Introduction

Running a business means navigating through various contracts and agreements, and sometimes things don't go as planned. When a contract is breached, one of the primary concerns for business owners is the potential financial impact.

This is where "damages" come into play. Understanding what damages are and how they work is crucial for protecting your interests and ensure fair compensation when things go wrong.

What are damages?

In legal terms, damages are a monetary compensation awarded to a party who has suffered a loss or injury due to the breach of a contract or wrongful act. The goal of damages is to restore the injured party to the position they would have been in had the breach or wrongful act not occurred.

Types of damages

Damages can be categorized into several types, each serving a different purpose:

Compensatory damages

Compensatory damages are the most common type of damages awarded in contract disputes. They're meant to cover the real losses someone faces when a contract is broken. There are two types: direct damages, which cover the immediate losses from the breach, and consequential damages, which cover losses that happen as a result of the breach, even if they weren't directly caused by it.

Punitive damages

Punitive damages aren’t about covering losses for the injured party; they’re about punishing the wrongdoer. These damages are awarded when someone’s behavior is especially harmful, to make an example of them and discourage similar actions in the future.

Nominal damages

These are small amounts of money awarded when a breach has happened, but the injured party didn't suffer any actual financial loss. Nominal damages recognize that a legal right was violated, even if no significant harm was done.

Liquidated damages

These are predetermined amounts specified in the contract itself, to be paid in the event of a breach. Liquidated damages are used when it is difficult to determine the actual harm caused by a breach. For example, a construction contract might include a liquidated damages clause that requires the contractor to pay a set amount for each day the project is delayed.

Restitution

This type of damage aims to return the injured party to the position they were in before the contract was made. It involves returning any benefit that the breaching party received from the injured party. For example, if a business paid in advance for services that were never rendered, restitution would involve returning the payment.

Why are damages important?

Understanding damages is crucial for small to medium-sized business owners because it helps in:

Risk management

Knowing the potential financial consequences of a breach can help businesses manage risk and make informed decisions.

Contract drafting

Including clear damage provisions in contracts can protect businesses and provide clarity on what happens if things go wrong.

Dispute resolution

Being aware of the types of damages that can be claimed can aid in resolving disputes efficiently and fairly.

Example of damages

Suppose you own a small catering business and have a contract to provide catering services for a large corporate event. The contract specifies that you will be paid $10,000 for your services. However, the client cancels the contract at the last minute without a valid reason.

In this scenario, you could claim the $10,000 you were supposed to be paid for your serviced as direct damages. If you turned down your catering opportunities because your were committed to this event, you could also potentially claim the lost profits from those missed opportunities as indirect damages.

How to protect your business

To protect your business from potential damages due to contract breaches, consider the following steps:

1. Clear contracts: Ensure that your contracts are clear and detailed, specifying the obligations of each party and the consequences of a breach.

2. Damage clauses: Include damage clauses in your contracts, such as liquidated damages, to provide clarity and protection.

3. Document everything: Keep detailed records of all communications and agreements related to the contract.

4. Legal advice: Consult with a legal professional when drafting contracts or when dealing with potential breaches to ensure that your interests are protected.

How Cobrief can help

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Upload your contract to Cobrief's AI contract review software, click review, and you'll get it screened for risks in plain English, helping you decide if you want to sign, reject or negotiate the contract—or escalate it to a lawyer.

Conclusion

Damages are a key aspect of contract law that every business owner should understand. They provide a way to compensate for losses and hold parties accountable for their actions. By understanding the different types of damages and how they work, you can better protect your business and ensure fair compensation if things go wrong.