The idea of breach of contract damages lost profits refers to the profits lost by an individual or business when the other party breaches the terms of a contract.

Contract Claims and Compensatory Damages

In a claim around contractual obligations, compensatory damages are the types of damages that will compensate the party that did not breach the contract. This compensation is supposed to cover the losses of that party that resulted from the contract breach. Compensatory damages are usually awarded if one party breaches the terms of a contract.

The two main types of compensatory damages are:

  • Specific damages
  • General damages

Specific damages will compensate the plaintiff's losses that relate to but don't result directly from the breach, such as a negative impact on one party's reputation. General damages will often cover any losses that relate directly to the contract's subject matter or terms, such as failing to ship a set number of products.

How to Prove Compensatory Damages

When taking legal action, a plaintiff usually must specify their request for compensatory damages. A request for special damages must especially be specifically called out because they involve any losses that wouldn't be addressed in the terms of the agreement. If you don't include a request for compensatory damages at the time you file the claim, you could become ineligible to receive any monetary damages.

In order to prove the request for compensatory damages, certain requirements apply:

  • Calculable: any losses being addressed for damages must be able to be calculated into specific dollar amounts
  • Causation: the breach of the contract must cause the economic losses of the plaintiff, whether directly or indirectly
  • Unavoidable: any loss from the contract could not have been avoided
  • Foreseeability: any losses must be able to be foreseen when the contract is formed

These requirements are evaluated based on the fair market values when the contract was formed. If a loss cannot be calculated or quantified in a monetary amount, it will not be granted. If the loss could have been prevented by the party that did not breach the contract, but that party didn't take action to prevent the loss, compensatory damages will not be issued. This concept is referred to as the doctrine of avoidable consequences. When proving these requirements, the party that didn't breach the contract often has to provide evidence that supports the claims of loss.

For example, the non-breaching party might have to show evidence that during contract negotiations, the risks of the contract were fully discussed by both parties. The non-breaching party may use records of contract negotiations or transcripts of conversations that outline potential businesses losses associated with entering into the contract. By retaining these records, the party that didn't breach the contract might be able to better prove the idea of foreseeability, which is a requirement to show that losses resulted from the breach.

Unavailability of Compensatory Damages

Not all legal cases will award compensatory damages. Statutes in specific states limit the compensation amount that a plaintiff can legally receive in a claim of breach of contract. In the contract, the involved parties may also choose to waive their rights to receive compensatory damages.

Even if the legal restrictions don't allow for compensatory damages, other legal action or remedies could be available. For example, the party that didn't breach the contract could request that the breaching party be ordered to perform the duties or responsibilities outlined in the contract. In most states, the plaintiff is legally required to decide at the start of the trial whether they plan to seek monetary damages or an equitable remedy. The plaintiff usually is not allowed to request both.

Is a Lawyer Needed in Contract Claims?

By nature, contract claims and the legal process associated with them are complex. When a breach of contract happens, the relationship and legal ramifications become more complicated. When you are taking legal action for contractual issues or seeking damages, it is helpful to discuss your case with an attorney. A business lawyer with experience in contractual issues can help determine the best course of action and whether seeking compensatory damages would be an appropriate option in your case.

Quantifying Economic Damages: Lost Profits Approach

A financial expert will look at lost profits that potentially arose from a breach of contract, which is referred to as quantifying the economic damages suffered by the non-breaching party. Economic damage quantification usually happens in commercial cases, such as:

  • Fraud
  • Unfair competition
  • Negligence
  • Intellectual property infringement
  • Contract disputes

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