Types of Damages for Breach of Contract
There are many types of damages for breach of contract that you may receive should a breach occur.3 min read
Updated August 21, 2020:
There are many types of damages for breach of contract that you may receive should a breach occur, these being meted out both to deter parties from breaking contracts and to compensate parties should a contract be broken. The main types of damages are compensatory, liquidation, punitive, nominal, and ordinary damages.
Compensatory damages are monetary damages that are awarded with the intent of compensating the non-breaching party for any losses suffered as a result of a contract breach. They are not designed to punish the breaching party, but merely make the party that was breached against “whole again,” as it is commonly phrased.
As an example, if a contract were signed in which Party A agreed to pay Party B $5,000 for consulting services, but Party A breached the contract by not then using the services and not paying, then Party B would be entitled to $5,000 in compensation. On the other hand, if Party B broke the contract and party A was forced to hire a different consultant for $6,000, Party A would be entitled to $1,000, that being the difference in the contract fee.
In the realm of compensatory damages, there are two sub-types of damages, and they are:
- Expectation damages. These are meant to cover whatever the injured party expected to obtain from the contract. Calculating this is usually straightforward, as it is usually based on the terms of the contract or market values.
- Consequential damages. These are meant to reimburse an injured party for any indirect damages outside of what was covered in the contract. This could include, for example, the loss of business profits stemming from an undelivered piece of equipment. In order for consequential damages to be awarded, injuries must be judged to have been either a direct result of the breach of contract or reasonably foreseen by both parties at the time of entering the contract.
Liquidation damages are damages that are stated specifically in the contract. They can be put in a contract when damages are difficult to foresee, and an estimate is necessary for damages should there be a breach. Thus, such damages are agreed upon by both parties during the contract negotiation.
For instance, if Party A contracts Party B to build a new building that they need for use by a certain date, they could include a provision in the contract that Part B must pay $1,000 per day for every day longer it takes them to finish the building than the date stipulated in the contract.
However, courts can tend to be hesitant to award liquidation damages that they judge to be excessive. To avoid this then, you will want any liquidation damage amount to be reasonable. To help in judging this, some state laws restrict the amount of liquidation damages that can be awarded.
Punitive damages are damages designed to punish a breaching party and deter parties from committing breaches. Such damages are rarely awarded for contract breaches, however, although they may be awarded in some tort or fraud cases that overlap contract cases.
Nominal damages are dispensed when the injured party did not suffer a monetary loss, but a judge wants to show that the injured party is in the right. Generally, nominal damages are very small in amount and are more symbolic in nature.
Ordinary or General Damages
These are damages that stem from the ordinary, natural, and probable course of events in the breach of contract. For example, if Party A agreed to sell Party B grain at $20 per bag with the payment to be made at the time of deliver, but the market price rose to $25 per bag by the time of delivery and Party B as a result refused to sell for anything less than $25 per bag, Party A can then claim damages of $5 per bag.
In some cases, monetary damages may be judged insufficient to compensate the aggrieved party. In this case, equitable remedies may be awarded. Equitable remedies involve a court ordering a party or parties to act or not act in a certain way. Examples could include:
- Specific performance. This could include but is not limited to, forcing the breaching party to perform their end of the contract.
- Contract rescission. In this, the old contract is canceled, and a new one is drawn up.
- Contract reformation. In this, the old contract is rewritten to reflect the true intent of the parties.
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