purposes and interact with the three damages interests in different ways.

The Restatement framework applies primarily to common law contracts (services, land, etc.), but the Uniform Commercial Code (UCC) provides its own remedial scheme for the sale of goods under Article 2. The UCC remedies — while grounded in the same expectation-reliance-restitution logic — use specific statutory formulas that you must distinguish on the bar exam. The UCC also introduces unique concepts like cover (§ 2-712), market-price differential (§ 2-713 for buyers; § 2-708 for sellers), and the lost-volume seller doctrine.

Beyond the UCC, advanced contracts theory explores efficient breach — the idea that a party should breach when the gains from breach exceed the expectation damages owed, resulting in a Pareto-efficient reallocation of resources. This theory justifies expectation damages as the default because they force the breacher to internalize the full cost of non-performance. You may also encounter disgorgement and punitive damages in contract in advanced coursework, though the general rule remains that punitive damages are not available for breach of contract absent an independent tort.