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.