Litigating Contract Damages

Damages are an essential part of any breach of contract claim. Understanding the monetary value of the client’s claim is just as important as understanding the elements or likelihood of success of that claim. This article explains the types of damages that may be available for a breach of contract and the limitations that may apply to the amount or type of damages a prevailing plaintiff can recover.

(For more on breach of contract damages, including calculating and proving damages, and additional types of monetary relief that may be available to a prevailing plaintiff in a breach of contract action, see Litigating Contract Damages on Practical Law.)

Types of Contract Damages

There are various types of damages that may be available in a common law breach of contract action. Courts may award:

General (or Direct) Compensatory Damages

General (or direct) damages flow naturally and directly from, or are the natural and probable consequence of, a breach of contract. They arise from the usual course of events of the breach itself, meaning their occurrence is predictable enough at the time of contracting that the parties are deemed to have contemplated them. (Bi-Economy Mkt., Inc. v. Harleysville Ins. Co. of N.Y., 856 N.Y.S.2d 505, 508 (2008); Keystone Airpark Auth. v. Pipeline Contractors, Inc., 266 So.3d 1219, 1222 (Fla. 1st DCA 2019).)

General damages typically fall into one of three categories:

Expectancy Damages

Expectancy damages, sometimes called expectation or benefit-of-the-bargain damages, give to the injured party the benefit of the negotiated bargain. Courts generally accomplish this by awarding money damages that put the plaintiff in the position it would have been if the parties had fully performed the contract. Expectancy damages capture the gain the plaintiff would have realized if the defendant had not breached. (See, for example, Leaf Invenergy Co. v. Invenergy Renewables LLC, 210 A.3d 688, 695 (Del. 2019); Goldstein Constr. Corp. v. City of New York, 590 N.Y.S.2d 425, 429 (1992); Anthony’s Pier Four, Inc. v. HBC Assocs., 583 N.E.2d 806, 823-24, 829 (Mass. 1991); Speirs v. BlueFire Ethanol Fuels, Inc., 243 Cal. App. 4th 969, 989 (2015); Powers v. Delnor Hosp., 135 Ill. App. 3d 317, 322 (1985); Restatement (Second) of Contracts § 347, cmt. a; 24 Williston on Contracts §§ 64:2-64:3 (4th ed.).)

Reliance Damages

Reliance damages, sometimes called out-of-pocket damages, seek to put the plaintiff in the position it would have been had the contract never existed (Summit Props. Int’l, LLC v. Ladies Prof’l Golf Ass’n, 2010 WL 4983179, at *5 (S.D.N.Y. Dec. 6, 2010); Atrium Med. Ctr., LP, 595 S.W.3d at 193; Shovel Transfer & Storage, Inc. v. Pa. Liquor Control Bd., 739 A.2d 133, 140 (Pa. 1999)). Courts do this by awarding damages that compensate the plaintiff for expenses incurred from relying on the defendant’s promises.

Reliance damages may include:

A plaintiff often seeks reliance damages where proof of the plaintiff’s expectation interest is speculative, not reasonably certain, or unable to be measured (Brennan v. Carvel Corp., 929 F.2d 801, 810-11 (1st Cir. 1991) (applying Massachusetts law); Restatement (Second) of Contracts §§ 347, 349). This may occur where, for example, a seller breaches a real estate sales contract and the buyer cannot prove expectancy damages because the market value of the property (while likely to rise significantly in the future) did not exceed the contract price at the time of breach. In this situation, a plaintiff may not recover expectancy damages but may recover reliance damages for money spent in preparing to perform its contractual obligations, like money spent to arrange financing and obtain tenants. (Brennan, 929 F.2d at 811; see, for example, St. Lawrence Factory Stores, 889 N.Y.S.2d at 535-36.)

Restitution

Restitution damages generally permit a plaintiff to recover the reasonable value of any benefit the plaintiff gave to the defendant because of the parties’ contract. Like reliance damages, restitution is designed to put the plaintiff back in the position it had been before the parties’ contract (Ocean Commc’ns, Inc. v. Bubeck, 956 So.2d 1222, 1225 (Fla. 4th DCA 2007)). However, restitution and reliance damages differ in that:

Restitution may include, for example:

Consequential (or Special) Damages

In certain situations, a plaintiff may recover consequential (or special) damages for breach of contract. Consequential damages are indirect damages that are not likely to occur in the usual course of events. They are derivative or secondary losses that arise not directly from the defendant’s breach, but from circumstances that are particular to the parties or their contract. To be recoverable, consequential damages must have been foreseen and reasonably within the parties’ contemplation as a probable result of a breach at the time they agreed to contract. (Bi-Economy Mkt., Inc., 856 N.Y.S.2d at 508; Lewis Jorge Constr. Mgmt., Inc., 34 Cal. 4th at 968-70; Keystone Airpark Auth., 266 So.3d at 1222-23.)

Consequential damages may include things like business interruption losses, lost customers, or losses resulting from the inability to fulfill a collateral contract with a third party (Bi-Economy Mkt., Inc., 856 N.Y.S.2d at 509; Certain Underwriters at Lloyd’s v. BioEnergy Dev. Grp. LLC, 115 N.Y.S.3d 240, 240-41 (1st Dep’t 2019); Keystone Airpark Auth., 266 So.3d at 1222-23). In cases where an insurer breaches an insurance contract, for example, consequential damages may include damages for the demise of a business resulting from the inability to reopen because of the insurer’s delay in timely investigating, adjusting, and paying a claim for business interruption loss coverage. The inability to reopen is a reasonably foreseeable consequence of an insurer’s failure to pay business interruption losses. (Bi-Economy Mkt., Inc., 856 N.Y.S.2d at 510-11.)

Liquidated Damages

Liquidated damages are a predetermined amount of money that the parties set out in their contract estimating the amount of damages likely to result if one party breaches (Truck Rent-A-Center, Inc. v. Puritan Farms 2nd, Inc., 393 N.Y.S.2d 365, 368 (1977); Vitatech Int’l, Inc. v. Sporn, 16 Cal. App. 5th 796, 805-06 (2017); Dotson v. Cogswell, 2010 WL 437983, at *3 (Mass. App. Div. Feb. 4, 2010)). Parties often include liquidated damages in their contracts where it is difficult, if not impossible, to calculate accurately the damages a nonbreaching party may incur in case of a breach.

Courts typically enforce liquidated damages clauses where:

Some jurisdictions have different or additional elements for the enforcement of a liquidated damages clause. Illinois, for example, also requires a plaintiff to prove that the parties intended to agree in advance to the settlement of damages that may arise from a breach (GK Dev., Inc. v. Iowa Malls Fin. Corp., 2013 IL App (1st) 112802, ¶ 49).

Tort-Based Damages

Although it is rare, a plaintiff may sometimes obtain tort-based damages in a breach of contract case (Sommer v. Fed. Signal Corp., 583 N.Y.S.2d 957, 960-62 (1992); Acadia, Cal., Ltd. v. Herbert, 54 Cal. 2d 328, 336 (1960); but see Robinson Helicopter Co. v. Dana Corp., 34 Cal. 4th 979, 988 (2004); Elec. Waste Recycling Grp., Ltd. v. Andela Tool & Mach., Inc., 968 N.Y.S.2d 765, 767 (4th Dep’t 2013)).

Tort damages may be available in a breach of contract action where the defendant:

Several jurisdictions do not permit a plaintiff to recover both tort and contract damages for the same loss and therefore the plaintiff must elect to proceed under tort or contract (Acadia, Cal., Ltd., 54 Cal. 2d at 336-37). A benefit to electing tort-based damages over contract damages is that a plaintiff entitled to tort-based damages for breach of contract may recover damages that typically are not available in breach of contract cases, such as damages for emotional or mental distress and punitive damages (Gruenberg v. Aetna Ins. Co., 9 Cal. 3d 566, 581 (1973); Archdale v. Am. Int’l Specialty Lines Ins. Co., 154 Cal. App. 4th 449, 466-68 (2007); D’Ambrosio v. Pa. Nat’l Mut. Cas. Ins. Co., 396 A.2d 780, 784-85 (Pa. Super. 1978) (collecting cases from other jurisdictions)).

In certain cases, courts may award nominal damages to a prevailing plaintiff for breach of contract. Nominal damages are a trivial amount of money intended to vindicate the plaintiff’s contract rights where, for example:

One dollar is the typical nominal damages award (MBM Fin. Corp., 292 S.W.3d at 665 (holding that $1,000 is not nominal damages); Page v. New England Tel. & Tel. Co., 418 N.E.2d 1217, 1218 (Mass. 1981) (holding that $10,000 is not nominal damages); McMahan v. McMahan, 38 N.Y.S.3d 728, 735 (Sup. Ct. Westchester Co. 2016) (awarding nominal damages of $1)).

A plaintiff may question whether it is worthwhile to bring a breach of contract claim where the only possible recovery is nominal damages. Depending on the circumstances, bringing the suit may be worthwhile because an award of nominal damages can vindicate contract rights, compel future performance, establish the plaintiff as the prevailing party, result in monetary awards for the costs incurred in resolving the dispute, and define the parties’ future contractual rights and obligations for the remainder of the contract term (see, for example, Loughlin v. Meghji, 132 N.Y.S.3d 65, 73-74 (2d Dep’t 2020); Belle Terre Ranch, Inc. v. Wilson, 232 Cal. App. 4th 1468, 1476 (2015); Jones v. Rempert, 2012 IL App (2d) 110208-U, ¶ 27).

Limitations on Contract Damages

The law or the parties may limit the amount or type of damages a plaintiff can recover in breach of contract actions. A plaintiff generally may not recover damages where, for example:

Damages Precluded or Limited by Contract

Parties may contractually agree to disclaim liability for certain damages, such as consequential damages, reliance damages, or lost profits (see, for example, WeBoost Media S.R.L. v. LookSmart Ltd., 2014 WL 824297, at *6 (N.D. Cal. Feb. 28, 2014); Empire One Telecomms., Inc. v. Verizon N.Y., Inc., 888 N.Y.S.2d 714, 722-23 (Sup. Ct. Kings Co. 2009)).

Duty to Mitigate

A breach of contract plaintiff generally has a common law duty to mitigate its damages (also known as cover or the avoidable consequences doctrine) (Holy Props. Ltd. v. Kenneth Cole Prods., Inc., 637 N.Y.S.2d 964, 966 (1995); Healy v. Hagberg, 2020 WL 5734248, at *3 (Mass. App. Ct. Aug. 14, 2020); Mack-Cali Realty, L.P. v. Everfoam Insulation Sys., Inc., 972 N.Y.S.2d 310, 312 (2d Dep’t 2013); Forbes v. Prime Gen. Contractors, Inc., 255 So.3d 448, 452 (Fla. 2d DCA 2018)). This duty precludes a plaintiff from recovering damages that could reasonably have been avoided without undue risk, harm, or humiliation. A plaintiff must mitigate as soon as it has reason to know that the defendant intends not to perform the contract. (Royal Thrift & Loan Co. v. Cty. Escrow, Inc., 123 Cal. App. 4th 24, 33 (2004); Ingraham v. Trowbridge Builders, 297 N.J. Super. 72, 82-83 (App. Div. 1997); Grill v. Adams, 123 Ill. App. 3d 913, 921 (1st Dist. 1984); Restatement (Second) of Contracts § 350.)

Counsel should:

Raised as a Defense

Failure to mitigate becomes an issue only where the defendant raises it as a defense, which a defendant typically does as an affirmative defense in an answer. The defendant therefore has the burden of proving a failure to mitigate (Cornell v. T.V. Dev. Corp., 268 N.Y.S.2d 29, 33 (1966); Agam v. Gavra, 236 Cal. App. 4th 91, 112 (2015); Mullins v. Corcoran, 2018 WL 2049365, at *2 (Mass. Super. Mar. 27, 2018)). Once the defendant raises the defense, it must prove facts supporting it. In some jurisdictions, for example, the defendant would have to show the extent to which the plaintiff’s efforts, had they been taken, would have reduced the damages. (LaSalle Bank Nat’l Ass’n v. Nomura Asset Cap. Corp., 846 N.Y.S.2d 95, 99 (1st Dep’t 2007).)

A defendant that proves failure to mitigate is entitled to offset any damages award by the amount the plaintiff could have saved if it had mitigated its losses (Ingraham, 297 N.J. Super. at 83; Washington Courte Condo. Ass’n — Four v. Washington — Golf Corp., 267 Ill. App. 3d 790, 822 (1st Dist. 1994); Juvenile Diabetes Rsch. Found. v. Rievman, 370 So.2d 33, 36-37 (Fla. 3d DCA 1979); Restatement (Second) of Contracts § 350).

Rebutting the Defense

A plaintiff can often defeat a failure to mitigate defense by offering evidence that, for example:

Mitigation and Liquidated Damages Clauses

Most jurisdictions hold that mitigation is irrelevant and should not be considered when a liquidated damages clause applies. The rationale is that liquidated damages contemplate the parties’ inability to estimate the likely damages resulting from a breach and therefore the nonbreaching party cannot be expected to identify those damages and mitigate them. (See, for example, NPS, LLC, 886 N.E.2d at 675; Cady v. IMC Mortg. Co., 862 A.2d 202, 219 (R.I. 2004) (applying Florida law); Lake Ridge Acad. v. Carney, 613 N.E.2d 183, 190 (Ohio 1993); Forty Pine, LLC v. Country Bank for Sav., 2019 WL 1768949, at *5 (Mass. App. Ct. Apr. 22, 2019); Fed. Realty Ltd. P’ship v. Choices Women’s Med. Ctr., Inc., 735 N.Y.S.2d 159, 162 (2d Dep’t 2001); Musman v. Modern Deb, Inc., 377 N.Y.S.2d 17, 19 (1st Dep’t 1975).)

However, some jurisdictions consider mitigation efforts when deciding whether to enforce a liquidated damages clause. This situation most often arises when the party contesting enforcement claims that the amount set out in the clause is disproportionate to the actual damages suffered. (See, for example, Days Inn Worldwide, Inc. v. Sonia Invs., 2006 WL 3103912, at *7-8 (N.D. Tex. 2006); Atrium Med. Ctr., LP, 595 S.W.3d at 197; Wasserman’s Inc. v. Twp. of Middletown, 137 N.J. 238, 257-58 (1994).)

Courts in these jurisdictions adjust actual damages by the amount the plaintiff could have mitigated, and then compare them to the amount set out in the liquidated damages clause. For example, a court may find a liquidated damages clause unenforceable if the clause provides for $1 million in damages, but the plaintiff could have mitigated those losses to $1,000 and failed to do so. The contesting party in these jurisdictions should be prepared to offer evidence as to the specific dollar amount of actual damages suffered and the amount by which the plaintiff could have reduced them by mitigation. (Days Inn Worldwide, Inc., 2006 WL 3103912, at *7-8.)

Courts generally determine the reasonableness of a liquidated damages clause as a matter of law. However, the amount of actual damages sustained and the amount by which the plaintiff could have mitigated them typically are fact questions that must be resolved before a court can determine the legal question. (Jacobson v. Prodel, 2019 WL 3720637, at *3-4 (Tex. App.—Texarkana Aug. 8, 2019); Garden Ridge, L.P. v. Advance Int’l, Inc., 403 S.W.3d 432, 438-39 (Tex. App.—Houston [14th Dist.] 2013).)

Speculative Damages

Breach of contract damages may not be based on speculation or surmise. Damages must be measured and based on known reliable factors and proven with reasonable certainty. (See, for example, E.J. Brooks Co. v. Cambridge Sec. Seals, 80 N.Y.S.3d 162, 168 (2018); Ashland Mgmt. Inc. v. Janien, 604 N.Y.S.2d 912, 915-16 (1993); Schroeder v. Auto Driveway Co., 11 Cal. 3d 908, 921 (1974); Devon Med., Inc. v. Ryvmed Med., Inc., 60 So.3d 1125, 1128-29 (Fla. 4th DCA 2011).)

Courts often find claims for lost profits to be speculative when they involve a new business or product with little to no profit or sales history. Without a history from which to draw proof, a lost profits claim generally is based only on assumptions and projections, which courts have held to be too remote and not reliable factors on which to base a claim (see, for example, TAS Distrib. Co. v. Cummins Engine Co., 491 F.3d 625, 632-37 (7th Cir. 2007); Kenford Co. v. Cnty. of Erie, 67 N.Y.2d 257, 260-63 (1986)).

Double or Duplicative Damages

A plaintiff may not recover damages twice for the same loss. The amount awarded must make the plaintiff whole, neither more nor less. The plaintiff may not recover more from a breach than it would have received if the defendant had fully performed. (Contempo Design, Inc. v. Chi. & N.E. Il. Dist. Council of Carpenters, 226 F.3d 535, 553-54 (7th Cir. 2000); Freund, 357 N.Y.S.2d at 859-60; Devon Med., Inc., 60 So.3d at 1128.)

Double-recovery issues can manifest themselves in several different ways. For example, a plaintiff may not:

However, certain damages awards would not constitute double recovery, such as where a plaintiff shows that:

Punitive Damages

A plaintiff generally may not recover punitive damages in a breach of contract action (Rocanova v. Equitable Life Assur. Soc., 612 N.Y.S.2d 339, 342-43 (1994); Ginsberg v. Gamson, 205 Cal. App. 4th 873, 896 (2012)). However, some jurisdictions permit the recovery of punitive damages for breach of contract where:

Punitive damages also may be available where the conduct constituting the defendant’s breach rises to the level of gross negligence, recklessness, or other intentional wrong aimed at the public generally. For example, an insurance carrier may be subject to punitive damages where it breaches the contract and also:

Tom Witz joined Practical Law from Wilson Elser Moskowitz Edelman & Dicker LLP, where he was a litigation partner representing clients on product liability, professional liability, medical and dental malpractice, and commercial litigation matters at the trial and appellate levels. Previously he was an associate at Thorn Gershon Tymann & Bonanni, LLP and assistant counsel with the New York State Division of Parole.