Compensatory Damages in Breach of Contract

A contract is a document that records an agreement between two private parties. This creates mutual legal obligations and provides certain legal rights. A contract can be either oral or written; however, oral contracts are more challenging to enforce, and as such should be avoided.

A breach of contract occurs when a party to a valid contract fails to fulfill their side of the agreement. The specific terms contained within a contract instructs the parties regarding what they must do, and how they must do it, in order to maintain their promise. If a party does not do what the contract instructs that they do, the non-breaching party may take legal action and file a lawsuit against them in court.

Breaches can be either partial or complete. In order to determine what type of damages should be paid, the court will also assess whether the breach was substantial or minor.

There are three main ways in which a person may breach a contract. This includes when:

• There is an anticipatory breach. This is often referred to as anticipatory repudiation, and occurs when the breaching party informs the non-breaching party that they will not be fulfilling the terms of their contract. Once the other party has been notified, they can sue for breach of contract;
• A party has committed a minor breach of contract, which happens when one party fails to perform a small detail of their contract. The entire contract has not been violated, and can still be performed to a substantial degree. A minor breach of contract may also result from a technical error contained within the terms of the contract, such as an incorrect date, price, or typo; and/or
• There is a material or fundamental breach, which are the most common types of breaches that lead to legal action. A material or fundamental breach occurs when the breach is so substantial, it essentially cancels the contract. This is due to the fact that it renders performance by either party impossible.

Some other ways that a contract can be breached include:

• When the contract is fraudulent;
• If the contract was formed illegally;
• If the contract is unconscionable;
• When there is a mistake of fact present within the contract terms; and
• The parties may include specific conditions that are unique to their particular contract, which specify when a party’s actions would be considered a breach.

Individual state laws and the type of contract may determine other ways that a contract could be breached. An example of this would be how a  lease agreement, sales contract, and government contract would all have different ways in which they may be breached.

What Are the Types of Damages Awarded in Breach of Contract Cases?

Although the plaintiff in a breach of contract case must specify the damages they are seeking in their complaint, it is up to the court to decide what type of damages, if any, that the plaintiff should receive. There are several factors that the court takes into consideration when making this determination.

Generally speaking, the most common remedy for a breach of contract case is a monetary damages award. Monetary damages are also known as legal damages, and can be defined as the amount of money awarded to the injured and prevailing party in a lawsuit. These damages are typically paid out by the party who caused the injuries, and may be issued as a penalty, restitution, or both. 

Some examples of monetary damages and other legal remedies include:

• Restitution: The purpose of restitution is to restore an injured party to the position they were in before a contract was formed;
• Liquidated Damages: This is a pre-set amount meant to reflect an estimate of the actual damages a party should receive, should a contract breach occur. Liquidated damages clauses appear in contracts where the subject matter may complicate the process to predict the amount of actual damages;
• Nominal Damages: Nominal damages are essentially symbolic, and are awarded when no true harm resulted from the breach of contract. Because these damages represent more of a matter of contract principles, nominal damages can be as low as one dollar; 
• Quantum Meruit: Quantum meruit is a Latin phrase which translates to “what one has earned.” This is intended to recover the reasonable value of services performed by one party for another;
• Remedies in Equity: Remedies in equity refer to a different form of legal remedies, and are not at all related to monetary damages; and
• Punitive Damages: Punitive damages are issued when there is an incentive to punish and deter the offending party from re-committing such outrageous and offensive actions in the future.

What Are Compensatory Damages in a Contracts Claim?

Compensatory damages are the most popular form of legal remedy requested in breach of contract cases. They are meant to compensate the non-breaching party for any financial losses suffered as a result of the breached contract. Compensatory damages are used to make the non-breaching party whole again, and can include such things as costs for loss of future earnings, costs of hiring new parties to complete the contract, etc. 

The term “compensatory damages” covers general damages and specific damages. General damages commonly cover losses that are directly related to the subject matter of the contract, such as failing to meet a set number of shipments. Specific damages, on the other hand, compensate the plaintiff for losses related to the breach, but not resulting directly from the breach. An example of this would be damage to a business’ reputation. 

What Is Required to Prove Compensatory Damages?

In most breach of contract lawsuits, the plaintiff must specifically state that they are requesting compensatory damages when they file the claim. This is especially true for special damages, as those involve losses that are not addressed in the terms of the contract. If the plaintiff fails to request compensatory damages, they may be ineligible for monetary damages.

Some additional requirements for proving compensatory damages include:

• Causation: The defendant’s breach must be the reason for the plaintiff’s economic losses. These may either be directly caused,as in general damages, or indirectly caused, such as special damages;
• Foreseeability: The losses must be foreseeable at the time of contract formation. Meaning, the foreseeable damages should be considered as reasonably arising naturally from the breach; or, in the contemplation of both parties as the probable result of a breach. If the losses were not foreseeable, a compensatory damages award will not be issued;
• Calculable: The losses must be quantifiable and able to be calculated into specific monetary amounts. Generally, this is accomplished using fair market values at the time of contract formation; and 
• Unavoidable: If the non-breaching party could have prevented the losses but failed to do so, they will be disqualified from receiving compensatory damages. This is known as “the doctrine of avoidable consequences.”

To prove each of these requirements, the non-breaching party may need to provide additional evidence in support of their claims. An example of this would be how the victim of the breach may need to provide evidence that they and the defendant engaged in discussion, regarding the risks involved with their contract. The plaintiff may submit transcripts or records of negotiations providing evidence that the parties discussed potential losses.  

What If Compensatory Damages are Unavailable?

There are certain circumstances in which compensatory damages will not be available. State statutes could limit the amount of compensation that a plaintiff may receive in a breach of contract claim. Further, the parties may waive their rights to compensatory damages in a provision contained within the contract. 

If compensatory damages are unavailable, there may be other available remedies. It may be possible to request for certain equitable remedies, such as an injunction ordering the defendant to perform their contractual duties. As previously mentioned, most states require the plaintiff to choose whether they will be requesting monetary damages or equitable remedies at the beginning of the trial. It is important to note that it is usually not possible for a plaintiff to claim both types of remedies. 

Do I Need an Attorney for a Breach of Contract Case?

If you are involved in any sort of issue involving a breach of contract, you should consult with an area contract lawyers. An experienced and local business attorney will be best suited to understanding your state’s specific laws regarding contracts, and how those laws will affect your legal options. An attorney can also represent you in court, as needed, while helping you work towards an appropriate remedy, such as compensatory damages.