B. The Expectancy Principle

Author:John D. McCamus
Profession:Professor of Law. Osgoode Hall Law School, York University

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1) The Basic Principle

The basic principle for calculating an award of damages in a contract claim - the expectancy principle - has the objective of providing the plaintiff with a monetary equivalent of performance. The expectancy principle is forward-looking in the sense that it attempts to secure for the plaintiff the benefits of performance rather than merely restoring the plaintiff to the position he or she was in before the contract was created. The latter objective could be served by simply awarding the plaintiff recovery of all the out-of-pocket expenses sustained in reliance on the con-

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tract. Reimbursement of such losses as have been incurred in reliance on the contract would make the plaintiff whole in the sense of restoring the plaintiff to the financial position the plaintiff was in before entering the contract. Recovery of this kind, often referred to as reliance damages, is, in contrast to the expectancy principle, backward-looking.

The classic exposition of the expectancy principle was set out in Robinson v. Harman7by Baron Parke as follows: "The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."8This principle has been recited by the courts in numberless cases. In the decision of the Privy Council in Sally Wertheim v. Chicoutimi Pulp Company,9it was coupled with the following encomium: "That is a ruling principle. It is a just principle."10Although, as we shall see, the question of how to justify the expectancy principle or identify its underlying rationale has attracted some debate among legal theorists,11there can be no doubt that the expectancy principle is well established and applied by the courts in calculating damage awards in claims for damages for breach of contract.

The operation of the principle may be portrayed by some illustrations of its application. If an owner of land hires a builder to erect a structure on the land and the builder abandons the project before its completion, the owner would be entitled to claim the difference between the amount remaining to be paid under the contract and the amount required to hire a substitute builder to finish the work.12Such an amount would normally place the owner of the land in a position he or she would have been in if the contract had been performed. An employee under a contract of employment at will who is entitled to reasonable notice of termination of the relationship from the employer and who is wrongfully dismissed without such notice would be entitled to recover the wages that would have been earned during that notice period.13In a contract for the pur-

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chase and sale of goods, if the seller refuses to deliver the goods, the purchaser is normally entitled to claim the difference between the contract price and the market price of substitute goods.14In an appropriate case, the expectancy principle might provide a basis for recovery of what might be considered to be consequential losses. Thus, in a contract to supply a chattel that will be used by the buyer to generate profit, the supplier of a defective chattel may be liable for the loss of profits sustained by the buyer as a result of the breach.15Where it is the purchaser of goods that breaches the contract of sale by refusing to take delivery of goods, however, a more complex picture emerges. In order for the seller to claim expectancy damages in the form of the profit that would have been made by completing the transaction, it must first be determined whether the contract price is higher than the market price. If it is, the seller should be entitled to recover the difference between the two as that amount is required to put the seller in as good a position as the seller would have been in if the contract had been performed. If the contract price and the market price are equivalent, it may appear that no expectancy loss has been sustained. If, however, the seller has, in effect, lost a sale because the seller has access to a supply of such goods that is greater than the potential demand for them, the seller should recover the profit that would have been made on this transaction.16Thus, if a car dealer sells the very car that the defaulting purchaser refuses to accept to another purchaser but could, in any event, have obtained a further car from the manufacturer to supply to the second purchaser, the car dealer has suffered a loss in volume of sales and should recover expectancy damages. On the other hand, if the dealer’s access to cars is restricted with the result that the dealer can sell every car obtained from the manufacturer, the dealer has suffered no loss in volume and would not be entitled to expectancy damages.17

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In some fact situations, application of the expectancy principle may generate a calculation that appears to replicate reliance damages. For example, if the undertaking that has been breached is one that, if performed, would have led the promisee not to enter the agreement or, at least, not to detrimentally rely on the undertaking in question, application of the expectancy rule may restore the innocent party, in a financial sense, to the position that the party was in before the contract was entered. In an English case,18for example, the lessee of a service station entered into the station lease with the lessor oil company on the faith of the lessor’s undertaking that a study of the "through-put" or volume of sales likely to be enjoyed at the particular location had been carefully done. In fact, the study carelessly overestimated the volume of the projected sales, and the lessee’s business failed. It was held that the lessee was entitled to recover, as damages for breach of contract, his lost investment on the theory that if the study had been carefully done, it would have revealed the sorry prospects for the business and the lessee would never have made that investment. Thus, although the calculation is an expectancy calculation in the sense that it puts the lessee in the position he would have been in if the undertaking concerning the study had been performed, the calculation corresponds with a reliance calculation in the sense that it allows the lessee to recover his out-of-pocket expenses and to be restored to his pre-contractual position. Similarly, it has been held, in the context of a construction contract, that where the employer of the contractor breaches a contractual undertaking to have prepared the site properly before the construction work was to begin, the contractor is entitled to recover as expectancy damages, the expenses incurred in doing the work that should have been done by the employer. The contractor would not, however, be entitled to recover a profit margin on that work. If the employer had performed its undertaking, the work would not have been done by the contractor and no profit would have been enjoyed on that work.19In cases of this kind, the expectancy measure of damages thus appears to coincide with the reliance or reimbursement measure of damages that would be applied in a tort claim if the contract had been induced by tortious misconduct.20

The contractual expectancy measure and the tort measure of indem-

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nification for injuries sustained will also coincide in a case where the breach of contract, such as careless driving by one’s chauffeur, results in personal injury or property damage. Placing the injured employer in the position he or she would have been in if the chauffeur had complied with the contractual obligation to drive carefully requires compensation for the injuries sustained and would not involve a profit element.

2) Exceptions

The expectancy principle admits of few exceptions. Indeed, the pervasiveness of the expectancy principle may be illustrated by the fact that a number of the principal exceptions recognized at common law have been undermined or, indeed, overruled. Thus, an important exception at common law related to the non-payment of money. The traditional position was that where breach consisted of a failure to perform an obligation to pay money, interest on the amount in question would not be awarded at trial in the absence of an explicit agreement to pay interest in such circumstances.21This approach may be said to constitute an exception to the expectancy principle as a person who receives the sum that was due on an earlier date only at the time of trial cannot be said to have been placed in as good a position as he or she would have been in if the contract had been performed. In the modern era, however, common law jurisdictions have typically enacted legislation enabling courts to award both pre-judgment interest, running typically from the date of breach until the date of judgment, and post-judgment interest running after that date.22The interest awarded is normally simple rather than compound and at the bank rate. It may not, therefore, precisely place the payee in as good a position as he or she would...

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