Compensatory Damages in Contract Cases

Damages for breach of contract fall into three categories:

  • Expectation – prospect of gain from the contract.
  • Reliance – detriment the injured party may have incurred by changing his or her position.  The purpose of reliance damages is to restore the victim of a breach to the position s/he would have been in if the contract had not been made.
  • Restitution – interest in the benefits the injured party has conferred upon the breaching party.

Generally, the objective of contract damages is to insure that the aggrieved or injured party receive what s/he expected from the bargain.  The aggrieved party should be placed in the same position as though the contract had been fully performed.  This is what is known as protecting the expectation interest of the parties.  An injured party may recover for a breach of contract the amount which will compensate the party “for all the detriment proximately caused by the breach, or which, in the ordinary course of things, would be likely to result from the breach.”

There are several limitations on awarding damages to make the non-breaching party whole.  A party cannot recover for loss which s/he could have avoided or mitigated through his/her reasonable efforts.[i]  A person injured by the wrongful acts of another has a duty to mitigate or minimize the damages and must protect himself/herself if s/he can do so with reasonable effort or at minimal expense, and can recover from the delinquent party only such damages as s/he could not, with reasonable effort, have avoided.  The duty to mitigate damages is sometimes referred to as the doctrine of avoidable consequences.[ii]

Damages are limited to those losses which were foreseeable.[iii].  Special damages are recoverable when special circumstances exist which cause some unusual injury to the plaintiff.  The plaintiff can only recover special damages if the defendant knew or should have known of the special circumstances at the time the defendant entered into the contract.

Moreover, damages must be established with reasonable certainty, in order to be recoverable.  Damages which are speculative, remote, imaginary, contingent, or merely possible cannot serve as a legal basis for recovery.[iv]  Damages will not be awarded for the mental distress or emotional trauma that may be caused by a breach of contract.  The injured party should not be in a better position as a result of the breach than s/he would have been if the contract had been fully performed.  However, the quasi contractual remedy of quantum meruit allows a promisee to recover the value of services s/he gave to the defendant irrespective of whether s/he would have lost money on the contract and been unable to recover in a contract action.[v]

Pursuant to UCC 2-711 (1)(a), when there is a repudiation of the contract by the seller, the buyer may “cover”. UCC 2-712 provides that s/he may recover as damages the difference between the cost of goods in substitution for those due from the seller and the contract price together with incidental or consequential damages.  Pursuant to UCC 2-713, s/he may have damages measured by the difference between the market price at the time of the breach and the contract price in addition to any incidental or consequential damages.  UCC 2-712(1)(2) provides the remedy of “cover”, which gives the buyer the right to recover the cost of a good faith purchase of substitute goods made without unreasonable delay.  UCC 2-715 provides that recovery of lost profits is consequential damages.  However, UCC 2-715(2)(a) bars consequential damages where the loss could have been avoided by “cover.”  The objective of the law of contracts is not to punish the breaching party, but rather to grant relief to the victim of the breach, by making him/her “whole” again.

As an element of general damages, loss of profits may be recovered for a breach of contract if:

  • The loss is the direct and natural consequence of the breach,
  • It is reasonably probable that the profits would have been earned except for the breach, and
  • The amount of loss can be shown with reasonable certainty.

An employee, who was damaged as a result of a breach of an employment contract by the employer, has a duty to take steps to minimize the loss by making a reasonable effort to find comparable employment.  If the employee through reasonable efforts could have found comparable employment, any amount that the employee could reasonably have earned by obtaining comparable employment shall be deducted from the amount of damages awarded to the employee.[vi]

Liquidated damage clauses are enforceable if:

  • the amount fixed is a reasonable forecast of just compensation for any harm that would be caused by breach and
  • the harm that is caused by the breach must be uncertain or difficult to quantify.

The general rule is that punitive damages as opposed to compensatory damages are not recoverable for breach of contract, even if the breach is willful.  However, recent cases have tested the limits of this principle.  The plaintiff is not limited to damages recoverable in a contract action.  However, the plaintiff is entitled to the damages allowable under the more liberal rules recognized in tort actions.

Specific performance is available when other traditional remedies would be inadequate.  While a court may refuse to grant specific performance where such a decree would require constant and long-continued court supervision, this is an issue left to the discretion of the court which may be ignored when the public interest is involved.  Specific performance will not be ordered when the party claiming breach of contract has an adequate remedy at law.  A remedy at law adequate to defeat specific performance must be certain, prompt, complete, and efficient to attain the ends of justice as a decree of specific performance.  It is not required that both parties be mutually entitled to the remedy of specific performance in order that one of them be given that remedy by the court.[vii]  In lieu of monetary damages, the parties may be entitled to the equitable remedy of rescission.

[i] Rockingham Cty. v. Luten Bridge Co. 35 F.2d 301 (4th Cir. 1929)

[ii] Hanson v. Boeder, 2007 ND 20 (N.D. 2007)

[iii] Hadley v. Baxendale. 9 Exch. 341(1854)

[iv] McDonald v. John P. Scripps Newspaper, 210 Cal. App. 3d 100 (Cal. App. 2d Dist. 1989)

[v] United States v. Algernon Blair 479 F.2d 638 (4th Cir. 1973).

[vi] Parker v. Twentieth Century-Fox (1970) 3 Cal.3d 176, 181-182.

[vii] Laclede Gas Co. v. Amoco Oil Co. 385 F. Supp. 1332 (E.D.Mo. 1974)


Inside Compensatory Damages in Contract Cases