6 Types of Damages in Contract Law

If two people are engaged in a contract, and one of the parties fails to fulfill their side of the contract, the other person is entitled to be compensated. There are a number of potential ways the situation can be remedied when a party breaches its end of the contract. So, what are the types of damages in contract law?

Damages refer to the money or compensation given to the non-breaching party of a contract. It is a legal remedy. There are six common types of damages a person can recover — compensatory, incidental, consequential, nominal, liquidated, and punitive. Let’s explore each damage type in greater detail.

Related: What are the Different Types of Contract Law?

What are the Six Different Types of Damages in Contract Law?

1) Compensatory Damages

Compensatory damages is money paid directly to the non-breaching party to compensate for the worth of what was left incomplete or performed incorrectly. Sometimes calculating what the compensatory value should be is easy. Other times, however, it is much more challenging to figure out. If what was promised was a service, then the compensation would be what it would cost to have another person perform the contracted work. But the calculation can be complex when the service is not something that is easy to duplicate.

Compensatory Damages Example #1 – Autobiography

As an example, let’s say a woman wanted an autobiography written about her life, and she hired Ernest Hemingway to author the book for her. However, halfway through her story, he backed out. The cost could not be measured by hiring another author, such as Dr. Seuss, to complete it. Only Ernest Hemingway can write like Ernest Hemingway. Dr. Seuss may not charge or write the same type of story the woman was seeking. So, in this case, they would have to calculate the net value that would have been granted had Hemingway completed the book and use this amount to measure the amount to award for compensatory damages.

Compensatory Damages Example #2 – Promised Salary

In another example, let’s suppose an employer hired an employee to work for him and offered to pay $65,000 a year. After signing a contract, the employer changes his mind. As a result, the employee is now out of a job and out of an expected income of $65,000. However, this employee goes on a job search and finds a job that will pay him $60,000 a year. His compensatory damages would no longer be $65,000 for breach of contract because he found another job that will pay him $60,000 annually. Thus, he will be awarded $5000 in compensatory damages because this is how much he actually lost when the first employer broke the agreement.

2) Consequential Damages

Consequential damages can be considered special damages because they don’t happen directly from the breach of contract but are consequences that occurred because of the breach. As an example, I was recently in a minor car accident. It happened as I was pulling out of my driveway. As I was backing out, I noticed an accident that had occurred right next door. The car was still stopped in the middle of the road, and the driver was on the phone. As I looked at the accident, I didn’t notice that the person across the street was also backing out of his driveway, and we backed right into each other, causing minor damage to both our cars. My accident occurred as an indirect result of the first accident, which distracted both myself and the neighbor across the street.

3) Incidental Damages

Incidental refers to something that happens by chance. It was not intended. Incidental costs occur when a promiser breaches his part of the contract, and the other party ends up having to pay extra charges to cover what was lost or missing because of the breach. These costs were not expected. They can include such things as:

• Inspections
• Transportation or special care of inventory
• Expenses sustained in connection with the broken contract, such as delayed items
• Storage costs of defective items that need to be retrieved by the supplier

The difference between incidental and consequential damages is that incidental damages happen as a direct result of the breach of contract. Consequential damages are incurred not because of the broken contract but due to the end result of the broken contract.

Incidental Damages Example – Mall Security Cameras

As an example, suppose a new store opened up at the mall. They contracted with a company that was going to install a security system. The security company contracted with a supplier who would supply 35 security cameras. At the last minute, the supplier said that they didn’t have the cameras and backed out. Because they backed out, the security company lost the contract with the mall. The losses incurred by the security company are a direct result of the supplier’s breach of contract. Those damages are considered incidental damages.

Now, because the security company had to back out, the new store at the mall could not open on time, and so they lost several days in the rental space they paid for yet were unable to use until the cameras were installed. So they missed a few days’ worth of income potential. The store’s losses directly resulted from the camera supplier’s breach of contract, and those are considered consequential damages.

4) Nominal Damages

Nominal damages are awarded when there is a breach of contract, but the plaintiff did not suffer any loss or, if they did, it can’t be proven how much. As compensatory damages are awarded to make up for the injury to the plaintiff, nominal damages are awarded as a way to remember the plaintiff’s day in court. In most cases, the amount awarded is one dollar, though some courts will vary the amount based on the conditions of the case.

5) Liquidated Damages

Sometimes there will be a case where it is hard to assess the amount of loss in damages. When this happens, courts will enforce a liquidated damages provision, and a sum that is estimated based on the project is given as the award. It has to be shown in court that actual damages were hard to ascertain. Liquidated damages are specified by both parties in the beginning, as they are drawing up the contract.

6) Punitive Damages

Rounding up the list of types of damages for breach of contract are punitive damages.  Punitive damages are considered punishment when criminal sanctions do not apply. Here the defendant is being punished through civil action. In normal circumstances, a plaintiff is awarded money when the defendant has committed a wrong. However, in this case, punitive damages are awarded in addition to compensatory damages because it was proven that the defendant acted willfully, maliciously, or committed a reckless act. It can also be called exemplary damages and is used to hopefully deter the defendant from committing the same act again.

Now that we’ve gone over the types of damages in contract law let’s look at some real-life examples.

Real-Life Cases of Damages in Contract Law

A Case Example of Punitive Damages

In 2002 a Los Angeles Jury awarded Betty Bullock, a 64-year-old woman who suffered from inoperable lung cancer, $28 billion in punitive damages. Bullock sued tobacco maker Philip Morris for negligence, strict liability, and fraud. This award was in addition to the already awarded compensatory damages of $850,000.

The judge in Bullock’s case concluded that there was evidence that demonstrated the tobacco company’s executives knew, since the 1950s, that cigarette smoke caused lung cancer and that nicotine was highly addictive. There was also evidence that the tobacco company destroyed any research showing the adverse health impact from the use of tobacco and that they went to great lengths to sway the public into believing that smoking was neither harmful nor addictive. Evidence also showed that the tobacco companies were specifically targeting their ads to children.

Another well-known case where the plaintiff was awarded punitive damages was the civil case against O.J. Simpson by the families of Nicole Brown Simpson and Ronald L. Goldman.

There was a time back in 1995 when the O.J. Simpson criminal case made headlines daily and was televised live. The result was that O.J. Simpson was found not guilty of murdering his wife Nicole and Ronald Goldman. The country was polarized and yet captivated by the outcome.

Next, the families turned around and filed a civil suit. This time the jury agreed with the plaintiffs in a vote of 12 to 0, stating that Simpson, wearing a dark sweatsuit, designer shoes, and fancy gloves, slashed Nicole Simpson’s throat and then stabbed Ronald Goldman to death. They awarded the plaintiff $25 million in punitive damages.

A Case Example of Nominal Damages

In Moore v. Liszewski, an Illinois inmate, Moore, sued a corrections officer, Liszewski, alleging he used excessive force during an altercation they had almost ten years prior. The jury determined that Lizewski did use excessive force, but because no injury resulted from the force, they could not award compensatory damages.

However, because the jury concluded that Liszewski did use excessive force, they awarded Moore nominal damages of $1 “on the grounds that the excessive force had not caused injury to the plaintiff, and thus, he had no entitlement to compensatory damages –– there was nothing to compensate him for.”

Thankfully, the justice system continues to grow and adapt to the changing times, doing its best to ensure that all citizens can, in some way, seek a remedy for an injustice done to them. The list above describes a few ways they can gain compensation for their loss.