Compensatory damages are intended to place the nonbreaching party in the same position he would have been in had the breach not occurred. This is done with an award of money. There are four basic forms of compensatory damages:
- Loss of the Bargain: the difference between what the nonbreaching party was entitled to under the contract and what he actually received, minus any savings he realized because of the breach.
- Cost of Completion: Reasonable cost of curing the defect in the tendered performance by haing the performance completed by a third party. Setoff.
- Incidental Damges: Damages that flow directly from a breach of contract.
- Consequential Damages: Damages that are not caused directly by a breach but result as a direct, foreseeable consequence of the breach.
Some special compensatory damages situtions:
Sale of goods: In a contract for the sale of goods, the usual measure of compensatory damages is an amount equal to the difference between the contrat price and the market price. For example, suppose the ABC Corporation contracts to buy ten servers (computers) from XYZ Corporation for $8,000 each. XYC fails to deliver the servers to ABC. The market price of the servers at the time ABC learns of the breach is $8,150. ABC's measure of damages is $1,500 (10 x $150) plus any incidental damages (expenses) caused by the breach. On the other hand, if the buyer breaches and the seller has not yet manufactured the goods, compensatory damages normally equal lost profits on the sale, not the difference between the contract price and the market price.
Sale of land: If the equitable remedy "specific performance" (discussed below) is unavailable (for example, when the seller has sold the property to someone else), or when the breach is by the buyer, the measure of damages is ordinarily the same as in contracts for the sale of good -- i.e., the difference between the contract price and the market price of the land.
|Party in breach
||Time of breach
||Measurement of Damages|
||Before construction has begun
||Profits (K price less cost of materials & labor)
||Profits plus costs incurred up to the time of breach
||After construction is completed
||K price plus interest
||Before construction is completed
||Generally, all costs owner incurs to complete construction
Courts award nominal damages when a breach of contract is proven by the plaintiff cannot prove any actual damages. Most law suits brought for nominal damages are brought "for the principle of the thing."
Unliquidated damages are damages that have not been calculated or determined. Liquidated damages are damages that are certain in amount. A liquidated damages clause in a contract specifies a certain amount to be paid in the event of a future default or breach of contract. For example, a provision requiring a construction contractor to pay $200 for every day he is late in completing the construction is a liquidated damages clause. Liquidated damages differ from penalties. Penalties specify a certain amount to be paid in the event of a default or breach of contract and are designed to penalize the breaching party. Liquidated damages provisions are enforceable; penalty provisions are not.
To determine whether a particular provision is for liquidated damages or for a penalty, two questions must be answered. First, when the contract was entered into, was it apparent that damages would be difficult to estimate in the event of a breach? Second, was the amount set as damages a reasonable estimate and not excessive. If both answers are yes, the provision will be enforced. If either answer is no, the provision will not be enforced.
Recission & Restitution
Recission is an action to undo or terminate a contract. Restitution is to return te contracting parties to the positions they occupied prior to the transaction. When fraud, a mutual mistake, duress, undue influence, misrepresentation, or lack of capacity to contract is present, recission is available.
Reformation is an equitable remedy used when the parties have imperfectly expressed their agreement in writing. Reformation allows the court to rewrite the contract to reflect the parties' true intentions. It aplies most often when fraud or mutual mistake is present. Reformation is almost always sought that some other remedy may be pursued. For example, if Gregory contracts to buy a certain parcel of land from Cavendish, but their contract mistakenly refers to a parcel of land different from the one being sold, the contract does not reflect the parties' intentions. A court of equity can reform the contract so that it conforms to the parties' intentions and accurately refers to the parcel of land being sold. Gregory can then, if necessary, show that Cavendish has breached the contract as reformed and seek specific performance of the contract.
Election of Remedies
In many cases, a nonbreaching party has several remedies available. The party must choose which remedy to pursue. The purpose of the doctrine of election of remedies is to prevent double recovery.
This doctrine has been eliminated in contracts for the sale of goods in the UCC.
Mitigation of Damages
Generally, parties have an affirmative duty to mitigate their damages by taking any steps reasonably necessary to lesson the breaching party's damages.