Parties to a contract may stipulate damages or contain a method for fixing damages but generally the contract cannot provide a penalty. However, a penalty provision will be valid and enforceable if, at the time of the contract, (1) damages are difficult to estimate, and (2) the provision is a reasonable forecast of possible damages. Whether a party suffers actual damages is irrelevant so long as the penalty is a reasonable forecast at the time the contract was entered into.
The general measure of damages for breach of an ordinary contract is expectation damages. This means that the injured party is entitled to recover an amount that would put him in as good a position as if the contract had been performed.
The measure of damages in employment contracts depends on whether the breaching party is the employee or the employer. Let's say Matt Ryan contracts to work for the Georgia World Congress Center Authority as a spokesperson for 12 months for $85,000 to promote the building of a new Georgia Dome. If Matt Ryan quits after 4 days, and the Authority pays Joe Average $90,000 to replace him, then the Authority can recover $5,000 - the extra cost to replace Matt Ryan.
If however, the Authority wrongfully terminates Matt Ryan after he has worked for only four days, Matt Ryan could recover from the Authority the full contract price of $85,000 (minus any avoidable damages) for being Matty Iced out.
Land Sale Contracts
For land sale contracts, a party can elect to have specific performance and/or money damages. Let's assume for now that money damages are sought. If a seller who has contracted with a buyer to sell land breaches, then the buyer's damages are calculated by the difference between fair market value ("FMV") and the contract price. Thus, if a piece of land has a FMV of $100,000 and a seller breaches a contract to sell the land to a buyer for $80,000, then the buyer's damages are $20,000, the difference between FMV and the contract price.
Let's say a seller contracts to sell land to a buyer for $80,000 and the land has FMV of $75,000. If it is the buyer who breaches, then the seller's damages are measured by the difference between the contract price and FMV, or $5,000. This makes sense because if the contract had been performed, then the buyer would have paid $5,000 for the $75,000 piece of land; so, the seller would have the expectation of $5,000.
Keep reading below to find out how to calculate money damages for construction contracts and for more information.
Expectation Damages Continued
There is a slightly different measure of damages for breach of construction contracts because builders often incur costs before beginning work on construction jobs and owners often incur additional costs for replacing a builder who breaches either prior to beginning the work or during the job.
What can a builder recover when the homeowner breaches? Where it is the owner that repudiates a contract after a builder has begun work on building the house, then the measure of damages is calculated by adding together the amount of costs incurred and the builder's expected profits had he been able to complete the construction. Remember, expectation damages must be established to a "reasonable certainty" in Georgia to be recoverable. Where expectation damages are too speculative to measure, other damages (called reliance damages) may be recovered. Reliance damages will be discussed later this week.
What if it is the builder who breaches?
In the case the builder is the party repudiating the contract prior to beginning construction, the owner's damages are the difference between what the owner had to pay to have the same house built by a new builder and the contract price. The following example illustrates this: Builder Bob contracts to build a house for owner Owen for $100,000. Before beginning construction, Bob repudiates. Owen then finds and pays $115,000 for a new builder, Ned, to build the same house. Here, Owen can recover $15,000, or the difference between what he had to pay Ned and the contract price.
What if Bob quits in the middle of the job?
Let's say Bob contracts to build the house for $70,000 and starts work on the house, incurring costs of $30,000 and then breaches the contract. If Owen spends $50,000 to have the house completed by Ned, then both Bob and Owen can recover. Here, Owen would pay Ned the $50,000 and pay Bob $20,000. This is because if Owen paid the full $30,000 for Bob's costs, Owen would be $10,000 worse off than he would have been had Bob performed under the original contract. Thus, the payment of $20,000 to Bob and $50,000 to Ned puts the parties where they expected to be under the original contract - at $70,000.
Stay tuned for a discussion on breach of contract damages for sale of goods contracts later this week. If you have a contract dispute and want to know about your ability to recover money damages, contact an experienced Georgia contracts attorney at Betts & Associates.