Compensatory Damages

Generally, when judges or writers refer to contract damages what they mean is the monetary remedy assessed and awarded by the court to compensate the claimant for loss caused by the defendant’s breach of contract.

In practice C has a right to compensatory damages following a breach of contract by D provided that C can show that the breach has caused her recoverable loss. In other words, to obtain compensatory, rather than merely nominal, damages, C must prove actual recoverable loss.

What is the Aim of an Award of Contractual Damages?

The fundamental aim of an award of compensatory damages for breach of contract is to make good the loss which C has suffered as a result. Compensatory damages require D to indemnify C for the loss which D’s breach has caused C to suffer.

While this may sound straightforward, the position is complicated by the fact that there are different ways of measuring C’s loss.

Calculating Damages

The process of working out the amount of damages to which C is entitled following D’s breach of contract may be broken down into two steps:

1. What loss has C suffered as a result of the breach?

2. How much of this loss is recoverable?

In order to answer this first question, we need to bear in mind the different ways in which a court may measure loss.

Broadly, C’s loss may comprise a loss of expectation. C may claim that she would have made a profit had the contract been performed. As a result of D’s breach of contract, C will not now make that profit.

Alternatively, C may claim expenditure which she has incurred which is wasted as a result of D’s breach of contract. This is sometimes referred to as an ‘out of pocket’ loss: C is actually worse off than she was before the breach.

Another way of framing a loss is as a loss of a chance. Here C argues that the contract conferred on her the chance or opportunity of making a gain or profit, and that D’s breach has deprived of that chance. Note that with an expectation loss, C maintains that she would have made a profit. With loss of a chance, C is saying that the contract gave her merely the chance of making of a profit: in effect, she might have made a profit.

A fourth way of framing C’s loss is as the sum of money which C might reasonably have demanded from D as the price for releasing D from the particular obligation which D went on to breach. Damages measured by this type of loss are known as negotiating or Wrotham Park damages.

Of these four measures of loss, the most important by far in practice is the first: the expectation measure.

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