PastPaperHero | Remedies - Expectation interest (including direct, incidental, and consequential damages)

Learning Outcomes

This article explains expectation interest in contract remedies, including:

How expectation damages function as the primary measure of recovery and how they aim to place the non-breaching party in the economic position they would have occupied had the contract been fully performed.
How to distinguish and correctly categorize direct (general), incidental, and consequential damages, and why those classifications matter for limits on recovery under both common law and the UCC.
How to apply the requirements of causation, foreseeability, reasonable certainty, and mitigation to determine which claimed losses are recoverable and which will be cut off on an MBE question.
How to compute expectation damages in typical exam fact patterns involving service, construction, employment, real estate, and sale-of-goods contracts using standard formulas.
How to recognize when consequential damages, especially lost profits, are available to buyers but not sellers under the UCC, and how examiners commonly test this distinction.
How contractual limitations, such as exclusion clauses and agreed remedies, interact with expectation damages and the prohibition on punitive damages in contract cases.
How to use a systematic checklist approach to classify damages, plug numbers into the correct formula, and avoid common computational traps on multiple-choice questions.

MBE Syllabus

For the MBE, you are required to understand contract remedies and the calculation of damages, with a focus on the following syllabus points:

The definition and purpose of expectation interest as the primary measure of contract damages.
The distinction between direct (general), incidental, and consequential damages.
The requirements for recovering consequential damages, including foreseeability and reasonable certainty.
The duty to mitigate and its effect on recoverable damages.
Standard formulas for expectation damages and common pitfalls in applying them on the MBE.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

What is the primary purpose of expectation damages in contract law?
1. To punish the breaching party.
2. To put the non-breaching party in the position they would have been in had the contract been performed.
3. To restore the parties to their pre-contract positions.
4. To compensate only for out-of-pocket expenses.
Which of the following is required for a plaintiff to recover consequential damages?
1. The damages must be foreseeable to the breaching party at contract formation.
2. The damages must be punitive in nature.
3. The damages must be speculative.
4. The damages must be expressly stated in the contract.
A buyer covers after a seller’s breach by purchasing substitute goods at a higher price and incurs extra storage costs. Which is true?
1. The buyer may recover only the price difference.
2. The buyer may recover the price difference and incidental damages.
3. The buyer may recover only incidental damages.
4. The buyer may recover punitive damages.

Introduction

Expectation interest is the standard measure of damages for breach of contract on the MBE. The law aims to place the non-breaching party in the economic position they would have occupied had the contract been fully performed—not better and not worse.

Key Term: Expectation Interest
The measure of contract damages intended to give the non-breaching party the “benefit of the bargain” by putting them in the position they would have been in if the contract had been performed as agreed.

Expectation damages are contrasted with:

Reliance damages (reimbursing expenditures made in reliance on the contract), and
Restitution (preventing unjust enrichment of the breaching party).

On the MBE, unless the question explicitly asks about reliance or restitution, assume that the correct baseline is expectation interest.

Types of Damages

Damages for breach of contract are generally divided into three categories: direct (general), incidental, and consequential damages. Getting the category right is important on the MBE because different limits apply to each category.

Key Term: Direct (General) Damages
Damages that flow naturally and necessarily from the breach, representing the value of the promised performance itself.

Key Term: Incidental Damages
Reasonable expenses incurred in responding to a breach, such as costs of cover, inspection, storage, or transportation.

Key Term: Consequential Damages
Damages that do not flow directly from the breach but result from the non-breaching party’s special circumstances, recoverable only if foreseeable at contract formation.

Direct (General) Damages

Direct damages are the core of expectation damages. They compensate for the loss of the contract’s value itself. The exact computation depends on the type of contract:

Sale of goods (UCC – buyer’s damages):
- If the buyer covers: price of cover – contract price.
- If the buyer does not cover: market price at time of breach – contract price.
Sale of goods (UCC – seller’s damages):
- Contract price – resale price, or
- Contract price – market price, or
- Lost profit for a lost volume seller (see below).
Construction contracts:
- Owner breaches: builder recovers expected profit plus costs incurred.
- Builder breaches: owner typically gets cost of completion or, if that would be economic waste, diminution in market value.
Employment contracts:
- Employer breaches: employee recovers agreed wages – amount earned (or that could reasonably have been earned) in substitute employment.
- Employee breaches: employer recovers cost of replacement – contract wage, if higher.

Key Term: General Damages
Another name for direct damages; the type of loss that almost anyone in the plaintiff’s position would incur from a breach.

Incidental Damages

Incidental damages are reasonably incurred efforts and costs in dealing with the breach. They are usually small compared to direct or consequential damages but are frequently tested.

Examples include:

Expenses of arranging cover or resale.
Costs of storing, transporting, or insuring rejected or undelivered goods.
Reasonable costs of attempting to secure a substitute performer.

Under the UCC, both buyers and sellers can recover incidental damages in addition to direct damages.

Consequential Damages

Consequential damages compensate for additional losses caused by the breach that depend on the plaintiff’s particular situation—especially lost profits.

Examples:

Lost profits from interrupted production because a seller failed to deliver a critical component.
Lost profits from a third-party contract the plaintiff could not perform due to the defendant’s breach.
Extra losses from special storage needs or regulatory penalties triggered by delayed performance.

These do not flow automatically from every breach; they arise because of special circumstances.

Requirements for Consequential Damages

The classic rule (from Hadley v. Baxendale) controls both common law and UCC analysis on the MBE.

To recover consequential damages, the non-breaching party must show:

Causation:
The damages were caused by the breach (no recovery for losses that would have occurred anyway).
Foreseeability:
The damages were foreseeable to the breaching party at the time of contract formation—either:
- They arise naturally from the type of breach, or
- They were within the parties’ contemplation because the non-breaching party communicated the special circumstances.

Key Term: Foreseeability (Contract Damages)
A limit on damages requiring that, at the time of contracting, the breaching party had reason to know the type of loss that would probably result from a breach.

Reasonable Certainty:
The amount of loss can be proven with reasonable certainty; purely speculative damages are not recoverable.

Key Term: Reasonable Certainty
A damages requirement that the amount of loss be proven by reliable evidence; courts reject claims based on guesswork or speculation.

New businesses claiming lost profits are especially vulnerable on this element because they lack a track record. On the MBE, assume lost profits of an unestablished venture are too speculative unless the facts clearly supply a reliable basis (e.g., existing contracts, comparable businesses).

Under the UCC:

A buyer can recover foreseeable consequential damages.
A seller cannot recover consequential damages (only direct and incidental).

Calculation of Expectation Damages

A useful general formula is:

Expectation Damages
= (Value of promised performance)
– (Value actually received)

(Incidental damages)

(Consequential damages)
– (Losses avoidable by mitigation)

How this plays out in different contract types:

Service / employment contracts:
- If an employer fires an employee without cause:
  - Damages = contract wages for the remaining term – what the employee actually earns or could reasonably earn in comparable employment.
Construction contracts:
- If owner repudiates before completion:
  - Damages = expected profit + costs already incurred.
- If builder substantially performs but with defects:
  - Usually, cost of repair; but if repair is economic waste, diminution in value.
Real estate contracts:
- Standard measure for buyer when seller breaches:
  - Damages = market value of the land at time of breach – contract price.
- Often, buyer can also recover incidental costs (title search, inspections).
Sale of goods – buyer’s options (UCC):

Key Term: Cover
A buyer’s good-faith purchase of reasonable substitute goods after the seller’s breach, used to measure direct damages.

Cover: damages = (cover price – contract price) + incidental + foreseeable consequential.
No cover: damages = (market price at time of breach – contract price) + incidental + consequential.
Sale of goods – seller’s options (UCC):

Key Term: Lost Volume Seller
A seller who, even after resale, would have made both the original sale and the resale; such a seller can recover lost profit as expectation damages.

Resale: damages = contract price – resale price + incidental.
Market measure: damages = contract price – market price at time of breach + incidental.
Lost volume seller: damages = lost profit (including reasonable overhead).

Duty to Mitigate

The non-breaching party must take reasonable steps to reduce their losses. Damages will not be awarded for losses that could have been avoided with reasonable effort.

Key Term: Mitigation
The obligation of the non-breaching party to take reasonable actions to minimize damages; also called the “avoidable consequences” rule.

Key points:

The duty is one of reasonableness, not perfection.
The breaching party bears the burden of showing the plaintiff failed to mitigate and that mitigation would have reduced the loss.
If the plaintiff fails to mitigate, damages are reduced as if they had mitigated successfully.

Examples:

Wrongfully discharged employee must seek comparable employment, not inferior or substantially different work.
Buyer of goods should attempt cover if reasonably possible.
An owner whose contractor walks off the job must hire a reasonably priced replacement, not sit idle and allow further damage.

Mitigation does not require the non-breaching party to take steps that are unduly risky, humiliating, or clearly inferior.

Limits on Recovery

In addition to mitigation, several limits restrict expectation damages:

Certainty:
Damages must be proven with reasonable certainty; speculative losses (especially future profits without a track record) are not recoverable.
Foreseeability:
Consequential damages must have been foreseeable at contract formation.
Causation:
The breach must be a substantial factor in causing the loss; intervening events may break the chain.
Contract limitations:
Parties can limit or exclude consequential damages by agreement (subject to unconscionability, especially for personal injury).
No punitive damages:
Punitive damages are not available for breach of contract, even for willful breach, unless the conduct also constitutes an independent tort for which punitive damages are allowed.

Exam Tip: Be alert when the fact pattern looks like tort (e.g., bad faith refusal to pay insurance). For MBE Contracts questions, assume contract remedies unless the question clearly invokes tort law.

Worked Example 1.1

A supplier contracts to sell 500 widgets to a retailer for $10 each. The supplier breaches and fails to deliver. The retailer buys substitute widgets from another supplier for $12 each and pays $400 in extra shipping costs. What damages can the retailer recover?

Answer:
The retailer can recover direct (general) damages of $1,000 (the $2 per widget price difference × 500 widgets) and incidental damages of $400 (extra shipping costs). If the retailer can prove lost profits from lost sales due to the breach, and those profits were foreseeable at contract formation, those may be recoverable as consequential damages.

Worked Example 1.2

A seller breaches a contract to deliver a custom machine, knowing the buyer needs it to fulfill a contract with a third party. The buyer loses $8,000 in profits from the third-party contract as a result. Can the buyer recover the lost profits?

Answer:
Yes. Because the seller knew or had reason to know at contract formation that the buyer needed the machine to perform a contract with a third party, the lost profits are foreseeable consequential damages and are recoverable, provided they can be proven with reasonable certainty.

Worked Example 1.3

An employer hires an employee for a one-year term at $5,000 per month. After three months the employer breaches and fires the employee without cause. Comparable jobs are available, and the employee in fact obtains another job four months later at $4,000 per month. What expectation damages can the employee recover?

Answer:
The contract promised 9 remaining months at $5,000 = $45,000. The employee actually earned $4,000 × 6 months = $24,000 in substitute work. Damages = $45,000 – $24,000 = $21,000. The employee must mitigate by taking comparable work, and earnings from that work reduce the recovery.

Worked Example 1.4

Owner contracts with Builder to construct a house for $300,000. After Builder has incurred $80,000 in costs and earned no profit yet, Owner repudiates. Builder’s expected profit on the project was $40,000. What expectation damages are appropriate?

Answer:
Builder can recover costs incurred plus expected profit: $80,000 + $40,000 = $120,000. This puts Builder in the position they would have been in had the contract been performed (recovering cost and profit).

Worked Example 1.5

Buyer contracts to buy a keg of beer from Seller (a brewer) for $100. Buyer repudiates, and Seller resells the keg for $80. What are Seller’s expectation damages?

Answer:
Seller’s direct damages are the contract price minus resale price: $100 – $80 = $20. Seller may also recover any incidental costs of resale (e.g., advertising) if proven.

Worked Example 1.6

Buyer contracts to purchase a car from Dealer for $20,000. Dealer is a large-volume dealer with many identical cars and would have sold a car to Buyer and to all other customers regardless of Buyer’s breach. Buyer repudiates, and Dealer resells the car for $20,000 to another customer. What are Dealer’s damages?

Answer:
Dealer is a lost volume seller. Resale does not fully compensate because Dealer would have made both sales. Dealer can recover its lost profit on the breached sale (contract price – Dealer’s cost, including a share of overhead), even though the resale price equals the contract price.

Worked Example 1.7

FedEx contracts to deliver concert tickets overnight for $20. FedEx breaches and refuses to deliver. The customer pays UPS $50 for rapid delivery and spends $5 on gas driving to UPS. Can the customer recover the extra costs? What about lost profit if the tickets cannot be delivered on time?

Answer:
Extra shipping ($50 – $20 = $30) and $5 gas are incidental and direct damages: $35 total. Lost profits from resale of the tickets are consequential damages and are recoverable only if FedEx had reason to know of the resale arrangement at contract formation and the profits can be proven with reasonable certainty.

Exam Warning

Consequential damages are only recoverable if the breaching party had reason to foresee them at contract formation. If the damages result from special circumstances unknown to the breaching party, they are not recoverable.

Common pitfalls on the MBE:

Treating all lost profits as automatically recoverable. Always test foreseeability and certainty.
Allowing a seller to recover consequential damages under the UCC. Sellers get direct and incidental damages only.
Ignoring mitigation—especially in employment and construction fact patterns.

Revision Tip

Always check whether the non-breaching party took reasonable steps to mitigate losses. Failure to mitigate will reduce recovery for avoidable damages, but it does not bar all damages—only those that could reasonably have been avoided.

A quick checklist when analyzing an MBE damages question:

Identify the type of contract (goods, services, construction, employment, land).
Determine the baseline: value of what was promised minus value actually received.
Add any incidental damages.
Ask whether any claimed consequential damages were foreseeable and can be proven with reasonable certainty.
Subtract any losses the plaintiff could reasonably have avoided by mitigation.

Summary

Expectation damages aim to put the non-breaching party in the position they would have been in had the contract been fully performed. Direct (general) damages compensate for the value of the promised performance. Incidental damages cover reasonable costs incurred in dealing with the breach. Consequential damages compensate for additional losses arising from special circumstances but are subject to strict limits of causation, foreseeability, and reasonable certainty.

The non-breaching party must mitigate damages by taking reasonable steps to reduce loss. Courts will not award damages for losses that could have been avoided with reasonable effort. Punitive damages are not available for breach of contract; contract law is compensatory, not punitive.

On the MBE, you will be expected to classify damages correctly, apply the foreseeability and certainty limits to consequential damages, and compute expectation damages using appropriate formulas for the contract type involved.

Key Point Checklist

This article has covered the following key knowledge points:

Expectation interest is the primary measure of contract damages and aims to give the non-breaching party the benefit of the bargain.
Direct (general) damages flow naturally from the breach and represent the value of the promised performance.
Incidental damages are reasonable expenses incurred due to the breach (e.g., costs of cover, storage, transportation).
Consequential damages are only recoverable if caused by the breach, foreseeable at contract formation, and proven with reasonable certainty.
Buyers under the UCC may recover consequential damages; sellers may not.
The non-breaching party must mitigate damages; failure to do so reduces recovery for avoidable losses.
Damages that are speculative, unforeseeable, or not causally linked to the breach are not recoverable.
Punitive damages are not available for breach of contract.

Key Terms and Concepts

Expectation Interest
Direct (General) Damages
General Damages
Incidental Damages
Consequential Damages
Foreseeability (Contract Damages)
Reasonable Certainty
Mitigation
Cover
Lost Volume Seller

Remedies - Expectation interest (including direct, incidenta...