Lost profits may come to mind first when contemplating damages for breach of contract. This article reveals, however, that several other available remedies should also be kept in mind, including other compensatory damages, incidental and consequential damages, attorneys’ fees and costs, rescission, and reformation.
Breach of contract damages go beyond lost profits
In commercial cases involving breach of contract, the parties often turn automatically to lost profits damages as the solution. Lost profits certainly have their place in such cases, but other types of damages and remedies also might be available.
Lost profits basics
Financial experts often invoke business valuation techniques when determining lost profits because the cash flows associated with a contract resemble those considered when valuing a business. In the context of lost profits, experts measure the amount of income lost as a result of the contract breach and apply an appropriate discount rate to obtain the present value. The discount rate varies depending on the facts of the case and accounts for the risk that profits wouldn’t have been achieved even without the breach, as well as the time value of money.
Experts begin with a theory of damages, such as “but for the defendant’s failure to deliver the parts as promised, the plaintiff would have sold more vehicles.” From there, they weigh questions about just how many units the plaintiff would have sold and how much profit the plaintiff would have enjoyed on those sales.
Experts also consider alternative damages theories in anticipation of alternative interpretations of a specific case’s law and facts. For each theory under consideration, experts should be prepared to explain to the trier of fact which expenses were considered, which were not, and why.
A spectrum of remedies
Lost profits may come to mind first, but here are other remedies available for breach of contract to keep in mind:
Compensatory damages. These damages, including lost profits, aim to give the plaintiff the “benefit of the bargain” contemplated by the contract. Other compensatory damages might include costs the plaintiff reasonably incurs to secure a replacement contract with another party or otherwise mitigate its damages.
Incidental and consequential damages. These cover foreseeable losses caused by the breach, such as the cost of securing an alternative supply source.
Liquidated damages. When actual damages would be difficult to calculate, the contract may specify an amount of damages (“liquidated damages”) to be paid in the event of a breach. Courts often are reluctant to enforce liquidated damages clauses, however, scrutinizing them to ensure they’re not unenforceable penalty clauses. A court confronted with such a clause will assess the reasonableness of the agreed-upon amount, the parties’ intentions, the proportionality of the amount and the actual loss.
Attorneys’ fees and costs. Generally, fees and costs are available only if they’re expressly provided for in the contract.
Specific performance. If monetary damages would be inadequate, a court can order performance under the contract. Specific performance is usually reserved for real estate transactions or other unique property or goods.
Rescission. This equitable remedy cancels the contract and excuses both parties from further performance. Rescission might include the return of goods and reimbursement of expenses incurred.
Reformation. Contract terms are amended to reflect the parties’ intentions at the time of the agreement.
Bear in mind that in all breach of contract cases plaintiffs are expected to take reasonable steps to mitigate their damages. Failure to do so can reduce their recovery.
Keep your options open
Lost profits may seem the obvious remedy in breach of contract cases, but they rarely represent the only recourse. One or more of the remedies and damages described above also may serve to make the nonbreaching party whole.