Expectation damages: the benefit of the bargain

We met this hand in Lecture Three. A boy in New Hampshire with a palm scarred by an electric burn nine years before. A surgeon who wanted to try skin grafting, and who said, I will guarantee to make the hand a hundred per cent perfect hand. The graft took skin from the boy's chest. The hand came out worse, and hairy. The jury found a contract and gave damages. The trial judge threw the verdict out as excessive.
The Supreme Court of New Hampshire ordered a new trial, and told the next judge how to measure the loss.
Here is what the first judge had told the jury. If you find the plaintiff entitled to anything, he is entitled to recover for what pain and suffering he has been made to endure and what injury he has sustained over and above the injury that he had before. That sounds fair. It is the measure a tort lawyer would use. And it was wrong, said the Supreme Court, for a reason that organises this whole module.
So here is the question. When a promise is broken, what is the injured party owed? The pain he went through? The money he spent? Or the thing he was promised and did not get? Think about it before I go on, because the three answers have names, expectation, reliance and restitution, and the law's default choice among them is the surprising one.
And now the question I keep asking. What exactly did these people promise each other? A perfect hand, for an operation and a fee. Every module until now has asked whether there is a contract and whether it was broken. This module asks what the breach costs. Today, the default measure. Next, its limits. Then the alternatives, and finally the remedies the parties can write for themselves.
Here is the first line for the board. By damages, as that term is used in the law of contracts, is intended compensation for a breach, measured in the terms of the contract. The purpose of the law is to put the plaintiff in as good a position as he would have been in had the defendant kept his contract.
The measure of recovery is based upon what the defendant should have given the plaintiff, not what the plaintiff has given the defendant or otherwise expended.
Second line. Expectation is the value of the promised performance to the plaintiff, not its cost to the defendant, and not more than the plaintiff would have had on full performance. Money damages are substitutional relief designed in theory to put the injured party in as good a position as he would have been put by full performance of the contract, at the least cost to the defendant.
The injured party should not recover more from the breach than he would have gained had the contract been fully performed.
Third line. Where the breach is a defective or incomplete performance, the usual measure is the cost of completing or repairing it. But where that cost is grossly disproportionate to the value the performance would add, the measure is the difference in value. You met the pipe in Module Nine. Today you meet the strip mine.
Now the case. Hawkins against McGee, Supreme Court of New Hampshire, nineteen twenty nine, Justice Branch. The court reached for an analogy. The present case is closely analogous to one in which a machine is built for a certain purpose and warranted to do certain work.
The measure for a broken warranty is the difference between the value of the machine if it had corresponded with the warranty and its actual value, together with such incidental losses as the parties knew or ought to have known would probably result.
So, the hand. We, therefore, conclude that the true measure of the plaintiff's damage in the present case is the difference between the value to him of a perfect hand or a good hand, such as the jury found the defendant promised him, and the value of his hand in its present condition, including any incidental consequences fairly within the contemplation of the parties when they made their contract. Damages not thus limited, although naturally resulting, are not to be given.
And why not the pain? Because the pain was the boy's side of the bargain. The pain necessarily incident to a serious surgical operation was a part of the contribution which the plaintiff was willing to make to his joint undertaking with the defendant to produce a good hand. It represented a part of the price which he was willing to pay for a good hand, but it furnished no test of the value of a good hand.
He would have suffered it if the doctor had performed. It is not a loss caused by the breach.
One more point, easy to miss. The court said the jury might award damages for the defendant's failure to improve the condition of the hand even if there were no evidence that its condition was made worse as a result of the operation. That is expectation exactly. A promise of a perfect hand is broken by an unchanged hand as much as by a ruined one. The measure is the gap between promise and result, whatever the starting point.
Now Massachusetts, forty four years later, and a court that found the measure too generous. A professional entertainer contracts with a plastic surgeon to reduce the prominence of her nose in two operations. It takes three, and her appearance is worsened. Her nose now had a concave line to about the midpoint, at which it became bulbous. The jury finds for her on contract, for the doctor on negligence, and awards thirteen thousand five hundred dollars.
Her out-of-pocket payments were six hundred and twenty two dollars.
The Supreme Judicial Court, in Sullivan against O'Connor, nineteen seventy three, Justice Kaplan, described Hawkins accurately and then declined to follow it all the way. Where, as in the case at bar, the doctor has been absolved of negligence by the trier, an expectancy measure may be thought harsh. The fee paid by the patient to the doctor for the alleged promise would usually be quite disproportionate to the putative expectancy recovery.
And to put a value on the condition that would or might have resulted may sometimes put an exceptional strain on the imagination of the fact finder.
So the court chose the middle. A recovery limited to restitution seems plainly too meager, if the agreements are to be enforced at all. On the other hand, an expectancy recovery may well be excessive. There is much to be said, then, for applying a reliance measure to the present facts. She recovered her expenses, the worsening of her condition, and the pain and mental distress of the third operation, which she would not have undergone had the doctor performed.
Not the value of the nose she was promised.
The court gave the theory behind the choice, from Fuller and Perdue's famous article. The reasons for granting damages for broken promises to the extent of the expectancy are at their strongest when the promises are made in a business context, when they have to do with the production or distribution of goods or the allocation of functions in the market place. They become weaker as the context shifts from a commercial to a noncommercial field. Hold that thought for Lecture Forty Three.
Today the point is that expectation is the default, and courts depart from it for reasons.
Now a commercial case that shows the measure is value to the plaintiff, not cost to the defendant. New York, nineteen sixty five. A college teacher contracts with a publisher for his book on modern drama. He delivers the manuscript and gets a nonreturnable two thousand dollar advance. The publisher merges, stops publishing hardbacks, and refuses to publish at all.
The teacher proves what it would cost to publish the book himself, and the trial court awards him ten thousand dollars, by analogy to a builder who fails to finish a house.
The Court of Appeals, in Freund against Washington Square Press, nineteen seventy four, cut it to six cents. The error by the courts below was in measuring damages not by the value to plaintiff of the promised performance but by the cost of that performance to defendant. Damages are not measured, however, by what the defaulting party saved by the breach, but by the natural and probable consequences of the breach to the plaintiff.
What was the value to him? Not the books. The specific value to plaintiff of the promised publication was the royalties he stood to receive from defendant's sales of the published book. And those he could not prove. His expectancy interest in the royalties, while theoretically compensable, was speculative. He provided no stable foundation for a reasonable estimate. So nominal damages, awarded as a formal vindication of plaintiff's legal right to compensation which has not been given a sufficiently certain monetary valuation.
He kept his manuscript, his advance, and six cents.
Now the strip mine, and the cost versus value problem at its sharpest. Oklahoma, nineteen fifty four. A farming couple leases sixty acres to a coal company for five years of strip mining. They insist, as a condition of signing, on clauses requiring the company to restore the land at the end. Fill the pits, smooth the spoil banks, leave the creek crossings usable. Everyone performs except that the company does none of the restoration. The work would cost about twenty nine thousand dollars.
The farm, restored, would be worth about three hundred dollars more than unrestored.
The Supreme Court of Oklahoma, in Peevyhouse against Garland Coal, nineteen sixty two, gave them three hundred dollars, over four dissents. The majority found the situation artificial. It is highly unlikely that the ordinary property owner would agree to pay twenty nine thousand dollars for the construction of improvements upon his property that would increase its value only about three hundred dollars. It quoted Cardozo from the pipe case.
The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained.
And it stated the rule. Where the contract provision breached was merely incidental to the main purpose in view, and where the economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises because of the non-performance. Oklahoma statutes helped.
No person can recover a greater amount in damages for the breach of an obligation, than he would have gained by the full performance thereof.
The dissent, Justice Irwin, is the better known half of the case. The farmers had insisted on the restoration clauses and would not have signed without them. The company knew the cost when it signed. The breach was wilful. Defendant has received its benefits under the contract and now urges, in substance, that plaintiffs' measure of damages for its failure to perform should be the economic value of performance to the plaintiffs and not the cost of performance.
To give it that, he said, completely rescinds and holds for naught the solemnity of the contract before us and makes an entirely new contract for the parties.
Put the four cases side by side. Hawkins, the pure expectation measure, promised hand against actual hand. Sullivan, expectation thought harsh in a medical promise, reliance substituted. Freund, expectation measured by value to the plaintiff, and nothing because he could not prove it. Peevyhouse, expectation measured by value rather than cost where the cost was grossly disproportionate. In every case the court starts from the same place. What would the plaintiff have had on performance? The fights are about how to count it.
Now let's change one fact. The boy's hand in New Hampshire had come out of the operation exactly as it went in, the graft having failed to take at all. Choose an answer before I go on.
He still recovers, and the court said so. Damages might properly be assessed for the defendant's failure to improve the condition of the hand even if there were no evidence that its condition was made worse. The measure is the value of the promised hand less the value of the hand he has. A doctor who promises a perfect hand and delivers the same scarred hand has broken the promise as completely as one who makes it worse. He has simply caused less loss.
Change one fact again. The Peevyhouse restoration would have cost three thousand dollars rather than twenty nine, on a farm worth five thousand restored. Choose.
Now cost of performance. The Oklahoma rule turns on gross disproportion, and three thousand against a value gain of a few hundred is not the near hundredfold gap the majority faced. The court said the measure is ordinarily the reasonable cost of performance. The exception is for the artificial case where an award would give the owner many times the value of his land. Most courts, and the Restatement, ask whether the cost is clearly disproportionate to the probable loss in value.
At ten to one, the answer is contestable. At a hundred to one, it is not.
Change one fact a third time. The teacher in New York had contracted for the publisher to print and deliver two thousand hardbound copies to him, to sell as he wished, and the publisher had not. Choose.
Now the construction analogy the Court of Appeals rejected would fit, and the court said so. Had the plaintiff contracted for the printing, binding and delivery of a number of hardbound copies of his manuscript, to be sold or disposed of as he wished, then perhaps the construction analogy, and measurement of damages by the cost of replacement or completion, would have some application. The value of that performance to him is the books, and the cost of getting them elsewhere measures it.
Here is what people get wrong here, and why it is tempting. The first mistake is measuring by what the plaintiff spent or suffered. That is reliance, and it is the exception. The default is the value of what was promised. The second mistake is measuring by what the defendant saved. Freund shows why. The publisher saved ten thousand dollars, and the author lost royalties he could not prove.
The third mistake is assuming cost of completion always. Where the cost is grossly out of proportion to the value gained, courts award the difference in value, and the dissent in Peevyhouse will tell you why that can feel like theft.
Here is the rule, in one breath. Damages for breach of contract put the injured party in the position performance would have put him, measured by the value to him of the promised performance less what he has received, not by his expenditure or the defendant's saving, and never more than performance would have given.
For defective or incomplete performance the measure is the cost of completion unless that cost is grossly disproportionate to the value it would add, in which case it is the difference in value. Now, five questions.