Opinion ID: 3010664
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Heading: Theories of Contract Enforcement by

Text: an Award of Damages In general, contract law espouses three distinct, yet equally important, theories of damages to remedy a breach 16 of contract: expectation damages, reliance damages, and restitution damages. See Trosky v. Civil Serv. Comm'n, 652 A.2d 813, 817 (Pa. 1995); Restatement, supra,S 344. The preferred basis of contract damages seeks to protect an injured party's expectation interest -- that is, the interest in having the benefit of the bargain -- and accordingly awards damages designed to place the aggrieved in as good a position as would have occurred had the contract been performed. See Trosky, 652 A.2d at 817; Restatement, supra, SS 344(a), 347. Toward that end, expectation damages are measured by the losses caused and gains prevented by defendant's breach, to the extent that are in excess of any savings made possible by nonperformance. American Air Filter Co. v. McNichol, 527 F.2d 1297, 1299 (3d Cir. 1975) (citations omitted). While the traditional law of contract remedies implements the policy that goods and services should be consumed by the person who values them most highly, and hence the preference for expectation damages, other theories of damages provide alternative avenues for contract enforcement. This is especially so where an injured party is entitled to recover for breach of contract, but recovery based on traditional notions of expectation damages is clouded because of the uncertainty in measuring the loss in value to the aggrieved contracting party. See Restatement, supra, S 349 cmt. a; 5 Arthur L. Corbin, supra, S 1031, at 188. Thus, where a court cannot measure lost profits with certainty, contract law protects an injured party's reliance interest by seeking to achieve the position that it would have obtained had the contract never been made, usually through the recovery of expenditures actually made in performance or in anticipation of performance. See DePaolo v. DeRomo, 31 A.2d 158, 161 (Pa. 1943); In re Kellet Aircraft Corp., 191 F.2d 231, 236 (3d Cir. 1951); 5 Arthur L. Corbin, supra, S 1031, at 188. Finally, damages under a theory of restitution provides an appropriate form of relief in many contract cases. Its objective is not the enforcement of contracts through the protection of an injured party's expectation or reliance interests, but is instead rooted in common notions of equity through the protection of the injured's restitution interest. 17 See Fidelity Fund, Inc. v. DiSanto, 500 A.2d 431, 438 (Pa. Super. Ct. 1985); 5 Arthur L. Corbin, supra, S 1101, at 548; Restatement, supra, Ch. 16, Topic 4, intro. note, at 199. Accordingly, restitution damages will require the party in breach to disgorge the benefit received by returning it to the party who conferred it. See Trosky, 652 A.2d at 817. Pennsylvania courts will look to traditional principles of equity, such as unjust enrichment or forfeiture, in considering the propriety of restitution damages. See DiSanto, 500 A.2d at 438-39.
With these principles in mind, we now address plaintiffs' first contention on appeal -- that they need not demonstrate damage flowing from breach to a reasonable certainty. Although mathematical certainty is not typically required, the general rule in Pennsylvania, as in most jurisdictions, is that if damages are difficult to establish, an injured party need only prove damages with reasonable certainty. See Scobell, Inc. v. Schade, 688 A.2d 715, 719 (Pa. Super. Ct. 1997); Sobers v. Shannon Optical Co., 473 A.2d 1035, 1039 (Pa. Super. Ct. 1984); see also Restatement, supra, S 352; 5 Arthur L. Corbin, supra, SS 1020, 1022. Doubts are construed against the breaching party. See Delahanty v. First Pennsylvania Bank, 464 A.2d 1243, 1257 (Pa. 1983); Restatement, supra, S 342 cmt. a. Reasonable certainty, as with most other standards of proof, is a difficult concept to quantify, but Pennsylvania courts have provided guidance as to what the term entails for purposes of assessing damages. At a minimum, reasonable certainty embraces a rough calculation that is not too speculative, vague or contingent upon some unknown factor. See Spang & Co. v. United States Steel Corp., 545 A.2d 861, 866 (Pa. 1988). Conversely, applying the reasonable certainty standard does not preclude an award of damages because of some uncertainty as to the precise amount of damages incurred. Pugh v. Homes, 405 A.2d 897, 909 (Pa. 1979). Pennsylvania jurisprudence governing the issue is summarized in Aiken Indus., Inc. v. Estate of Wilson, 383 A.2d 808 (Pa. 1978), where the Pennsylvania Supreme Court ultimately concluded that 18 compensation for breach of contract cannot be justly refused because proof of the exact amount of loss is not produced, for there is judicial recognition of the difficulty or even impossibility of the production of such proof. What the law does require in cases of this character is that the evidence shall with a fair degree of probability establish a basis for the assessment of damages. Id. at 812. Plaintiffs' cited authority is not to the contrary. See Spang & Co. v. United States Steel Corp., 545 A.2d 861 (Pa. 1988); Delahanty v. First Pennsylvania Bank, 464 A.2d 1243 (Pa. 1983); Pugh v. Holmes, 405 A.2d 897 (Pa. 1979); Standard Pipeline Coating Co. v. Solomon & Teslovich, Inc., 496 A.2d 840 (Pa. Super. Ct. 1985). None of these cases establish a more relaxed standard of proof than that required by reasonable certainty. The Restatement itself, which promulgates a reasonable certainty standard, states that [d]amages need not be calculable with mathematical accuracy and are often at best approximate. Restatement, supra, S 352 cmt. a. Thus, we conclude that the district court correctly applied Pennsylvania law in attempting to ascertain damages with reasonable certainty.
the Teaming Agreement Having established the necessary standard of proof to recover damages as a consequence to breach of contract, we now address whether plaintiffs have met such a burden. The district court held that it could not assess expectation damages measured in lost profits because the parties never agreed to a price on plaintiffs' subcontract. While the district court considered the possibility of restitution damages, it concluded that it could not place a definite value on the benefit realized by defendant as a result of plaintiffs' performance. Plaintiffs do not claim reliance damages on appeal, nor did the district court address that possibility as an alternative measure of damages.
Plaintiffs maintain on appeal that they have met their burden of proving expectation damages to a reasonable 19 certainty. Although courts have applied expectation damages to remedy the breach of a teaming agreement, see Air Tech., 199 N.E.2d at 548-49, we find the requisite proof of plaintiffs' expectation interest, measured in reasonably certain lost profits, lacking in this case. Even when discounted to reflect uncertainty, there would be absolutely no basis for the district court to place a value on plaintiffs' subcontract. As the record clearly demonstrates, the parties were far from agreeing on a contract price, financing fees, and other terms of the subcontract. Indeed, the district court found through ample support in the record that significant obstacles stood in the way of an agreement on the subcontract's price, and that the plaintiffs had not presented sufficient evidence that further negotiations would likely have proven fruitful. It is true, as plaintiffs note, that the Pennsylvania law of contracts allows for some uncertainty in calculating damages -- perhaps even a significant amount of uncertainty -- but a lost profits calculus based solely on unsubstantiated speculation and conjecture cannot form the basis of recovery. See Spang & Co., 545 A.2d at 866. Such a vague and speculative determination would have been necessary in this case if the district court assessed lost profits as damages, and accordingly the district court correctly declined to award expectation damages. See E. Allan Farnsworth, supra, 87 Colum. L. Rev. at 264 (lost profits not appropriate with a breach of a preliminary agreement because there isno way of knowing what the terms of the ultimate agreement would have been, or even whether the parties would have arrived at an ultimate agreement); Brent E. Newton, supra, 91 Colum. L. Rev. at 2028 (same).
Notwithstanding any uncertainty in assessing lost profits as a measure of expectation damages, contract law does not preclude an otherwise appropriate remedy under a restitution theory of damages. This is especially the case where, as here, unknown variables cloud a reasonably certain calculation of lost profits stemming from the breach of the teaming agreement. See Air Tech., 199 N.E.2d at 549. Thus, we agree that it would be appropriate for the district 20 court to measure the fair value of [the subcontractor's] contribution to [the prime contractor's] agreement, in order to protect the subcontractor's restitution interest. Id. As the district court properly concluded in this case, plaintiffs contributed valuable services to defendant's Greek RFP bid and significantly enhanced its chances of winning the project. However, the court ultimately held thatit is not clear how to quantify the value of those services, and therefore denied restitution as a measure of damages. While we share the district court's appreciation of the difficulties in measuring the benefit conferred on defendant, we believe the court's denial of restitution as a possible remedy premature without an evidentiary hearing. The district court, with characteristic courtesy, did invite the parties to further brief the issue of restitution, but it did not offer them an opportunity to present additional evidence that might shed light on the quantification of restitution damages. Such evidence might include the testimony of knowledgeable experts in the field who would testify as to the reasonable value of plaintiffs' technical and consulting services in this market of government contracting. Furthermore, as the plaintiffs claimed before the district court, defendant saved approximately $2 million by subcontracting with Craig and Airflow. See App. at 835. If this is indeed the case, the district court may then consider how much of that savings reflected preliminary services rendered by the plaintiffs that ultimately benefitted the Craig proposal. Thus, given the possibility of the plaintiffs' proving reasonable restitution damages, we will vacate the district court's entry of judgment against defendant for nominal damages in the amount of $1. In arriving at this conclusion to remand, we believe that equitable considerations must predominate over a parochial approach to the number of issues properly before us.