Businesses facing a breach of contract may first seek to settle the dispute through mediation or commercial negotiations. But often in situations like these, arbitration or litigation may be the only means of recovery. A business owner would have the right to sue the nonperforming party for breach of contract. While one can ask for a variety of things in a lawsuit for breach of contract, including specific performance, what’s usually at stake are various types of monetary damages. In general, there are two types of recoverable damages: compensatory, i.e., actual damages, and punitive or exemplary damages.
Compensatory damages represent those that pay for the actual losses a business owner may have sustained due to the other party breaching the contract. In other words, compensatory damages replace the breach of contract losses suffered. Compensatory damages themselves come in two forms, general and special, and recovery of both is possible if the breach of contract suit is successful.
General compensatory damages cover the losses one “directly and necessarily” incurred as a result of the other party’s breach of contract. Special compensatory damages, often called consequential damages, cover the losses incurred as a consequence of special, usually unpredictable, circumstances associated with the breach of contract.
Liquidated damages represent a special breed of compensatory, i.e., actual damages. If the contract with the breaching party calls for liquidated damages, this means the two parties agreed to set forth an amount in the contract that each would have to pay if (s)he breached the contract.
Even if the contract calls for liquidated damages, however, the court may not always enforce that provision of the contract in a breach of contract suit. Why? Because a party opposing liquidated damages may argue that it constitutes an unenforceable penalty because it is disproportionate to the actual damages. In other words, the court must not view the liquidated damage amount as an attempt to get punitive damages by means of the contract itself.
Sometimes a jury will award punitive damages. As their name implies, punitive damages, also called exemplary damages, have nothing to do with the amount of damage actually incurred as a result of the other party’s breach of contract. Instead, juries award punitive damages above and beyond actual damages if they believe the defendant engaged in willful or particularly egregious behavior. In other words, punitive damages serve to punish the breaching party and act as a warning to other contract parties not to engage in similar behaviors and practices. A party seeking punitive damages in Texas must demonstrate by clear and convincing evidence that the loss suffered was caused by fraud, gross negligence, or malice.
There are many elements involved in a breach of contract case and the damages related to that breach, so it’s important to seek advice from an experienced attorney.