How to calculate compensation for breach of contract

Lots of business contracts are not successful because of one party cannot live up to the obligation due under the contract, when damages occur after the breach of contract, ¨the law provides remedies to the harmed party, often in form of monetary damages¨[i], the harmed party is intended to be compensated by a monetary amount, ¨or in limited circumstances, in the form of specific performance of the promise made¨[ii], the harmed party could consult a business attorney/accountant to discuss how to calculate the compensations, especially consequential damages for breach of contract.

How does the compensation for breach of contract being calculated? What are the methods of calculating the compensation?

Generally, there are two types of compensatory damages:

  1. Expectation Damages: It is very straightforward, often regarded as tangible damages that are goods or services or damages that are awarded to compensate the loss of future income; the damages of the innocent party who suffered from the breach of contract will be covered by the party that has breached the contract. The court will use the rule of the expectancy to determine the appropriate award. The calculation is based on the market value or the contract itself, the harmed party should provide invoices or proof the harmed party has to pay overtime, in other words, the innocent party is entitled to damages that will put the innocent party in the position that party would have been in had the contract not been breached.
  2. Consequential Damages: It is difficult to assess; it could be the loss of time, reputation and money or any indirect damages caused by the breach of contract. It could be, as well, for instance, loss of business profits due to an undelivered machine: in order to recover, the injury must flow from the breach. (e.g.: be a direct result of the breach, and be reasonably foreseeable to both parties when they entered into the contract.)[iii]

When a contract is breached, usually, there are two ways of measuring expectation damages: (a) difference in value; (b) cost of cure. There must be a causative link between the loss and the breach: to obtain substantial damages from other party, the innocent party must show that they have suffered loss as result of breach, that the loss was a likely consequence of the breach and the amount of loss[iv].

Nevertheless, the calculation method is more complicated for consequential or intangible damages. Consequential damages such as disappointment, mental distress, and injured feelings are not generally awarded; however, damages for such may be awarded if contract itself was supposed to provide peace of mind or freedom from distress[v]. Generally, when the damages are consequential or intangible, consider to discuss how to quantify the intangible loss with a business attorney/ accountant in order to calculate the damages.

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[i] Cornell Law School

[ii] Cornell Law School

[iii] Legal Match

[iv] Norwegian Research Center for Computer & Law

[v] Norwegian Research Center for Computer & Law