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24. In an action by the contractor against the homeowner for damages, which of the following would be the largest amount of damages recoverable by the contractor?
A homeowner and a contractor entered into a contract for the construction of a home for $300,000. The contractor was to earn a profit of $10,000 for the job. After the contractor had spent $45,000 on labor and materials, including $5,000 on oak flooring not yet installed, the homeowner informed the contractor that the homeowner had lost his job and could not pay for any services. The homeowner told the contractor to stop working immediately. The reasonable market value of the labor and materials provided by the contractor at that point, including the oak flooring, was $40,000. The contractor used the oak flooring on another job.
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General expectation formula = loss in value + other loss — cost avoided — loss avoided:
Loss in value = the difference between the performance the nonbreaching party should have received under the contract and what was actually received, if anything, in this case, $300,000 less $0
Other loss = consequential and incidental damages, if any, in this case, $0
Costs avoided = the additional costs the nonbreaching party can avoid by rightfully discontinuing performance under the contract as a result of the other party's breach, in this case, $290,000 less $45,000
Loss avoided = the beneficial effects of the breach due to the nonbreaching party's ability to salvage or reallocate resources that otherwise would have been devoted to performing under the contract, in this case, $5,000
So $300,000 + $0 — $245,000 — $5,000 = $50,000.
A is incorrect. The $40,000 figure is an attempt to calculate the contractor's restitution recovery, measured by the benefit conferred on the owner, which will yield the smallest amount of recovery. The restitutionary measure would not allow the contractor to recover damages related to the benefit of the bargain. Circumstances are not present that would cause the contractor to seek damages based on the restitution principle and forgo his expectation measure of recovery. In addition, the $40,000 amount is incorrect as a restitution amount since it fails to deduct the $5,000 worth of oak flooring the contractor used on another job. Restatement (Second) of Contracts §§ 371, 347.
B is incorrect. $40,000 represents the contractor's reliance measure of recovery and fails to take into account the contractor's benefit of the bargain, the profit the contractor anticipated making on the project. Reliance damages are measured based on the contractor's unreimbursed expenses for labor and materials, $45,000, less the salvage value of the oak flooring, $5,000, which equals $40,000. Circumstances are not present that would cause the contractor to seek damages based on the reliance principle and forgo his expectation measure of recovery. Restatement (Second) of Contracts §§ 349, 347.
D is incorrect. A $55,000 damages recovery will place the contractor in a better position than he would have been in but for the breach because it fails to take into account the loss avoided--the beneficial effects of the breach due to the contractor's ability to salvage or reallocate resources that otherwise would have been devoted to performing under the contract. Here the loss avoided is the $5,000 worth of oak flooring that the contractor used on another job. Restatement (Second) of Contracts § 347.