Compensatory Damages: Damages that Compensate for Actual Harm
Compensatory damages are one of the most common forms of damage recovery in cases of contract breach. The goal of compensatory damages is to compensate, or to make whole, the actual losses incurred by the non-breaching party. In essence, the court attempts to put that party in the same position it would have been in had the breach never occurred. It is important to note here that compensatory damages generally do not provide for punitive damages, or monetary awards that exceed the actual pecuniary losses.
To illustrate the function of compensatory damages in such a case, assume that two parties enter into a lease agreement. If one of the parties breaches the agreement by abandoning the property, a court may award compensatory damages to the non-breaching party to cover actual costs resulting from the breach. For example, if the landlord had to leave the property vacant for an extensive period of time, the lost rental income might be a basis for the award of compensatory damages, although this will depend on the specific facts and circumstances of the lease agreement and the actions of the tenant. If the landlord had to lower the rent or re-rent the property to a third party at a lower rate as a result of the breach , that cost could be covered as well. If the provisions of a contract specify the type and amount of compensation available in the event of breach, that provision will be enforced unless it is found to be unconscionable (unreasonable) in nature. One purpose of these provisions, known as liquidated damages clauses, is to close a gap and allow the parties to receive compensation for an act that couldn’t necessarily be reduced to an exact value. A court may award compensation for an event that is satisfiable only via a subjective measure, such as the extent of emotional distress. Even without the defense of unconscionability, a court may still recharacterize a liquidated damages clause as a penalty if it goes beyond the compensation necessary to make a non-breaching party whole. This means that compensatory damages, including those described in a liquidated damages clause, must fall within, but may not exceed, the theoretical maximum amount of recovery that would have resulted from breach. While this seems a simple measure, it can be difficult to apply.
Consequential Damages: Damages Resulting from Consequences of Breach
Also referred to as special damages, consequential damages cover losses that do not stem from the immediate breach of a contract but instead arise as a foreseeable consequence of that breach. Normal damages only compensate for breach-related losses that are anticipated at the time a contract is made, but consequential damages are not that simple. That’s because, when these damages are awarded, they consider circumstances outside of the contract itself and take into account how that breach might have a domino effect on other aspects of a plaintiff’s life or business.
To illustrate, imagine a scenario where a company agrees to buy 100 lightbulbs from a manufacturer as part of the office’s energy-saving efforts. Due to the defendant’s breach of contract, those lightbulbs are never delivered. However, this defendant should not be held liable for both the cost of the bulk order and the anticipated energy costs that the plaintiff would have saved. Rather, consequential damages compensate for the cost of the bulk order, but do not extend to the savings the plaintiff anticipated.
Foreseeability of those damages is therefore a central factor for courts. For instance, when lightbulb orders are placed in support of a larger company-wide project of which the manufacturer is already aware, it may be possible to argue that the breach also impacts that larger project and thus impacts future savings that the plaintiff anticipated. However, because it’s impossible to know exactly what damages might arise when entering a contract, it is not enough to anticipate damages broadly such as cost savings in a company project. Instead, a plaintiff must provide evidence that specific losses can trace their origin back to the original breach.
The burden of proof is on the plaintiff to prove both foreseeability and causation in order to qualify for consequential damages.
Punitive Damages: Damages Aimed at Punishment and Deterrence
Punitive damages bold to not serve the purposes of compensating the non-breaching party but rather seek to punish the breaching party. As a rule, there are no punitive damages in contract actions. See, e.g., Assoc. Aviation Underwriters v. Arrowood Indem. Co., 290 F.3d 416, 426 (4th Cir. 2002) (punitive damages not allowed in breach of contract claim under North Carolina law). However, some jurisdictions permit recovery of punitive damages in contract actions upon a separate tort, or tort-like, injury. For example, punitive damages may be recoverable for an insurance breach of contract where the insurer committed fraud, malice or oppression. Id.; see also Tyler v. Cape Hatteras Solllara, Inc., 167 N.C.App. 579, 586 (N.C. Ct. App. 2004) (permitting recovery of punitive damages in contract action for negligent handling of a lawyer’s trust account). In a contractual context, the jurisdictional prong is sometimes satisfied by a showing that the breaching party acted maliciously and/or in spite of the non-breaching party. ABC Mktg. Sys., Inc. v. Cott Beverages, Inc., 267 F.Supp.2d 627, 634 (D. Md. 2005) (denying punitive damages at the summary judgment stage but explaining that heightened knowledge of the breach would be sufficient for an award); see also Ex parte Thomas, 813 So.2d 846, 850-51 (Ala. 2001) (allowing punitive damages where evidence suggests vexatious commercial dealings on the part of the breaching party). Furthermore, in assessing whether punitive damages are appropriate, courts may weigh the magnitude of conflict between the breaching and non-breaching parties. For example, "[i]t has been said that in order for punitive damages to be awarded, there must be a severe conflict of interest between the parties or that the defendant was a blatant wrongdoer through fraud, insult, wanton negligence, or misconduct.) In certain circumstances, however, punitive damages may be recoverable where the parties are both engaged in a commercial enterprise, although that factor alone is not always sufficient." Hodges v. Weathers, 33 S.W.3d 68, 73-74 (Tenn. 2000) (internal citations omitted); accord Goldring v. Bonds, 75 Ga. App. 294, 297 (Ga. Ct. App. 1946) ("The degree of wrongdoing between the parties is a significant inquiry in determining the propriety of assessing punitive damages. The element of deterrence is obviously more forceful where the parties are on an equal business basis than where the injured party is in a position of dependence").
Nominal Damages: Damages Recognizing the Violation of a Right
Nominal damages are a legal principle that acknowledges a violation of rights even in the absence of significant loss or harm. They do not look into the actual amount of loss but only acknowledges that a breach has taken place. It can also be awarded when an aggrieved party fails to establish the amount of loss or when the losses suffered cannot be adequately compensated and quantified in financial terms. The shortfall approach also suggests that nominal damages are additional compensation for an injury in fact. In effect, they serve as an award for a moral victory resulting from an acknowledged violation of rights or a legal wrong. The damages awarded depend on the scope of the injury or the conditions required to prove the case. Some of the reasons why nominal damages may be awarded are: When nominal damages are awarded, they are usually nominal in the sense that they are very small amounts. Whatever the quantum of the damages may be , an award of nominal damages may be made for a technical violation of rights without any intentional or negligent wrongdoing on part of the accused. For example, nominal damages may be awarded for infringement of a right to privacy or a patent, but no loss is likely to be suffered. Nominal damages are to a certain extent just symbolic. In some jurisdictions however, there is a reverse assumption that a nuisance, trespass or other recognized tort or accepted injury would also imply damages to be awarded unless the defendant disproves the damages or proves that such damages did not result. There may be some difficulty in determining the appropriate amount of damages where nominal damages are claimed. Nevertheless, the courts have certain discretion in awarding damages to persons to whom substantial damages need not have been awarded.
Liquidated Damages: Damages Resulting from Pre-established Agreement
When a breach occurs, as discussed above, the injured party has damages to collect from the breaching party. But how much? Sometimes, it is difficult to say. In an attempt to say, parties will agree on a set amount that will be owed to the injured party in the event of breach ("liquidated damages") so that it is known ahead of time, when there would otherwise uncertainty. For instance, liquidated damages are often appropriate for real estate developments that require a certain amount of time to complete or setting up a new business. If the party required a certain amount of time to complete its obligation, the other party might prefer to know that, in the event of an early termination (at no fault of the developer), the developer needs to pay an agreed-upon amount of approximately $x dollars as compensation for the loss of use of the commercially valuable land upon which the development was planned to take place.
In some cases, the liquidated damages amount is also intended to compensate the wronged party for the inconvenience and stress of having to go back to the negotiation table and/or seek alternate remedies. For example, if a wishy-washy party promises to buy a piece of property but ultimately fails to hold up its end of the bargain, it could be extremely difficult for the other party to resell a piece of property within a short time frame. In that case, it is difficult to determine what the injured party’s true damages are to be made whole. However, if the parties decide at the outset, that the first party will owe the injured party $x per day until a sale of the property is made, once the property sells, the injured party has a clear mechanism to be compensated for its damage. Without that agreement, it would be much more difficult to define the damages (while also accounting for the true "cost" of having to rely on some other buyer’s goodwill).
For a liquidated damages provision to be enforceable, it must meet a few criteria: 1) the sum agreed to must be a reasonable estimate of instrument damage; and 2) the purposes behind the liquidated damages must be related to the breach of contract. Specifically, liquidated damages provisions are not enforceable if they are intended to punish, rather than to compensate:
Reliance Damages: Damages Paying Back a Party’s Expenditures
An alternative to expectation damages is reliance damages. Reliance damages refer to the idea that a person who relies on the promise of another party may be entitled to recover any costs he spent in reliance of that promise. This theory undermines the basic premise of expectation damages, as it does not serve to put the injured party in the position he would have been had the contract been performed. Rather, it serves to put the injured party in the position he would have been had the contract never been made (or at least as closely as possible). In short, the goal of reliance damages is to reimburse the injured party for expenses incurred by reliance on the promise of the other party. For this reason, reliance damages are more often involved in contract law than breach of warranty or misrepresentation cases.
Reliance damages are particularly useful when expectations or consequential damages will be difficult or impossible to value. Expectations alone can be a difficult valuation, but in many circumstances where reliance damages apply, expectations damages are also difficult to value. For example, if a person decides to sell his car based on the promise of a premium market value for his vehicle, and his expectations as a result are to be able to use the premium from the sale of the vehicle to fund a vacation, this can be a difficult valuation . To value the expectation damages, courts have to value whether the plaintiff would have actually gone on vacation. If the vacation only existed as a hypothetical possibility, it is impossible to value. Yet if the plaintiff has already been planning or preparing for the vacation, and started investing money or other resources into the planning of the trip, that investment does have a value. Thus, in this type of situation, reliance damages will apply.
However, the reliance damages rule is not without limitations. For example, the party who relies on the promise of the other will not be able to recover any expenditures that he suffered as a result of reliance if the promisor can show that no reasonable person would have relied on the promise (i.e., no reasonable person would have believed that he or she the promise was legitimate). Another limitation that is important to note is that the reliance must be foreseeable, given the circumstances. If a promisor enters into a contract knowing that the promise will probably be invalidated by the other party, or that the other party may not be able to fulfill the contract, then that can be an indication of bad faith, which may limit recovery as it shows that the party was aware of the likely breach, and still allowed the injury party to rely on the promise.