What are contract law damages?

The following is a discussion of contract law damages and other recoveries potentially available under Texas law in breach of contract litigation.

Recovery for a Breach of Contact

Benefit of The Bargain

A party who has suffered a breach of a contract may sue the breaching party to collect damages both from the direct and consequential effects of the breach. The law recognizes the direct damages as those that deprived the non-breaching party of the “benefit of the bargain.” In other words, the non-breaching party is entitled to all of the financial benefit that it would have gained had the contract not been breached. Examples of this form of recovery are the difference between the higher cost of substitute goods or services that the non-breaching party had to pay when the other party breached the contract by failing to deliver goods or services at the contracted for price.

Lost profits

Lost profits are also an available remedy. However, lost income is not the same as lost profits. The non-breaching party must prove losses of net profits, not gross profits—generally, gross receipts minus expenses.

Consequential Damages

The law also recognizes consequential damages that are not a direct result of the breach, but nevertheless result as a consequence of the breach. This type of damages is sometimes referred to as “indirect” or “special” damages. This type of damage is only recoverable if it was reasonably foreseeable that they might be suffered at the time the contract was formed. A good example of this special damage is when a critical part of a supply chain or manufacturing process is not provided on time or otherwise as specified in the contract. If the supply chain or manufacturing process needs to be shut down until a replacement part can be made, the costs incurred from this down time may be recoverable as consequential damages if it was reasonably foreseeable that this breach would halt the operation.

Reliance Damages

If the non-breaching party incurred expenses or other expenditures that were necessary for the completion of its contractual duties, those expenses may be recoverable as reliance damages. However, if it is possible, the nonbreaching party has a duty to mitigate its damages by finding an alternative use for the capital expenditures.

Liquidated Damages

Some contracts have liquidated damage provisions which provides for a pre-calculated amount of damages if the contract is breached. This is not the same as a penalty—penalty provisions in contracts are not enforceable. To be a valid liquidated damages clause, the parties to the contract must make a reasonable estimate of the damage that might result from the breach when the amount of damages is difficult to foresee.

Quantum Meruit

In circumstances where the parties neglected to form a contract, but where goods or services were rendered and accepted, the equitable doctrine of quantum meruit will imply a contract if certain circumstances are met. First, valuable services must have been rendered or materials furnished to the other party. Second, these goods or services must have been accepted by the other party under circumstances that reasonably notified it that the other party expected to be paid for these goods or services. While this remedy in not available if there is a contract that specifically addresses the goods or services in dispute, it may apply where the parties have a contractual relationship that has grown past the original contract. For example, if the contract is for hardware and one party requests software be developed and added to the hardware with the understanding that this expense will be added to the contract price but then fails to pay for the additional work, quantum meruit will allow the non-breaching party to recover those expenses even though they were never part of the original contract.

Attorney’s Fees

It is not unusual for a contract to provide for the recovery of attorney’s fees as an additional damage for breach of contract. But even if this is not provided for in the contract itself, Texas law allows recover of attorney’s fees under certain circumstances. This can be a game changer for the litigation of a breached contract, but the law does not apply in all circumstances and you should consult with your attorney to find out if this law applies in your case. 

Other Forms of Commercial Litigation

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