In contract disputes, there are a range of damage theories available for our clients who have suffered a breach of contract. Generally, the law divides monetary damages for breach of contract into two categories: direct and consequential damages.
Direct damages, sometimes known as general damages, are those damages that naturally and necessarily occur when one party fails to comply with contractual obligations. Generally, the party who suffers a breach of contract may obtain as direct damages the “benefit of the bargain” — that is, the financial benefit that the contract would have conferred had it not been breached.
Consequential damages are those that are not a direct result of the breach, but a consequence of the breach. For example, a breached contract may have lead to a loss of business from other sources. Such additional losses beyond the contract’s direct expected financial benefit may be recovered as consequential damages. Both direct and consequential damages are discussed more below.
Financial benefit of the lost bargain
You may be allowed to recover as a direct damage the benefit of the bargain that was lost as a result of the breach. In other words, this measure of contract damages allows the wronged party to recover the difference between the financial value that they would have received had the agreement not been breached minus whatever value the wronged party actually did receive. Put another way, a party may recover his or her expected financial benefit under the contract.
Another type of direct economic damage that may be recovered for a breach of contract is reliance damages — that is, those expenditures made in furtherance of the completion of contractual duties. Reliance damages are calculated by subtracting the value actually received under the contract, if any, from the value actually given or expended by the nonbreaching party in reliance on the contract. Reliance damages are available under the law regardless of whether the parties contemplated that these damages would exist when they made the contract.
Reliance damages may be the better measure of recovery for the party who suffers a breach of contract if (1) the profit or benefit from the benefit of bargain measure of recovery is uncertain or difficult to calculate; (2) the nonbreaching party is a new business and its operations are uncertain or (3) where the party claiming the breach of contract would have suffered a loss had the contract not been breached.
Special, or consequential damages, are losses that follow naturally, but not necessarily directly or immediately, from the breach. These types of damages may be recoverable when the breaching party had actual notice, or should have foreseen, that the nonbreaching party would suffer these losses.
For example, a business who suffers a breach of contract may lose the opportunity to obtain additional business and contracts; the profits from such additional business and contracts may be recoverable as consequential damages.
Some contracts have liquidated damage provisions, which state specifically what a party may recover if the contract is breached. The amount of contract damage that is set forth is called a “liquidated damage.” The law will allow recovery of liquidated damages in certain circumstances and will disallow such damages if they are found to be an illegal penalty.
An alternative measure of damages
Quantum meruit damages may be recovered if the contract is unenforceable, impossible, not fully performed or void for other legal reasons. Quantum meruit damages serve to return the damaged party to the position it would have been in if no contract had ever been made. The measure of damages in a lawsuit claiming quantum meruit is the reasonable value of the work performed and the materials furnished.
Attorney’s fees may be recoverable
Certain states have statutes that allow for the recovery of attorney’s fees as an additional damage for breach of contract. For example, Sec. 38.001 of the Texas Civil Practice & Remedies Code is one such statute. Further, some agreements will specify that the prevailing party will recover its attorney’s fees. The recoverability of attorney’s fees for breach of contract should be discussed with your breach of contract attorney as an important part of the case strategy.
When a party refuses to comply with their contractual obligations, a breach of contract attorney can help you obtain legal recourse.