A contract basically consists of an offer by one person to exchange a thing, service or something else of value with another person for money or something else of value, so long as the offer is combined with the other person’s acceptance of the offer as well as the performance by one of the parties of their duties under the contract.
If a person performs his or her obligations under a contract, but the other party does not, the person can seek an award of money “damages” from a court that will require the other party who breached the contract to put the non-breaching party into the same position that he or she would have attained if the contract had not been breached. Generally, that will require the breaching person to pay the cost to have the contract performed by someone else.
For example, if you pay a painter $1,000 to paint your home, but he only does part of the job and you have to pay another painter to finish the job, the painter that contracted with you to paint the house for $1,000 will have to pay you what you reasonably have to pay the substitute painter to finish the work, even if it is more than the $1,000 you paid to the first painter.
Another example would involve paying someone $1,000 for a particular item, but the person cannot obtain the item. If it costs you $1,200 to purchase the item from someone else, the first person will have to return the $1,000 you paid and pay the additional $200 required for you to obtain the item that was contracted to be sold to you for $1,000.
This general rule governing damages in contract, which dates back to old English common law, provides that the damages recoverable for a breach of contract are those that naturally flow from the breach and were foreseeable by the breaching party at the time the contract was made. The goal in awarding damages in an action for breach of contract is to restore the non-breaching party to the condition that would have existed if the contract had been performed. This is commonly called “the benefit of the bargain”, meaning that a person who is injured by the breach of a contract is entitled to damages in an amount needed to restore the benefit that party would have received if the contract had been performed. This principle establishes the limit of the damages that are recoverable, not only the right to recover them. A person is not entitled to receive a benefit greater than what is provided by the contract.
Loss of profits is a part of damages in an action for breach of contract. As with other kinds of contract damages, to be recoverable the loss of profits must naturally flow from the breach. The measure of damages for lost profits is the difference between the contract price and the cost of performance. This may reduce the amount of the remaining payments due under a partially performed service contract by the cost of the remaining services. When the measure of damages is lost profits, the loss must be proven with a reasonable degree of certainty to be recoverable.
Prejudgment interest, generally from the date of the loss to the date of the judgment, is also a proper element of damages in an action based on a contract.
If a contract is breached before it has been fully performed, the injured party may recover damages either in quantum meruit (meaning “the amount deserved”) or in contract. The measure of damages for a quantum meruit recovery is the reasonable value of the labor or services performed plus the market value of any materials provided. For a recovery under the contract, the measure of damages is the amount of the lost profits plus the reasonable cost of labor and material expended in partial performance. Damages are recoverable either under the contract theory or under the theory of quantum meruit, but not both.
The measure of damages to remedy a defective performance of a contract is the reasonable cost needed to make the work conform to the contract. An exception to this rule applies if the cost of curing the defect would cause economic waste. This exception is common in construction disputes, in circumstances where cosmetic construction defects can be corrected only by tearing down major structural components of projects, so the courts award damages based on the diminution in the value of the buildings rather than the cost to correct the cosmetic defects.
To be awarded at a trial, damages for breach of contract must be proven with reasonable certainty and supported by competent substantial evidence. If the amount of damages necessary to make a person receive the benefit of a contract cannot be determined precisely, the record must at least reveal some reasonable basis for the amount awarded.
* Disclaimer: This article is intended for general informational purposes only, and should not be relied upon as legal advice. There is no lawyer and client relationship arising from this article. You may contact us to discuss your specific concerns if you are seeking legal advice, assistance or representation.