Contracts are legally binding agreements that outline the expectations and obligations of two or more parties. Breaching a contract occurs when one party fails to fulfill their contractual duties. A breach of contract can result in damages, which are financial compensation awarded to the non-breaching party for losses suffered due to the breach. There are several types of damages that may be awarded in the event of a breach of contract.
1. Compensatory Damages: The most common form of damages for breach of contract, compensatory damages, sometimes referred to as general damages, are intended to compensate the non-breaching party for losses suffered as a result of the breach of contract. These damages are designed to place the non-breaching party in the same financial position they would have been in had the breach not occurred. Some examples: (a) A contractor fails to complete a project as agreed upon, the compensatory damages may be the amount needed to hire another contractor to complete the job; (b) As another example, if a company contracts with a supplier to deliver goods worth $10,000, and the supplier fails to deliver the goods, the company can seek compensatory damages to cover the cost of sourcing the goods from another supplier.
2. Consequential Damages: Consequential damages, also known as special damages, are damages that result from the breach of contract but are not a direct result of the breach. The key is, these damages are (1) the natural and probable consequence of the breach and (2) foreseeable at the time of entering into the subject contract. Consequential damages may include lost profits or damages to other parts of the business. For example, if a vendor fails to deliver goods as agreed upon, the consequential damages may include lost profits from sales that were not made due to the delay. Consequential damages are widely sought after but very difficult to prove in most cases. Whether you can get consequential damages requires an examination of (1) the particular contract at issues (2) whether there has been any conscious assumption of liability to pay the claimed damages, and (3) whether by the words or deeds the defendant reasonably led the plaintiff to believe that the defendant had assumed that liability.
3. Liquidated Damages: Liquidated damages are a predetermined amount of money that the parties agree to in the contract if one party breaches the agreement. The purpose of liquidated damages is to avoid lengthy court battles and provide a straightforward solution to breaches. These damages may be included in contracts for construction projects or in employment agreements.
4. Nominal Damages: Nominal damages are awarded when the non-breaching party has suffered a breach of contract but has not suffered any actual financial loss. The purpose of nominal damages is to acknowledge that a breach has occurred and to allow the non-breaching party to seek a legal remedy.
5. Punitive Damages: Punitive damages are awarded to punish the breaching party for their actions. They are only awarded in cases where the breach was intentional or the result of gross negligence. Punitive damages are not meant to compensate the non-breaching party for any losses but rather to deter the breaching party from engaging in similar behavior in the future.
