Contracts Law In Action

Owner (O) and Builder (B) contract to build a building for $100,000.

In reliance on the contract, O pays B $40,000.

In reliance on the contract, B invests $30,000 (pays workman, buys materials, etc.)

At this point the contract is breached.

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If B breached the contract, O has the right to be put where he would have been had the contract not been breached.  Had the contract not been breached, O would have had a building for an expenditure of $100,000.  O has already spent $40,000.

To mitigate his damages, and to get the building, O quickly finds a second contractor to complete the construction.

Assume the cost of completing the construction is $60,000 (that is, O can hire a new builder who would demand $60,000 to finish the building).  In this case, O would have paid $40,000 to B and $60,000 to the new builder and as a result of these payments, O would have the building.  In this case, O would have paid $100,000 and would get nothing from B.  [Similarly if O sues for his reliance interest, O would get nothing, because O has paid $40,000 for construction that is worth $40,000 to him: even though it only cost B $30,000, since it takes $60,000 to turn what B built into a building worth $100,000 to O, O has gotten $40,000 worth of value]

Assume the cost of completing the construction is $90,000.  Because constructing the building now costs O $130,000 ($40,000 to B and $90,000 to the new builder), O needs to receive $30,000 (so that O is out only $100,000).  O demands that from the breaching B.  Notice this protects not only O’s expectation interest (O is where he would have been had the contract not been breached – a building in exchange for $100,000), but also O’s reliance interest (O is restored to where he was before the contract was formed – O gets back $30,000 of the $40,000 and has a partly built building that is worth $10,000 to O – because it only costs $90,000 to turn that into the building O has valued at $100,000).  (O would be unjustly enriched if he gets back the entire $40K, since O has received $10K in value).

Assume the cost of completing the building is $100,000.  O would get back $40,000 from B.

[[How could this be since B has invested  $30,000?  Maybe the work B did needs to be torn down.  Law abhors waste, so would not order the building to be torn down unless that is necessary.  That law abhors waste explains why B is forced to accept the $10,000 construction in the previous example]].

Assume the cost of completing the building is $50,000.  B would owe O nothing. [For $40,000 in cash, B built something worth $50K to O)

[O’s recovery would be reduced by his failure to mitigate.  In this case, waiting to find a second contractor might reduce the value of what B has built, things would rust, etc.)

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If the Owner breached the contract, B has the right to be put where he would have been had the contract not been breached.  He can sue for his expectation damages.

Suppose that B would have made $20,000 had the building been completed (that is, B would have had to invest $80,000 in salaries to workmen, construction materials, etc. to build the building).

At the end of the job, B expected to have $20,000 in his pocket from constructing this building.  B now has $10,000 in his pocket: B got $40,000 from O and spent $30,000.  O owes B $10,000.  [If B can mitigate damages, such as by reselling some of the construction materials, B’s $10,000 recovery would be reduced by the amount B could have mitigated with reasonable efforts]. [If B sues for his reliance interests, B gets nothing.  In reliance, B spent $30,000 but has received $40,000]

Assume that instead of B having been paid $40,000, B had received nothing from O.   B would receive $50,000 – to end up with $20,000 in his pocket, B would have to be compensated for the sum invested in the project – $30,000 – B’s reliance interest. [ If B sues for his reliance interest only, B would get $30,000]

Assume that this was a losing contract for B, so that B would have had to spend $120,000 to build the building.  If O breaches, and B sues for his expectation interest, B would receive nothing:  At the end of the day, B would have had a hole in his pocket of $20,000.  [[The law does not require B to give that to O.  O gets his building for $100,000, the contract price. ]]

If O breaches, and B sues for his reliance interest, B would receive $30,000 (minus the amounts that can be mitigated). So, if the non-breaching party is on the losing side of a contract, he sues for reliance – not expectation – damages.

Notice, in the losing contract, if the party on the losing side breaches, she ends up paying her loss – to protect the expectation interests of the non-breaching party. If B breaches, O will have to pay someone else to build what is really a $120,000 building.  So, B will have to pay at least the $20,000 projected loss to O.  On the other hand, if the party on the winning side breaches, the loser will not have to account for the mistake and may end up without any loss.  So, the game is to get the person who won to breach.

This recovery of reliance damages can be reduced by as much as defendant can prove with reasonable certainty that the promisee would have lost had the contract been performed.

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And Getting the other party to break up with you

Is it possible to renegotiate the contract – It takes two to agree to the change.  It is possible.  It all depends on the relation.

Can he simply finish the project (for more $) and then collect/charge from O the additional amount? – not unless the contract gives C that right (and why would an O agree to it?)  Some contracts, like many contracts with the government, are cost+ contracts, where the C gets her costs, whatever they are, and then gets a guaranteed profit on top of that.