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RETURN OF DRAW THE LAW: CONTRACT DISPUTES – TYPES OF DAMAGES, PART I

So the contract has been broken and you have gone through all the prior posts on this subject matter: ADR is not working, the threat of nonpayment won’t get the other side to perform, and they stopped talking to you. So you are left with a lawsuit to try and recover, but what can you recover in terms of damages? Today’s post is all about the types of damages that you may be awarded in a breach of contract lawsuit. So seeing as Draw the Law has been a long vacation, let’s dive right into it.

General: Damages

In general, damages are awarded in a lawsuit to the party that brings a claim and successfully makes that claim under the facts of the case. The most typical type of award is money.  The rules vary based on the type of the claim, and as exemplified by the recent ruling in the Apple v. Samsung case the assessment of damages can be complicated (see the sheet the presiding juror had to fill out here).  If you are curious how the breakdown of that patent infringement case came out here is a helpful link.

For today’s discussion, I am only focusing on a breach of contract claim.  There are other claims and types of damages, which I will follow-up with in Part II, but for today it is all about the other party did not live up to what was in the agreement and what it will cost the other party for breaking its promise.  Therefore, the most common damages we are concerned about are compensatory, consequential, and liquidated.

The Most Common: Compensatory

Compensatory (also called expectation) damages are the most commonly awarded in a breach of contract suit. The concept is simple: what amount of money would put the nonbreaching party in the position it would have been if the breaching party had performed under the contract?  The rationale behind it could not be more simple as well, we want to give the nonbreaching party the benefit of the bargain, therefore we make the breaching party pay for not living up to the promise.

Example: Let’s say Ron accountant contracts with Annabel web marketer and consultant to do his web marketing and drive his SEO up for fifty-hours at a favorable rate of $50.00 an hour for 1-month. Therefore, he owes her $2,500 for her web marketing services.  If Ron breaches the agreement, Annabel would expect $2,500 as her compensatory damages, which is the economic loss she suffered.

Now, let’s reverse the situation, if Annabel breaks the contract and Ron has to get a new web marketer. To replace her and the new person costs $70.00 an hour for a total amount of $3,500. In this case, Mavis would owe Aaron $1,000. Why?  It is the difference from the benefit of their bargain, $2,500 and the amount he had to spend to deal with her breach, $3,500.  Therefore, a $1,000 from her would put him in the position of the original bargain where he was only going to pay to Annabel $2,500.

What Flows from the Breach: Consequential

Consequential damages are what would be received from all the harm caused by the breach in the contract.  One way to understand this concept is think that the original breach as the starting point of the damages (compensatory), but as many of you business owners know you order product and services in-turn to drive your own business goals. You order parts to build machines, you use web marketers to deliver your message, etc . . .  in order to make a profit.  If there is a delay in your goods or services you are expecting it causes more loss down the line.  These losses stemming from the breach are consequences of the breach, thus they are the consequential damages.

Example: Let’s continue with Aaron and Mavis as the example situation.  Aaron has told Mavis that he needs her services because he will be rolling out new services, in time for filing income tax returns, and he knows these service will generate an additional $3,000 in revenue. If Mavis breaches, and Aaron cannot announce his message on services in time, she will owe in addition to the compensatory damages, $3,000.00 in consequential damages.

Built-in: Liquidated

Liquidated damages is a very simple concept, what is the the amount of money built into the contract in the event of a breach?  That amount represents liquidated damages.

Example: Aaron and Mavis agree that Aaron’s assessment that he will receive $3,000 in additional revenue thanks to the new web marketing campaign over a 30-day period.  Therefore, Aaron makes Mavis agree to a damages clause, stating each day late from the day she is to deliver is $100.00 a day. Therefore, if she is delayed in implementing the web marketing campaign by 5 days, she owes Aaron $500.00 in liquidated damages as stated in the agreement.

Last Word: Limiting Damages

With consequential damages and the ability to build in some sort of formula into a written agreement there is definitely a way to limit damages for a breach.  This is sometimes an effective tool in allowing parties to purposefully breach and pay a known quantity for breaching.  In addition, with consequential damages no party wants to be responsible for everything that happens if they fail to live up to the agreement.  Contractors are keenly aware of this as someone who installs your electricity, water, and the like does not want to be on the hook for loss goods that need be refrigerator, damaged carpets from leaky points, and other nightmarish scenarios.  So usually, there is a warranty in the contract that specifically excludes consequential damages.

The way damages are calculated are always of concern in a business deal because you always should have in the back of your mind, what if this doesn’t work out or what if something more lucrative comes along, should I breach?  If you have a firm calculation it might pay to breach the contract and pay the damages or in negotiating you feel that the value of the benefit is too low or too high based on the risk of a breach.  As always, seek expert help or outside information when calculating for these things.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.

Draw the Law: Contract Disputes, Breach Remedies

So last week, I talked about how a breach in a contract occurs. The other side either (1) failed to perform; (2) made it impossible for you to perform; or  (3) they repudiated the contract.  So now what?  You have a broken contract, what are your options?
Typically, you have a number of ways to remedy the situation with the other party before heading to court. I will briefly cover your choices in this post and cover them in-depth in separate posts.

How do I Handle this Mess?

Chances are if you are the party that did not breach, and you are waiting around for the other side to fix the problem, you are getting irritated.  You don’t want to talk to them, you want to call your attorney and tell them prepare a letter (what lawyers refer to a “nasty-gram”), which states “do what you are supposed to do or else.”  While, this definitely one-way to talk the opposing side, it probably is not the best.  However, it is a method, negotiate/communicate.

You got into this contract probably out of some form of communication and you definitely can fix it by talking it out.

But, I don’t Want to Talk to Them or I Don’t Think They Will Respond

Sometimes communications have broken down completely, they don’t return your call or they ignore your Facebook messages (yeah, it sounds like a messy break-up).  You can take action on your own.

One method is that if you are the one that has to pay you could unilaterally stop payment. However, be warned that going down this path means you could be in breach of the contract as well.  Sometimes to preserve your rights under the contract you may still have perform. It depends, and sometimes legal advice should be sought.

Get a Third-Party to Decide

Alternative dispute resolution (ADR) is where you and the other party go through mediation or arbitration to resolve the matter.  Mediation and arbitration slightly differ in their approach and depends if they are appropriate to the dispute.  Couple things to note: (1) sometimes you put a clause in the contract in the case of a breach that you choose one or both; (2) because it requires agreement, if not in the contract, you cannot force the other side to ADR; and (3) ADR is not under a formal court system (but may produce a new agreement enforceable in court).

The Last Stop, I’ll See You in Court

Finally, there is the option you all already know and may consider (as you reading this post on a legal blog), law suit.  This should be the option of last resort.  You don’t need me to tell you that suing for damages or other remedies is costly, time-consuming, and an energy drain.   With this option, you definitely will want to seek legal advice on how to handle bringing your dispute into the court system.  However, consider the other three remedies as places to at least consult with an attorney to insure that this last option is preserved.  You do not want mistakenly lose the right to suit due to an action like self-help.

So I will see you next week where I will discuss remedy one, communicating with the breaching side to see if they are willing to fix the problem.

*Disclaimer:  This post discusses general legal issues, but does not constitute legal advice in any respect.  No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction.  Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.