Contracts are the backbone of business dealings, outlining obligations and expectations between parties. It is important to understand the different remedies available to you if your contract is breached.
What Damages Can Be Awarded?
There is a range of damages that courts may consider in determining the available and appropriate relief to award a non-breaching party. Some of these are compensatory, consequential, general, punitive, liquidated, and nominal damages, to name a few. Each type of damages award is designed to remedy the specific harm that a party may suffer from a breach of contract.
What are Compensatory Damages?
Compensatory damages compensate a non-breaching party for any losses that flow directly from the breach. In other words, compensatory damages aim to put the non-breaching party in the position they would have been in if the contract was fully performed. Oftentimes, compensatory damages may cover financial losses, costs, and other expenses that accrued because of the breach.
For example, some compensatory damages awards may include the entire contract price. Others may take the difference between the current market price of the goods and the original contract price and award that amount as compensatory damages. Alternatively, a court may award the non-breaching party the difference between the contract price and the replacement or resale price if the non-breaching party chose to replace or resell the goods in question, assuming the replacement or resale was reasonable under the circumstances. The exact amount or method used to calculate compensatory damages will vary based on the circumstances surrounding each breach of contract case.
What are Consequential Damages?
Consequential or special damages work to remedy any indirect harm that resulted from the breach of contract. The guiding principle is that, despite the harm being an indirect consequence of the breach of contract, the harm still would not have occurred if the contract had been fully performed. In other words, consequential damages seek to compensate changes in circumstances that indirectly arise from the breach of contract – think business interruptions, losses from the inability to perform your obligations to a third-party contract, or lost customers. To be recoverable, consequential damages must have been reasonably foreseeable at the contract’s inception.
Let’s look at an example to illustrate where consequential damages may apply. Say there is a contract between a restaurant and a utility company for the company to repair the restaurant’s defective pipes. If the company fails to show up and repair the pipes on the agreed day, the restaurant will likely need to close for that day. Consequently, the restaurant will lose all of its potential business for that day as an indirect result of the breached contract. Put simply, if the pipes had been repaired on that day as contracted for, the restaurant would have been able to open, conduct business, and generate revenue.
Unlike compensatory damages, there is no exact way to calculate consequential damages. However, so long as the consequential damages were reasonably foreseen at the time the contract was formed, they will be available to the non-breaching party.
What Are General Damages?
General damages are a subset of compensatory damages. They are non-monetary losses that do not have a specific dollar value attached to them. Instead, they aim to compensate the injured party for intangible harm or losses that are not easily quantifiable.
Examples of general damages are compensation for pain and suffering, emotional distress, loss of enjoyment of life, and loss of reputation. These damages are generally not recoverable is a breach of contract action.
What Are Punitive Damages?
Punitive damages, unlike the other damages discussed, do not relate to a non-breaching party’s actual harm. Instead, punitive damages are awarded to punish the breaching party for their conduct and deter similar conduct from occurring in the future. Because punitive damages aim to punish and deter rather than to compensate, they are almost never available in an action where only a breach of contract is alleged.
Punitive damages, like consequential damages, have no formula available to calculate the amount to be awarded. Punitive damages are left to the trier-of-fact’s discretion and are merely optional in certain types of cases where intentional and malicious conduct is alleged. However, if the trier-of-fact determines that punitive damages is appropriate in a particular case, the award should reasonably relate to both the conduct that caused the breach and the subsequent harm.
What Are Liquidated Damages?
Liquidated damages are pre-determined amounts of money that the parties to a contract agree will be awarded to the injured party in the event of a breach. This is done where the parties agree that a particular breach will cause harm, but are unable to determine what that harm would specifically be at the time the contract is signed. This can be a tricky area as not all liquidated damages clauses are enforceable.
For a liquidated damages clause to be enforceable, the non-breaching party must show that: (1) it is impossible or difficult to estimate the harm likely to be caused by a breach of contract, (2) the pre-determined amount included in the clause reasonably estimates what the harm could be, and (3) the clause is not contrary to public policy or unconscionable to either party. Put simply, the non-breaching party must show that the pre-determined amount is reasonably likely to compensate harm resulting from a breach of contract that cannot be determined at the time the contract is signed, and that it is fair to the parties and the public.
What Are Nominal Damages?
Nominal damages are a symbolic form of compensation that aim to recognize a breach of contract which does not result in any substantial financial loss to the non-breaching party. Typically, nominal damages awards are no more than $1. Nominal damages simply validate the non-breaching party’s contractual rights.
Conclusion
From compensating for direct losses to deterring future misconduct, each category of damages serves a unique purpose that aims to restore balance in contractual relations in its own way. Seek experienced legal counsel to effectively navigate the multi-faceted landscape of contract law.
Contributions to this blog by Brigid Bianco.
