Measuring Damages for Breach of Service Contracts

On the MBE, you'll need to know how to calculate damages for contracts for the sale of goods, as well as for common law contracts. Further, a variety of common law contracts can appear on the test, and how you calculate the damages depends upon what type of service is being provided. This note will provide a short review of the most common types of service contracts that show up on the exam.

Contracts for the Sale of Land: Damages are measured by the difference between the contract price and the fair market value of the land at the time of the breach. You should also always consider specific performance in land-sale contracts.

Employment Contracts: Here, you'll need to determine whether the employee or the employer breached the contract. If the employer breached, the employee gets the full contract price (less wages earned elsewhere after the breach). If, on the other hand, the employee breached, the measure of damages is whatever it costs to replace the employee (for example, if a new employee demands higher wages than the breaching employee.)

Construction Contracts: Again, determine who breached--the owner, or the builder. If the owner, the builder will be entitled to the profits that would have resulted from the contract plus costs expended in reliance on the contract. If the builder breaches, the owner is entitled to the costs of completing the project, plus reasonable compensation for the delay. Even if the builder breaches, however, most courts allow the builder to recover for work already performed to avoid unjust enrichment of the owner.

All of the above are the methods for calculating expectation, and reliance damages (ie, compensatory damages). In addition, to compensatory damages, you should also consider consequential damages. These will be awarded if a reasonable person would have foreseen at the time of entering the contract that such damages would result from the breach. In other words, if the damages were foreseeable.

Rather than compensatory damages, liquidated damages will be allowed if there was a provision in the contract for such damages, and the damages were difficult to ascertain at the time the contract was formed. In addition, the amount agreed upon had to have been a reasonable forecast of compensatory damages.

As a final note, punitive damages are generally not awarded for breach of service contracts, though nominal damages (for example, $1) may be awarded where a breach is shown but no actual loss is proven.