In business negotiations, a fundamental rule of law is the “loss of bargain” rule. This rule states that anytime a negotiated agreement falls apart because one party refused to or could not fully perform, compensation may be due to the other party. In legal terms, this is often referred to as “expectation damages.” The theory behind this is that it’s not fair for one party to profiteer off a broken deal, especially if the other was willing to fulfill their obligations.
For example, say an employer and employee agree to a raise in salary at a certain date in the future. If the employer then decides to rescind the agreement, the employee may be entitled to compensation—either because they lost out on their expected wages or because they acted in reliance on the agreement.
How Do Courts Determine Fair Compensation?
Courts weigh a variety of different factors in determining the amount of compensation that is due in the event of a broken agreement. For example, they consider the nature of the agreement itself, the nature of the relationship between the parties, the foreseeable costs or losses incurred as a result of the broken agreement, and any potential benefit to the breaching party.
Ultimately, the goal of these compensatory awards is to put the non-breaching party into the same position they would have been in had the agreement been fully performed.
What Are Some Strategies to Minimize Risk?
In order to minimize the risk of a breach of contract, parties need to be aware of the loss of bargain rule and continually monitor the performance of the other side to ensure they are keeping to the agreed terms. Furthermore, it can often be helpful to incorporate provisions within a contract that would lay out a specific course of action in the event of a breach.
Finally, it is important to keep in mind that contracts may be governed by both state and federal laws, so each party needs to be aware of all applicable regulations.
Conclusion
The loss of bargain rule is an important legal concept to understand for all parties involved in business negotiations. This rule makes it possible to hold parties accountable if they do not fully perform under an agreement, and can assist in providing compensation for damages or losses sustained as a result.