When two parties execute a contract, they are legally bound to abide by the terms of the agreement. If one party breaches the contract, it can cause considerable problems for the other party. Following a breach of contract, the non-breaching party can choose from several legal remedies. In this article, we discuss two types of breach of contract damages: compensatory damages and consequential damages.
Compensatory damages compensate a party for an actual loss sustained as a result of a breach of contract. Compensatory damages are divided into two categories: general and special. General damages are a direct result of the defendant’s wrongful conduct, and special damages are unique to the party affected by the defendant’s breach of contract. In a breach of contract lawsuit, a claimant is usually entitled to recover both general and special damages. Compensatory damages are not designed to punish a breaching party; rather, their purpose is to make the non-breaching party whole again. For example, if one party agreed via contract to pay another party $5,000 for consulting services but failed to do so, the non-breaching party would be entitled to $5,000 in compensatory damages.
Consequential damages are indirect damages that a claimant suffers as a result of a breach of contract. Although consequential damages are far less common than compensatory damages, courts will award them under the right circumstances. For example, in a breach of contract case, if at the time the contract was executed the parties contemplated the possibility that the non-breaching party would suffer a loss of profits from business dealings that the non-breaching party would enter into with third-parties, then the non-breaching party may be entitled to recovery of the lost profits. In this example, the lost profits would be a consequence of the breach.
However, even when a claimant is entitled to an award of lost profits due to them being within the parties’ contemplation at the time a contract was executed, this does not mean that such an award is guaranteed. The reason for this is that consequential damages in a breach of contract case must be directly traceable to the actions of the breaching party. This can be very difficult to prove. In addition, many written contracts expressly prohibit the recovery of consequential damages by either party, including lost profits.
Contact Our New York Business Contracts and Agreements Attorney
Contracts are a vital part of business. And, although it may be tempting to rely on contract templates or to draft your own contracts, this is rarely a good idea. Without an in-depth understanding of contract law, mistakes are bound to happen—mistakes that can cost you a lot of money. Therefore, before entering into a contract, you should consider contacting a business contracts and agreements attorney, who you can find at Business Law Firm LLC. Contact us to schedule a preliminary consultation.