Commercial contracts weave the fabric of industrial production. On average, my office hears no less than a dozen complaints a week about breach of contract in a commercial setting. Damages are often used to characterize the breach or give it a tangible impact, easily digestible by the offender when broken down into dollars and cents. One of the most challenging aspects of a commercial contract breach is defining the actual breach and corresponding damages. Often, these are perceived in one fashion, but in reality, defined in another.
Preliminary Steps for the Non-Breaching Party
Before calling corporate counsel to complain about the breaching party, take a few steps to help facilitate communication between counsel and save some billable time by doing the following:
1. Find the actual contract and all addendums associated with that contract.
2. Look for the Limitation of Liability Provision(s) and flag/highlight that section.
3. Look for the Warranties Section and flag/highlight that section as well.
This will assist counsel in determining if the breach is subject to special terms and conditions, subject to indemnification, and/or has a damages cap associated to the harm. Further, some breaches are material and terminate the cct and must be ascertained early in the breach discovery process.
Different Types of Damages
There is a lot of confusion as to what types of damages are available in a commercial breach and unfortunately, it depends on the language used in the contract. Generally speaking, there are:
actual or compensatory damages. The measure of damages based on the idea of putting the non-breaching party in the position the non-breaching party is likely to have been in had a breach not occurred. These damages are recoverable if a breach occurs absent a specific waiver. This umbrella category includes direct damages, but depending on the circumstances, practitioners and courts also sometimes include incidental and consequential damages. The terms actual and compensatory damages are frequently used interchangeably;
direct or general damages. These damages can be expected to naturally and necessarily result from a breach. The breaching parties often seek to limit the non-breaching party's recovery to direct damages. The terms direct and general damages are frequently used interchangeably;
indirect damages. There is no consensus on a formal definition of indirect damages. However, they can be defined as any claimed damages that are not direct damages and that cannot be expected to naturally and necessarily result from a breach. The breaching parties often seek to prevent the non-breaching party from recovering indirect damages;
incidental damages. These are costs incurred by the non-breaching party to avoid other losses caused by the breach. For example, expenses incurred by a buyer relating to the receipt, transportation, care, and custody of rejected goods;
consequential or special damages. Damages that arise out of special circumstances not ordinarily predictable to the parties. Recoverable only if the special circumstances were within the contemplation of both contracting parties;
lost profits. The total sum of money or benefits that are likely to have been made absent the breach of contract. Frequently considered direct damages if they are the direct and immediate fruits of the contract and if they were not foreseeable when the contract was entered or cannot be calculated with certainty;
speculative damages. Damages claimed by a non-breaching party that may occur in the future, but have not actually occurred and may never occur. These cannot be used as a basis for recovery in contract cases;
remote damages. Damages that result from an accidental or unusual combination of circumstances and produce a result over which the breaching party has no control. These are not recoverable because they lack an appropriately close causal link to the breach of contract;
punitive or exemplary damages. Damages awarded to a claimant in a civil lawsuit to punish the wrongdoer and deter the wrongdoer and others from engaging in the behavior in the future. These are reserved for situations in which the wrongdoer acted intentionally, recklessly, or with gross negligence. The terms punitive and exemplary damage often are used interchangeably. Typically, not available in breach of contract cases, but parties should be careful not to inadvertently contractually agree to make these damages available;
contractual remedies. Remedies that the parties expressly agree to include in the contract either as exclusive remedies (that is, in lieu of common law or other remedies) or as part of a broad array of cumulative remedies available to the non-breaching party (that is, in addition to common law and other remedies). This umbrella category includes, for example, liquidated damages and termination fees;
liquidated damages. A pre-determined fixed amount of money negotiated by contracting parties to serve as the exclusive compensation for the breaching party's failure to perform a specific task or comply with a particular obligation. The liquidated damages amount must reflect a compensatory rather than punitive intent and bear a reasonable relation to anticipated or actual damages; and
termination fee. A fee negotiated by contracting parties to be assessed against a party that exercises the bargained-for right to terminate an agreement. The termination fee must reflect a compensatory rather than punitive intent and bear a reasonable relationship to anticipated or actual damages.
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