Damages for Breach of Contract

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Posted on June 1, 2022 by Barry Zalma

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Generally, the purpose of an award of damages for breach of contract is to compensate the injured party and provide the benefits promised by the contract. The general rule is that damages are meant to place the claimant in the same position as if the contract had been performed.

In the 16th century, when our English forbears began resolving disputes through trial by jury rather than ordeal or battle, courts were divided into courts of law and courts of equity. The law courts dealt with money damages for various offences like breach of contract, negligence or intentional torts.

In order to discourage people from breaching contracts the law allows various remedies to the party to the contract who lost the benefit of the bargain. In the event a breach is proved a court may award:

damages,

specific performance,

contract rescission, and

contract modification or reformation.

While British Common Law was forming damages were the province of the law courts while the other three remedies were handled by the courts of equity. In the 16th century the equity courts were handled by clerics who, it was thought, were better qualified than appointed law judges, to provide the fairness required for equitable remedies.

The damages allowed for breach of contract was limited to compensatory damages. These are damages for a monetary amount that is intended to compensate the non-breaching party for losses that result from the breach. The aim of compensatory damages is to “make the injured party whole again” but not put the non-breaching party in a position better than contemplated by the contract terms.

Damages for breach of contract were traditionally limited to the need to compensate the Plaintiff for the harm proximately caused by the breach. Damages must have been contemplated by the parties or be reasonably foreseeable at the time the contract was entered into. Contract damages do not usually allow recovery for unanticipated harm or injury, as do damages for injuries caused by torts.

Damages for breach of contract must be clearly ascertainable. Proof of actual harm and its cause must be established. Damages restore the Plaintiff to the position they would be in had the contract been fulfilled. In other words, Plaintiff is entitled to the benefit of the bargain. A Plaintiff suing for breach of contract may not recover an amount greater than what they would have gained had the contract been fulfilled.
Compensatory Damages

Compensatory damages are not meant to be punitive in nature. The goal is not to punish the breaching party for “immoral” conduct, but rather to put the non-breaching party back into the position he or she would have been in, had the contract been performed.
Expectation Damages

These are damages that are intended to cover what the injured party expected to receive from the contract. Calculations are usually straightforward as they are based on the contract itself or market values.
Consequential Damages

These are intended to reimburse the injured party for indirect damages other than contractual loss; for example, loss of business profits due to an undelivered machine. Consequential damages aim to address the flow of problems that reasonably result from a party’s breach of contract.

In order for the injured party to recover, the injuries must be a direct result of the breach and be reasonably foreseeable to both parties when they entered into the contract. Consequential damages are designed to compensate for secondary or derivative losses resulting from special circumstances particular to that contract or to the parties.
Quantum Meruit

A court can award one party payment for what they deserve for any work that he or she performed before the other party breached the contract. Translated from Latin, the term means “as much as he deserved.”
Statutory Measure of Contract Damages

In California, for example, in very limited circumstances, statutory law specifies the measure of damages. These circumstances usually are:

Obligation to pay money only;

Covenant of seisin (the possession of land or chattels), of right to convey, of warranty, or of quiet enjoyment in a grant of real property;

Covenant against encumbrances;

Contract to convey land;

Agreement to deliver quitclaim deed;

Agreement to purchase real property;

Leases of real or personal property;

Obligations of carriers of passengers, freight, and messages;

Warranty of agent’s authority, or

Other statutory schemes governing the transaction

Traditionally, breach of an insurance contract only allowed damages that were those specified above from law courts who would determine the monetary loss caused by the breach.

In addition, insurance contracts were subject to the courts of equity who could formulate a fair remedy to a dispute over a breach of contract where money was not an appropriate remedy. Equitable remedies involve the court ordering the parties to act or to refrain from acting.
Liquidation Damages

Damages that are specifically stated in the contract because it would be difficult for the parties to prove the exact amount of damage in the case of a breach. To protect the parties to the contract they agree, at the time of contracting, what the damages will be in the event of a breach.
EQUITABLE REMEDIES

In modern American jurisprudence judges sit as both law judges and equity judges.

Types of equitable remedies include:
Specific Performance

Specific performance is usually available when the contract involves some kind of unique goods or other unusual benefit to the other party, and ordinary money damages are not sufficient to make the aggrieved party whole. Real estate is often the subject of specific performance because, in most cases, each piece of property is unique.

The court of equity, being fair to both parties, will issue a judgment that requires the breaching party to perform their part of the bargain indicated in the contract. For example, if one party has paid a premium for fire insurance but the insurer refuses to acknowledge the existence of the policy the court of equity would require the insurer to recognize the existence of the policy and pay the benefits promised by the policy.

In such a situation, the court of equity would leave to the parties the obligation to determine the dollar amount of benefits available to the insured.
Contract Rescission

If the court determines that the contract of insurance was entered into as a result of deception or mistake, the contract which is the subject of dispute can be “rescinded” (cancelled from its inception as if it never existed). This is a remedy typically given when both parties agree to cancel the contract or if the contract was created through fraud, misrepresentation or concealment of material fact, or mistake of material fact. For detail on the remedy of rescission see Rescission of — 2nd Edition available as a paperback and as a Kindle book or at amazon.com by searching for the title.
Contract Reformation

The contract of insurance is rewritten by the court with the new contract reflecting the parties’ true intent. Reformation of an insurance policy requires a valid contract to begin with and often is used when the parties had a mistaken understanding when forming the contract. The equitable remedy of reformation allows the contract of insurance to let each party receive the benefits of the contract they believed they made and fix errors in transcribing the understanding to the written contract.
Limitation of Damages by Contract of Special Circumstances

When a contract is terminated according to its terms, damages are limited to those accrued prior to termination. If the contract contains a provision allowing termination without cause upon due notice, but the party breaches by terminating without allowing the notice period to expire, then damages are limited to those that could potentially accrue during the period of the required notice. For instance, an insurance policy is improperly cancelled before its expiration damages may result if the policy is not replaced and a loss occurs.

When the breach of contract is partial, prospective damages are not available. Plaintiff may recover damages only from the time of nonperformance to the time of trial. Damages may not be recovered for anticipated future nonperformance.

See the next video for more on damages.

(c) 2022 Barry Zalma & ClaimSchool, Inc.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 54 years in the insurance business. He is available at http://www.zalma.com and [email protected].

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