By N. O. StockmeyerThe following article is an edited abridgement ofChapter 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.32

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Measures of Recovery

The Expectation MeasureIn a typical contract, one party has a duty

to perform (construct a building, delivergoods, convey real estate) and the other partyhas a duty to pay money. Breach by the per-former may take the form of nonperform-ance, defective performance, or delay in per-formance. The primary purpose of damagesfor breach of a contract is to protect thepromisee’s expectation interest in the prom-isor’s performance. Damages should put theplaintiff in as good a position as if the de-fendant had fully performed as required bythe contract.

In cases involving a failure to perform, theplaintiff ’s expectation interest is measured by

difference-money damages. Thus, the generalmeasure of damages for failing to perform aconstruction contract is the difference be-tween the contract price and the cost of con-struction by another builder. Damages forfailing to deliver goods are measured by thedifference between the contract price and themarket value of the goods (or the cost ofcover). Damages for failing to perform a realestate sale contract also are measured by thedifference between the contract price andmarket value.

In cases involving defective performance,the plaintiff ’s expectation interest may bemeasured in one of two ways: the cost of re-pair or the diminution in value. In construc-tion contracts, for example, damages for de-fective or incomplete construction generally

are measured by the cost of repair or comple-tion. In contracts for the sale of goods, on theother hand, damages for nonconformity withthe contract generally are measured by thediminution in value of the defective goods.The purpose of both measures is to place theplaintiff in as good a position as if the defen-dant had performed the contract according toits specifications.

If the performance of a contract is merelydelayed, the plaintiff may seek delay damagesto protect his or her expectation interest.These damages generally are measured bythe value of the use of the contract’s subject(building, goods, land) that was lost duringthe period of delay. Use value commonly ismeasured by the subject’s rental value. If thesubject of the contract has no ascertainablerental value, delay damages may be measuredby interest on the subject’s market value dur-ing the period of delay. Similarly, if the delayis in the payment of money, delay damagesare measured by interest on the sum due.

The Reliance MeasureIf expectation damages are unavailable

due to the limitations of certainty, foresee-ability, or mitigation (discussed below) thepromisee may measure damages by the re-liance interest. The purpose of measuringdamages by the reliance interest is to put theplaintiff in as good a position as if the con-tract had not been made, by compensating

DAMAGES for Breach of ContractMeasurement and Limitations

Tort lawsuits get more attention in the press, but contractlawsuits outnumber tort lawsuits in most state courts. In turn, the most important aspect of most contractlawsuits is the determination of damages. Few lawsuits

are undertaken merely for a declaration of rights or to recovernominal damages. Yet, comparatively little has been written on thetopic of contract damages. Thus, the purpose of this article is tosummarize the legal principles recognized by Michigan courts asgoverning the measurement of, and limitations on, damages forbreach of contract.

In an early Michigan case, in which the de-fendant’s breach prevented the completion ofa contract, the plaintiff ’s restitution optionwas described as follows:

The general rule is well settled that a party to acontract where labor is to be performed, uponthe breach of that contract by the other party,has two remedies open to him. He may sueupon the contract, and recover damages for itsbreach, or he may ignore the contract, and suefor services and labor expended, and expensesincurred, from which he has derived no bene-fit. In case he pursues the latter remedy, themeasure of damages as to services is not neces-sarily the contract price, even though the valueof the services can be measured or apportionedby the contract rate; but he may recover whathis services are reasonably worth, although inexcess of the rate fixed by the contract.

Because restitution is based on the benefitconferred on the defendant by the plaintiff ’sperformance, restitution is measured by quan-tum meruit (the reasonable value of servicesrendered) rather than the contract price (asin expectation damages) or the plaintiff ’scosts (as in reliance damages).

Limitations on Recovery

The Certainty LimitationAlthough damages need not be mathe-

matically precise, they may not be based onmere speculation. The evidence need onlyprovide a reasonable basis for computingdamages, which may be approximate. If theexistence of some damages has been estab-

lished, the defendant bears the risk of uncer-tainty about the amount of damages.

The certainty limitation is often raised asa defense to a claim for lost profits. The gen-eral rules regarding certainty apply to claimsfor lost profits. Thus, doubts about the cer-tainty of lost profits are to be resolved againstthe breaching party rather than the injuredparty. Lost future profits may be establishedby profits made in past years. The lack of arecord of profitability has led many jurisdic-tions to deny new businesses any recovery forlost profits, but Michigan has rejected thenew business/interrupted business distinc-tion. The leading case is Fera v Village Plaza,Inc (1976).

Damages for lost profits must be basedon net profits, not gross profits. Failing todefine the term lost profits in jury instruc-tions, and to distinguish between gross prof-its and net profits, is reversible error.

The Foreseeability LimitationThe foreseeability limitation has its roots

in the landmark decision of Hadley v Baxen-dale (1854), in which an English court estab-lished the following rule for recovering dam-ages in contract cases:

Where two parties have made a contractwhich one of them has broken, the damageswhich the other party ought to receive in re-spect of such breach of contract should be suchas may fairly and reasonably be consideredeither arising naturally, i.e., according to theusual course of things, from such breach ofcontract itself, or such as may reasonably be

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T for losses caused by the plaintiff ’s reliance onthe contract. Examples follow:

• A store owner whose commission salescontract is breached may recover thecost of altering the store to receive thedefendant’s goods and of selling the oldstock on hand at a loss, as well as theother costs of preparing to act as the de-fendant’s retail agent.

• One who breaches an option contractmay be held liable for expendituresmade and time spent by the plaintiff inattempting to perform the option.

• A sand-and-gravel contractor who isunable to prove lost profits resultingfrom the defendant’s anticipatory repu-diation of a supply contract may recoverreliance damages based on reasonableexpenses incurred in attempting to per-form the contract.

The plaintiff may not recover both expec-tation and reliance damages if the recoverywould put the plaintiff in a better positionthan if the contract had been performed. Forexample, if a supplier breaches a sales agencycontract, the plaintiff may not recover bothcommissions on lost sales and costs incurredin advertising the merchandise for sale.

Expenses incurred before entering into acontract are not recoverable if they were notcontemplated by the parties when they madethe contract. Nor may the plaintiff continueto incur reliance expenses after learning ofthe breach.

The Restitution MeasureIn some situations the promisee may seek

compensation for the restitution interest inorder to recover a benefit conferred upon theother party. Restitution commonly is soughtin rescission cases. For example, a land con-tract buyer who discovers defects in the ven-dor’s title may elect to rescind the contractand seek restitution of the payments maderather than to recover damages measured bythe reduction in value of the property.

Restitution as a measure of recovery forbreach of a contract is not limited to casesinvolving rescission, however. More gener-ally, the restitution measure permits recoverybased on the value of the plaintiff ’s perform-ance under the contract, rather than the losssustained as a result of the defendant’s breach.

Fast Facts:Damages 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 theparties when they made the contract.

Damages for lost profits must be based on net profits, not gross profits.

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supposed to have been in the contemplation ofboth parties, at the time they made the con-tract, as the probable result of the breach of it.

The decision in Hadley v Baxendale actu-ally established two rules. The first Hadleyrule limits contract damages to those gener-ally available to protect the prevailing party’sexpectation interest, as described above. Thesecond Hadley rule permits recovery of addi-tional damages based on the special circum-stances of a particular case, if the special cir-cumstances were within the contemplationof the parties when the contract was made.

Recent cases involving the foreseeabilitylimitation have clustered around the recover-ability of lost profits and damages for mentaldistress. In regard to claims for lost profits, itis important to distinguish between profitslost directly from the nonperformance of a

contract and profits lost in a collateral trans-action. To recover lost profits when the de-fendant’s breach of contract prevents theplaintiff from profiting from a collateraltransaction, the plaintiff must show that theparties contemplated the plaintiff ’s entryinto the collateral transaction. Only if thedefendant was aware of the plaintiff ’s collat-eral enterprise when the contract was madewould those lost profits be recoverable.

In Kewin v Massachusetts Mut Life Ins Co(1980), the Michigan Supreme Court reaf-firmed the view that under Hadley v Baxen-dale damages in commercial contract casesare limited to the monetary value of thebreaching party’s performance and cannot in-clude damages for mental distress. The courtheld that a disability insurance policy wassuch a commercial contract. Therefore, an in-surer’s breach does not give rise to a right torecover compensation for mental distress, ab-sent proof that mental distress was within thecontemplation of the parties when the con-tract was made.

The courts have used the Kewin decisionto deny mental distress damages for breachesof other forms of insurance contracts. Both

before and after Kewin, Michigan courtshave barred recovery of mental distress dam-ages in actions for breach of an employmentcontract. Likewise, construction contractshave been held to be commercial contracts;thus, mental distress damages are not recov-erable for breach of a construction contractunless these damages are proved to have beenwithin the contemplation of the parties whenthe contract was made.

The Kewin court recognized certain ex-ceptions to the general rule denying mentaldistress damages for breach of contract. Oneexample is breach of an agreement to deliverthe plaintiff ’s child by Cesarean section, re-sulting in the child being stillborn. An agree-ment to perform a tubal ligation was heldto be ‘‘intensely personal in nature.’’ Thus, adamages award for mental anguish was ap-

propriate because the failure to perform thecontract could foreseeably cause great mentalpain and suffering. Another example of acontract held to be personal rather than com-mercial is a contract for the care and burialof a deceased person’s body. Another is a con-tract for child care, where it was recognizedas foreseeable that a breach would cause men-tal distress to the parents.

The Mitigation LimitationThe Michigan Supreme Court has de-

scribed the duty to mitigate as follows:

Where one person has committed a tort, breachof contract, or other legal wrong against an-other, it is incumbent upon the latter to usesuch means as are reasonable under the cir-cumstances to avoid or minimize the dam-ages. The person wronged cannot recover forany item of damage which could thus havebeen avoided.

The critical word that defines the duty tomitigate is reasonable.

• In a medical breach-of-contract casefor an ineffectively-performed steril-ization procedure, the court held thatit was not reasonable to expect plain-

tiff to mitigate the ‘‘damage’’ of theunwanted pregnancy by undergoingan abortion or putting the child upfor adoption.

• In a case involving a sales agency con-tract, plaintiff was not required to useanother manufacturer to complete acontract because it would take three tofive years to complete the contract, andthe additional spending would not berecouped until years later.

• In an employment case, the court heldthat the plaintiff need not have acceptedwork that was part-time, at lower wages,of undetermined tenure, or that hadfewer supervisory duties.

Failure to mitigate damages is an affirma-tive defense. Thus, while the plaintiff has theduty to mitigate damages, it is the defendant

who has the burden of proving the plaintiff ’sfailure to mitigate. If the defendant does notplead and prove a failure to mitigate and,further, does not request a jury instructionon mitigation, the defendant may not arguein closing that the plaintiff failed to mitigate.Moreover, if there is evidence that the plain-tiff did comply with the duty to mitigateand no evidence that the plaintiff failed inthis duty, a jury instruction on mitigation isnot proper.

Here’s a final tip: Although the doctrineof mitigation generally is thought of as a‘‘negative’’ rule that limits damages, it has an‘‘aff irmative’’ side as well. Reasonable ex-penses incurred in an effort to mitigate dam-ages, even if the effort is unsuccessful, arerecoverable as damages. Such mitigation ex-penses should be regarded as special damagesfor purposes of pleading and proof. ♦

N. O. Stockmeyer is a member of the faculty ofThomas M. Cooley Law School where his teachingand research interests center on contracts and reme-dies. He can be contacted at stockmen@cooley.edu.An annotated version of this article, with citations tosupporting cases, can be found at www.michbar.org/journal/home.cfm.

Reasonable expenses incurred in an effort to mitigate damages, even if the effort is unsuccessful, are recoverable as damages.