in this lesson we will explore a pair of cases that deal with the problem or you might say the difficulty of computing expectancy damages as it turns out that the rule that underlies damage calculations is fairly simple at least from the standpoint that everybody agrees on what it is but there are significant arguments in litigation and in other disputes about what the exact method is to go about computing damages that are awarded for breach of contract so we will take a moment here to explore those our first of the two cases is liengong versus city of mandan weed board a case from the supreme court of north dakota it involved a municipal contract where the city awarded mr lingang a contract to cut weeds in the city on lots that had an area of greater than ten thousand square feet now paired with this contract was one given to another contractor who received a contract to remove weeds from the smaller lots however during 1987 lingang discovered that the weed board's agent was improperly assigning large lots to this other small lot contractor thus he was being deprived of business that he was entitled to under the contract in this case neither side ends up arguing that lost profits can't be calculated but each side does use a different method for computing lost profits and so that's what we need to figure out while we're exploring this case there really is no doubt that a breach of contract has occurred but we want to know how exactly do we figure out what the expectancy damages should be in the lower court the trial judge adopted what it called a modified net profit approach as the measure of damages spoiler alert this approach is wrong but now let's see what the court did the court first figured out what the profit margin of the company was it derived a profit margin of 20 percent by subtracting out four categories of expenses recorded on lien gong's schedule c that he filed with his tax returns and that were attributed to the weed cutting business the judge subtracted those expenses from the weed cutting income and the expense items that were chosen to be taken out were insurance repairs supplies and car and truck expenses once the court determined that the profit margin was 20 percent it assumed then that lien gong's damages would be 20 percent of the contract price this calculation is what mr lingang is appealing from and in fact he's going to win this appeal because what the trial court did was not the correct method for computing damages and specifically the court ignored a very important concept about different kinds of expenses and let's take a look at that now the complaint was that the method used by the trial court to derive net profits was improper because it did not restrict the expenses that were deductible from the contract price to those which would have been incurred but for the breach of contract that is to say it didn't take out those expenses lien gong did not have to pay because the city kept him from doing the work this is the difference between direct costs and indirect costs they're reflected in the graph over at the left side of your screen notice that there is a category of fixed costs running consistently across the bottom of the graph so even if we produce more units along the way of whatever our product is the fixed costs will remain the same things like the office electricity bill or the rent payments on the facility or the property taxes these are not going to vary based on the amount of business that the company does however money spent in specific aid of supplies for manufacturing or for conducting the service business more of that will be spent over time as more units are produced that is a variable cost and that was the problem in this case was the court did not distinguish between these two kinds of goods now even though we are dealing with services rather than manufacturing it's still easy to understand this so let's take a look at a review question out of your book understanding lien gong review question six says requires understanding the difference between these two kinds of expenses called direct and indirect put simply the direct costs are those that vary with the number of units sold while indirect costs sometimes called overhead costs are incurred regardless of the number of units sold in the book we give you some examples of how that might work with a hamburger stand there are going to be additional costs with every hamburger sold there's the burger making supplies there's the meat patties if you don't sell more burgers you actually will save some amount of money in that you are not buying more patties and lettuce and cheese and buns and so forth on the other hand the manager's salary and the property tax paid on the facility those all have to be paid even if you don't sell any burgers at all they don't change those costs are the true overhead expenses and those should not be taken out of the lost profits the problem with the formulation used by the trial court in liengong was that it did not differentiate between these two kinds of costs some items like the insurance cost that was listed are going to stay the same no matter how many weeds and how many lots there are for liengong to work on thus we shouldn't take those indirect costs out when figuring out his profits essentially the correct methodology for calculating damages would be to take the contract price and then eliminate only the direct costs that are saved we should not eliminate the indirect costs moving on we have a different issue that comes up in the case of brandeis machinery versus capital crane rental this case involves the sale of a crane a contract for sale of a crane that had been on site at a place where capital crane was using it brandeis is the seller and brandeis had a contract to sell the crane to capital and capital the renter who was supposed to become the buyer breached the contract seller brandeis then maintained that the trial court aired by failing to award it the full contract price and service charges for late payment according to the terms of its contract the breaching buyer capital argued that the damages should be calculated solely by subtracting the fair market price of the crane from the higher contract price and then the result would be the proper measure of damages these are the two methodologies that we need to consider brandeis's argument as the non-breaching seller was that we should get the purchase price of the crane fully and the contract interest plus any money we spent on inspection and repairs after the breach making a grand total of 460 000 and some change now while that's tempting in the sense that it is the innocent party making the argument notice that brandeis in this situation gets to keep the crane and the purchase price for the crane that is too much on the other side of this capital crane the breaching party went a little bit too far in the other direction though its argument was closer to the accurate result in the case capital crane argued that brandeis if it was entitled to anything it had first argued that there hadn't been a breach but that argument didn't go anywhere so if brandeis is entitled to something it was the contract price minus the fair market value of the crane at the time of the the sale should have happened because brandeis got to keep the crane so brandeis would there only be entitled to nineteen thousand two hundred seventy three dollars the price that the court ultimately awarded included that amount certainly but it also added the costs for inspection and repairs that brandeis had to pay because of the breach these are called incidental damages because they are incurred as an incident of the breach so in this case the correct amount that the court found was twenty nine thousand sixty seven dollars putting together roughly with a little bit of rounding going on the price uh or the difference between the contract price and the market price along with the incidental damages and that would be the correct way of thinking about contract damages now this formulation this methodology exists both in this uniform commercial code case and under the common law so let's think about this in a more methodical process so that we can apply the formula later down the road for expectancy damages we will first ask what's the position of the seller brandeis if the contract had been performed in that case brandeis would no longer have the crane but it would have had two hundred and ninety one thousand seven hundred seventy three dollars in cash because of the breach what position is it in now now brandeis still has the crane that it wasn't able to sell but which has a market price of only two hundred seventy two thousand five hundred dollars but it has no cash so we can see how its position has been worsened by the breach our ultimate question then is how much money would put brandeis in as good a position as it would have been in if the contract had been performed the answer is as shown on your screen the contract price minus the market price the market value of the crane and that was the 19 273 dollar amount then we add to that incidental damages money that was spent solely because of the breach of contract and that would have been costs of inspection and repairs that brandeis would not have been responsible for those are the incidental damages of nine thousand seven hundred and ninety five dollars added together once again the total damages are twenty nine thousand sixty seven dollars this principle that we are applying here are found in uniform commercial code section 2-709 which deals with buyers damages in the event of a breaching seller and take a look at the language here it ought to be familiar to you subsection 3 says damage is for non-acceptance and that is not acceptance of the goods where they should have been accepted those damages are the difference between the market price at the time and place for tinder and the unpaid contract price together with any incidental damages but in a category that didn't apply here less expenses saved in consequence of the buyer's breach that is a method of calculation and what it does is it puts the non-breaching party where the non-breaching party is a seller in as good a position as it would have been in if the contract had been performed but not a better position that is always going to be the tension with expectancy damages we want to make the non-breaching party whole but we don't want the non-breaching party to get a windfall because of the breach this lesson on methods of computing damages now comes to an end and coming up next we will consider another argument that parties have about damages should the non-breaching party's harm be based on the cost of performing the contract or by diminution in value caused by the contract stay tuned for that