Key Takeaways

  • Cover damages allow a buyer to recover the cost difference between the contract price and substitute goods purchased after a seller’s breach.
  • To claim cover damages, the buyer must act in good faith and make reasonable efforts to obtain substitutes.
  • Cover damages often include both incidental and consequential losses related to the breach.
  • In commercial contracts, cover is a form of compensatory remedy available under the Uniform Commercial Code (UCC).
  • Courts may deny cover damages if the buyer fails to mitigate losses or unreasonably delays substitute purchases.
  • Insurance policies, especially commercial general liability (CGL), may also define what types of damages are “covered,” but this is separate from contractual cover remedies.

A cover contract refers to a legal agreement for lessening a buyer's loss or injury when a seller commits a breach of contract. It is used as a remedy for the breach of a contract involving the sale of goods. Laws about cover in contracts might vary from state to state, but they all seek to help buyers who are victims of contract breaches receive fair compensation. Besides cover, there are several other remedies wronged parties can use to reduce their losses.

What Is Cover?

Cover is a remedy that allows the buyer in a contract to reduce damages when the seller fails to fulfill his or her contractual obligations. It is typically used in a situation where a seller has promised to sell a certain amount of goods to a buyer but fails to do so. The buyer might have to “cover” by buying substitute goods to offset the losses suffered. He or she must avoid making bad faith or unreasonable attempts to buy substitute goods.

When using cover, the buyer has the right to claim damages equal to the difference between the goods listed in the contract and the substitute goods, as well as incidental and consequential damages. However, he or she must deduct any expenses saved as a result of the contract breach.

Requirements to Recover Cover Damages

To successfully recover cover damages, a buyer must meet specific legal conditions:

  • Timely Substitution: The buyer must procure substitute goods within a reasonable time after the breach.
  • Good Faith: The substitute purchase must be made in good faith, not as a way to punish the seller or inflate damages.
  • Reasonable Substitutes: The buyer must seek commercially reasonable alternatives—not necessarily identical goods, but comparable in value and function.
  • Proof of Loss: The buyer must provide clear documentation of the original contract terms, the breach, the substitute transaction, and the resulting financial loss.

Courts often deny cover damages if the buyer delays purchasing alternatives or selects unreasonably expensive substitutes that are not consistent with normal market value.

Other Remedies for a Contract Breach

Other than cover, a wronged party in a contract can use several methods to reduce losses resulting from a breach, including:

  • Award of damages
  • Equitable relief
  • Restitution

Award of Damages

In a court of limited jurisdiction, the most commonly used remedy for breach of contract is the awarding of damages. Generally, the court can award one of two types of damages when approving a contract breach claim: compensatory or punitive damages.

How Cover Damages Are Calculated

Cover damages are calculated under UCC § 2-712 and typically include:

  1. Difference in Price:
    • Contract Price − Substitute Purchase Price = Direct Damages
  2. Incidental Damages:
    • Costs incurred in obtaining the substitute (e.g., shipping, inspection, financing).
  3. Consequential Damages:
    • Additional losses caused by the breach, such as lost profits or production delays, if foreseeable.
  4. Minus Savings:
    • Any expenses avoided because of the breach must be deducted from the total.

Example:If a buyer agreed to purchase 500 units of steel at $100 each, but had to cover at $120 each due to breach, the direct cover damages would be $10,000. If the buyer spent $1,000 on expedited shipping and avoided $500 in storage costs, the total recoverable amount would be $10,500.

Compensatory Damages

Also known as actual damages, compensatory damages cover the loss the nondefaulting party suffered because of the contract breach. The court will try to award an amount of damages that is enough to offset the innocent party's loss. Compensatory damages are further divided into two types:

  • General damages. These damages cover any loss that directly and necessarily results from the breach of contract.
  • Special damages. Also known as consequential damages, special damages cover any loss in a contract breach that is a consequence of special circumstances you would not have been able to predict.

When Cover Damages May Be Denied

Even if a breach occurs, cover damages may be reduced or denied in the following scenarios:

  • Failure to Mitigate: If the buyer makes no effort to replace the goods, courts may find the loss avoidable.
  • Unreasonable Delay: Delaying substitute purchases for too long can weaken the claim.
  • Inflated or Unnecessary Purchases: Overpaying or selecting luxury substitutes not comparable to the original goods may disqualify the buyer from full recovery.
  • Lack of Documentation: Without receipts or proof of the original contract and substitute purchases, recovery may be barred.

These limitations emphasize the importance of taking prompt, reasonable steps after a breach and keeping detailed records of all transactions and costs.

Punitive Damages

Also referred to as exemplary damages, punitive damages are awarded to make an example of or punish the guilty party for bad behavior and deter other people from committing the same act. They are awarded on top of compensatory damages. Punitive damages are rarely awarded in breach of contract cases. They are more common in tort cases, where they serve as a form of punishment for reckless or deliberate misconduct that causes personal harm.

Equitable Relief

Equitable relief comes in two main forms:

  • Specific performance
  • Injunction

Because these remedies are impartial, the court can award or reject them in its equitable discretion. Therefore, a plaintiff might not be granted equitable relief if he or she also engages in bad behavior.

Awarding specific performance is the standard practice for remedying a breach of contract involving the sale of real estate. When a contract for the sale of goods is breached, awarding monetary damages is the standard remedy. Specific performance is an option in the following situations:

  • Monetary damages are an inadequate compensation.
  • The contract's subject matter has unique or sentimental value.
  • Other remedies are not readily available.

In the case of an employee breaching an employment contract, specific performance cannot be used as a remedy. However, if the employee has unique and exceptional ability, skill, or knowledge, it might be possible to use a negative injunction to prevent him or her from working elsewhere.

Restitution

In certain situations, the court might create a fictional contract to prevent unjust enrichment. When this happens, the innocent party's cause of action is considered restitution instead of breach of contract. Restitution is usually used as a remedy when someone passively received or wrongfully secured a benefit that is considered unconscionable.

Cover Damages vs. Insurance Coverage

It’s important to distinguish between contractual cover damages and covered damages under insurance policies:

  • Contract Law Context:
    Cover damages compensate buyers who suffer financial losses after a breach by a seller.
  • Insurance Context:
    "Covered damages" refer to losses that fall within the scope of an insurance policy, such as commercial general liability (CGL) policies. These might include:
    • Bodily injury or property damage caused by business operations.
    • Advertising injuries or product liabilities.

Understanding this distinction is crucial—contractual cover damages are a legal remedy for a failed transaction, while covered damages under insurance involve a third-party insurer and apply to different scenarios.

Frequently Asked Questions

  1. What are cover damages in contract law?
    Cover damages are monetary remedies available to a buyer who purchases substitute goods after a seller breaches a contract.
  2. Can you recover both cover damages and consequential damages?
    Yes, as long as the consequential damages were foreseeable and directly resulted from the breach, they can be recovered alongside cover damages.
  3. What is the legal basis for cover damages?
    Cover damages are governed by UCC § 2-712, which provides buyers the right to substitute goods and recover resulting losses.
  4. Do you need a written contract to claim cover damages?
    Not necessarily, but having a written agreement strengthens the claim by clearly defining the original terms and obligations.
  5. Are cover damages available in service contracts?
    Typically, cover damages apply to the sale of goods under the UCC. In service contracts, other remedies like restitution or specific performance may be more appropriate.

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