In this segment of the course, what we're talking about is what happens when a contract breaks down and the parties are looking for compensation, or specifically, the non-breaching party or the injured party is looking for compensation. Contract law has an unusual and special relationship with the measure of damages. Damages means the money award that a court would give in the event that one party is economically or financially injured in a contract claim. I'm going to spend a couple of minutes here just introducing the basic concept of contract damages, and then we'll talk through some of the specifics. Here's the thing to know. Contract damages put the non-breaching party in the position she would have been in had the contract been fulfilled. This is a little different than some other kinds of damages awards because you don't just get paid for what you lost, the compensation aren't just about getting the injured party or the victim back to status quo, they are about getting the injured party all the way to the promised level. Now, this can be a little bit funny to conceptualize in the context of an employment contract, so let me see if I can offer some examples to help us walk through the logic here. Let's take an example, I'm going to use round numbers here so I can keep track of my own math. Let's say that I am hired on a one-year contract and I'm going to be paid $120,000 for that one year and I'm going to be paid monthly. It's $10,000 a month, just to pick a nice round number. Let's say that my boss fires me at the halfway point, so I get fired after doing six months of work. Let's just say at that point that my boss is also trying to not pay me for my last month of work, so I've only been paid for five months, just ignore taxes and stuff for now because that is going to make it a little bit more tricky, but let's imagine. I can't get a job for whatever reason until this 12 month period is over, maybe it's a seasonal hiring job like teaching. I was promised $10,000 a month for 12 months. I worked for six months and I have been paid for five months. When I go to court, I'm going to argue that I am entitled to a measure of compensation called expectation damages. Expectation damages put me, the non-breaching party, in the position I would have been in had the contract been fulfilled. Let's work that out. In this case, the amount of money that I would need in order to be put in the position that I would have been in had the contract been fulfilled, is going to be $70,000. Let's figure out why that's the case. It's not just how much I'm owed for the month of work that I did and didn't get paid for, it's the whole promised amount. I was promised $120,000 for 12 months of work. Instead, in 12 months, I only have $50,000 from this employer. I can't get another job for whatever reason. The difference between $50,000 and $120,000 is $70,000, that's expectation damages. Now, imagine probably the more likely scenario, which is that I was able to get another job. Let's imagine I'm able to get another job right away, but that job actually only pays $5,000 a month. Now what are my damages? Well, I promised I would do a year of work and I'll get paid a $120,000. If I complete this year of work, I will have done a year of work and gotten $50,000 for my breaching employer and $30,000 from my new employer. That's one year of work for which I received $80,000. If I sue that breaching employer, I'm going to sue for $40,000. I'm going to say, listen, in order to be put in the position I would have been in had the contract been fulfilled, I need to have made $120,000 for this year. I've only made $80,000 for this year, or only expecting to make $80,000 given what other employers would pay me and what you're paying me, you owe me $40,000 to bridge that gap. Expectation damages works in both directions, at least in theory. In any given contract, say a contract for the sale of goods, anyone can breach, the buyer can fail to pay or decide not to buy, or the seller could fail to deliver, decide not to sell. In employment contracts, outside of some more high profile employment arrangements, it would be practically very unlikely for an employer to sue for expectation damages. But you can probably think of some situations where this could happen. I think that probably the most natural situations to think of are cases in which the employee is a famous person, so the employee is in some ways special and hard to replace. Imagine, for example, an actor. Imagine that an actor commits to working on a movie for which they're going to get paid two million dollars, and then the actor walks off before the movie starts, before they even got paid any money, but after he's committed to the film. The studio sues and says, we are entitled to expectation damages because you've breached the contract. Expectation damages in this case require that the actor compensates us the studio enough to put us in the position that we would have been in had the actor fulfilled his contract. That's more than just maybe money we spent for the movie or whatever, in theory, at least, the studio can claim, we had to pay another actor take the first actor's place and it's really expensive because now it's last minute, or the market has shifted. We can track it to make a hit movie in six months and pay two million dollars for a lead actor. Instead, to get the movie made on time also with a similar actor, we had to pay three million dollars for that actor. We're suing the breaching actor for a million dollars. That's expectation damages. They say in order to put us in the position we would have been in had this contract been fulfilled by our original counterparty actor, we need to be paid the million dollars extra we had to pay to replace him. That's expectation damages in the event of an employee breach. The principle of expectation damages is that if there has been a breach of contract, the person left holding the bag, the injured party can claim compensation in an amount that puts them in the position they would have been in had the contract actually been performed. There are all kinds of complications and difficulties with proving that amount. You can ask questions like, what really is the value of one actor's work compared to another? What actor is a little bit more famous or more likely to make the movie a hit? What if the wrongfully discharged employee found another work of similar pay but worse hours, how do you think about compensation for that? Those are difficult evidentiary issues or how do I prove what the loss is, but conceptually, it's important to know what the principle of contract damages is. The principle is that the injured party can seek expectation damages, the amount that will put them in the position that they would have been in had the contract been fulfilled.
