When entering into a contract, all parties involved have the expectation that each will uphold their end of the agreement. However, sometimes one party fails to fulfill their obligations, resulting in a breach of contract. When this occurs, the non-breaching party is entitled to damages as a form of compensation for their losses. There are several types of damages that may be allowed in a breach of contract, each with its own unique purpose.
1. Compensatory Damages
Compensatory damages are meant to compensate the non-breaching party for their losses resulting from the breach. These damages are calculated based on the actual losses suffered by the non-breaching party and may include expenses such as lost profits, expenses incurred as a result of the breach, and other related costs. Compensatory damages may also cover any harm to the reputation of the non-breaching party.
2. Consequential Damages
Consequential damages, also known as special damages, are damages that flow from the breach of contract but are not a direct result of the breach. Consequential damages are often difficult to calculate because they are not immediate and can often be a result of a chain reaction of events caused by the breach. For example, if a supplier fails to deliver goods on time causing the buyer to lose a major contract, the consequential damages may include lost future business opportunities or reputational harm.
3. Liquidated Damages
Liquidated damages are damages that have been agreed to in the contract ahead of time. They are meant to cover any losses that may result from a breach and serve as a form of pre-determined compensation for the non-breaching party. Liquidated damages are often calculated as a set amount or a percentage of the contract value and can be included in the contract as a clause.
4. Punitive Damages
Punitive damages are meant to punish the breaching party for their actions or lack of action. They are not based on the actual losses suffered by the non-breaching party but are instead imposed as a form of punishment for the breaching party. Punitive damages are not often allowed in breach of contract cases in many jurisdictions, except in cases where the breach was intentional or malicious.
In conclusion, damages are an essential component of a breach of contract case. The type of damages that may be allowed in a breach of contract case will depend on a variety of factors, including the specifics of the contract and applicable laws. Understanding the different types of damages available can be helpful for both parties, as it can provide clarity and guidance in the event of a breach of contract.