I. Non-Compensatory Damages: Non-compensatory damages are pretty easy to deal with and they do not come up too often in law essay exams.
A. Nominal. Nominal damages tells one party that he was wrong, but only provides precedence and or satisfaction, e.g. one dollar.
B. Punitive. The general rule is that there are no punitive damages allowable in contract cases unless there is an independent, malicious or wanton tort. Some jurisdictions do not allow punitive damages if the cause of action “sounds in contract.” Presumably this means that if the significant cause of action is or should be one for breach of contract, no punitive damages are allowable even if one could fashion a tort action for misrepresentation, deceit and/or fraud. Some jurisdictions allow punitive damages for bad faith insurance, refusal to pay actions.
II. Compensatory Damages: Compensatory damages are awarded to compensate an injured party for all legally recognized harms or losses that have been sustained, thus making the injured party "whole" in the eyes of the law.
I believe it is best to look at four types of compensatory damages: Liquidated, Expectation, Reliance and Incidental.
A. Liquidated. Liquidated damages is straight forward. First, there must be a liquidated damages clause in a contract. Second, actual damages have to be difficult to ascertain and the amount set for liquidated damages must be a reasonable estimate of possible loss (not a penalty).
B. Expectation or Expectancy (Benefit of the Bargain). Expectation damages gives the non-breaching party something he or she would have had in the future, and contrasts with reliance damages, that puts the non-breaching party back where she would have been had the contract not been made. Expectation damages contrasts with restitution, that compels the breaching party to give back benefits conferred by the non-breaching party.
1. General Measure of Expectation Damages. The general measure of expectation damages is to put the plaintiff in as good a position as he would have been in had the defendant kept his contract – the Benefit of the Bargain. Generally, the aggrieved party may recover those damages as may fairly and reasonably be considered arising naturally according to the usual course of business (commonly called General Damages). This is the first rule of Hadley v. Baxendale, 156 Eng.Rep. 145 (1854).
Accordingly, you can easily determine expectation damages by first determining what the position of the non-breaching party would have been if the contract had been performed. Second, determine the position that the non-breaching party is presently in due to the breach. Third, determine how much money the non-breaching party needs to get to the position she would have been in if the contract had been performed as promised.
Remember to look at my first contracts post and review the standard measure of damages for specific types of contracts.
2. Consequential (Special) Damages. Consequential damages are the less obvious damages that are deemed contemplated by both parties at the time of contracting IF the promisor knows or has reason to know the special circumstances which will give rise to such damages. This is the second rule of Hadley v. Baxendale.
3. Limitation on Expectation Damages. There are three ways that expectation damages are limited.
a. Certainty - Damages must be reasonably certain (but not absolutely certain).
Lost Profits – Generally lost profits are not allowable because they are too uncertain, so apply Hadley v. Baxendale (foreseeable and contemplated by the parties). Also, lost profits are not allowable where a seller can merely resell the product and would then have double recovery. However, where a seller has an unlimited supply of a product and a buyer breaches by failing to buy per the contract, there would be an unjust result because even if the seller resells, he is not really selling that specific product. Thus the seller is allowed to recover the lost volume profits.
b. Foreseeability (Hadley v. Baxendale, second rule)
c. Mitigation – Avoidability of Harm
C. Reliance Damages. As noted before, reliance damages are the detriment incurred by changing positions and are available when expectation damages are uncertain or otherwise unavailable. The goal is to put the aggrieved party in as good a position as he would have been in had the contract not been made.
D. Incidental Damages. Incidental damages, under UCC 2-710 (Seller’s Incidental Damages) and 2-715 (Buyer’s Incidental Damages), are damages incident to breach such as additional costs of storage, shipping, insurance, finance charges, etc. It is best not to argue incidental damages here if your law is common law rather than the UCC. Most states do not recognize incidental damages as common law, but rather reserve it under the UCC. If you are using the common law, you can make an argument by analogy, but I would stay away from it. If you do, make it clear to your grader that you understand that incidental damages are almost always reserved for UCC claims.
Professor Doug Holden
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