Legal Definitions - benefit-of-bargain rule

The benefit-of-bargain rule is a fundamental principle in contract law that dictates how damages are calculated when one party breaches a contract. Its primary goal is to compensate the non-breaching party by putting them in the financial position they would have been in *if the contract had been fully performed* as originally agreed.

This means that the injured party is entitled to recover not just any money they spent out-of-pocket due to the breach, but also the expected profit or value they would have gained from the completed transaction. It aims to provide the non-breaching party with the "benefit" they expected to receive from the "bargain."

• Example 1: Business Acquisition

  Imagine a small technology startup agrees to sell its software platform to a larger company for $1 million. The larger company then breaches the contract before the sale is finalized. The startup eventually finds another buyer, but due to market changes, they can only sell the platform for $850,000.

  How it illustrates the rule: Under the benefit-of-bargain rule, the startup could seek $150,000 in damages from the original breaching company. This amount represents the difference between the $1 million they expected to receive from the original contract and the $850,000 they actually received from the subsequent sale. The rule aims to give the startup the financial benefit they lost from the original, more lucrative bargain.

• Example 2: Construction Project

  A homeowner contracts with a builder to construct a custom deck for $15,000. The builder breaches the contract by abandoning the project halfway through, after the homeowner has already paid $7,500 and the work completed is only worth $5,000. The homeowner then hires a different builder to complete the deck, which costs an additional $12,000.

  How it illustrates the rule: The homeowner expected a completed deck for $15,000. To achieve this, they ultimately spent $7,500 (to the first builder) + $12,000 (to the second builder) = $19,500. The benefit-of-bargain rule would allow the homeowner to recover the extra $4,500 ($19,500 actual cost - $15,000 original contract price) from the first builder. This puts the homeowner in the position they would have been in had the first builder completed the work for the agreed-upon price.

• Example 3: Professional Services

  A freelance graphic designer enters into a contract with a client to create a new brand identity for $5,000. The designer spends considerable time on initial concepts and research, incurring $1,000 in direct costs (e.g., software licenses, stock images) and sacrificing other potential projects. Before the final designs are delivered, the client abruptly cancels the contract without cause.

  How it illustrates the rule: If the contract had been performed, the designer would have received $5,000. Assuming the designer's total projected costs for the project were $2,000, their expected profit was $3,000. The benefit-of-bargain rule would allow the designer to claim damages that include not only their $1,000 in out-of-pocket expenses but also the $3,000 in lost profit, totaling $4,000. This compensates the designer for the financial gain they would have realized had the client not breached the agreement.