When a contract goes awry, the fallout is not just about hurt feelings and broken promises. It is about dollars and cents. The parties who enter a contractual arrangement expect each party to perform as specified within the agreement. A failure to do so can mean financial loss. But how do the courts calculate the damages when one party holds the other accountable?
The truth is it is a complicated process, and the particulars vary for each individual case based on the facts of the situation — but the process generally involves consideration of the following factors.
#1: Direct damages
These are the bread-and-butter damages — the ones that flow directly from the breach. Examples include lost profits, repair costs, or the price difference between what the other party to the contract promised and what you got. This portion is generally the most clear calculation and can result in large financial awards.
Direct damages are like a receipt for contract chaos.
#2: Liquidated damages
Sometimes, contracts include a pre-agreed amount to cover potential breaches. This could include the possibility of late delivery fees, penalty clauses, or the cost of a broken promise.
Liquidated damages are like a contract’s safety net.
#3: Consequential damages (A.K.A. special damages)
Think of these as the domino effect. They are the ripple effects caused by the breach. The lost business opportunities, reputation damage, or extra expenses incurred due to the breach.
Consequential damages are like the aftershocks of a legal earthquake.
In the courtroom, damages are not just numbers, they are the currency of justice. So next time you are in a contract pickle, remember it is not personal; it is just business.