COMMON REMEDIES FOR BREACH OF CONTRACT

When one party breaches a contract, the non-breaching party can claim various damages as compensation for the losses sustained due to the other party’s non- performance.

Understanding which losses are considered direct and which consequential, as well as what specific circumstances the parties contemplated at the time of contract formation, is crucial when negotiating a contract or pursuing damages for its breach.

Compensatory Damages

These damages cover the losses a party suffered as a direct result of the breach. They are the most common type of damage and consist of the following:

• Direct damages – losses resulting directly from the breaching party’s failure to perform. For example, if a party paid a contractor $100 for a custom widget that was never delivered, the direct damage the ordering party suffered is $100 they paid.

• Incidental damages – expenditures that the non-breaching party incurred when it attempted to minimize the direct loss resulting from the breach. For example, the non-breaching party might have incurred additional expenses to return defective goods, arrange for substitute goods, or pay a premium to another vendor who provided the same product at a higher price.

• Consequential damages (sometimes called special damages) – indirect losses that are not directly related to the contract itself but rather arise from special circumstances specific to the situation. The primary purpose of consequential damages is to compensate the non-breaching party for the broader effects that extend beyond the immediate breach. Consequential damages include property damage, personal injury, reputational harm, lost business opportunities, lost profits, loss of use, and attorneys’ fees incurred due to the breach or other damages related to third-party claims resulting from the breach. To recover consequential damages in Virginia, the non-breaching party must prove that these specific circumstances and potential losses were known or reasonably foreseeable by both parties at the time the contract was made. For example, if a supplier fails to deliver essential parts on time, causing the customer’s factory to shut down, the lost profits from the shutdown could be the a shutdown and the resulting losses.

While the terms “incidental damages” and “consequential damages” are sometimes used interchangeably in general conversation, they have distinct legal meanings under the Uniform Commercial Code.

Disclaimers of Consequential Damages

Incidental and consequential damages are frequently expressly disclaimed in contracts, often as part of the “standard” terms and conditions. However, disclaimers of damages should be carefully considered because, in some circumstances, lost profits can constitute the primary harm suffered due to a breach. For example, wrongful termination of a manufacturing contract will cause the non-breaching party to lose the anticipated net profit. In this case, lost profits will be considered direct damages. Consequently, a careless disclaimer that specifically excludes lost profits as consequential damages could significantly impact the non breaching party’s ability to recover their direct losses.

Liquidated Damages
Some contracts include “liquidated damages” clause, wherein the parties agree in advance on a specific monetary amount to be paid if a breach occurs. Virginia courts will generally enforce these clauses if two conditions are met: (1) the actual damages were uncertain or difficult to calculate at the time the contract was signed, and (2) the agreed-upon amount represents a reasonable estimate of the potential loss. Courts may invalidate clauses that are deemed to function as penalties rather than reasonable damage estimates.

Generally, liquidated damages and actual damages are considered mutually exclusive remedies for the same breach. Therefore, the inclusion of a valid liquidated damages clause in a contract will typically prevent the recovery of actual damages for the same injury, as the agreed-upon amount replaces the actual damages resulting from the breach.

However, in some specific cases, actual damages may be recoverable in addition to liquidated damages if the liquidated damages clause is explicitly limited to certain types of damage or specific breaches, leaving other damages outside its scope.

Equitable Remedies
In certain situations, a court may order a party to take an action designed to restore fairness in situations where monetary damages alone are inadequate to compensate the aggrieved party. These actions, called “equitable remedies,” include:

• Specific Performance – a court order requiring the breaching party to fulfill their specific obligations as outlined in the contract. This remedy is commonly applied in contracts involving unique items, such as antiques or custom-made goods. Real estate contracts often include clauses providing for specific performance because each property is considered unique.
• Injunction – a court order prohibiting a party from performing a specific act. In the context of contracts, it is often used to prevent a contracting party from taking an action that would violate the terms of the agreement. Examples include preventing the disclosure or use of another party’s confidential or proprietary information or preventing a party from competing with or soliciting the other party’s customers in violation of a non-compete clause.
• Rescission – an action that cancels the contract, effectively unwinding the agreement and restoring both parties to the positions they were in before the contract was formed. This remedy is only used when the breach is “material,” meaning it significantly affects the core essence of the contract.

What About Punitive Damages?
Punitive damages, which are designed to punish the wrongdoer, are generally not recoverable for a simple breach of contract in Virginia. The exception to this rule is rare and requires the non-breaching party to prove that the breach also involved an independent, willful tort (a separate civil wrong) characterized by malice, wantonness, or oppression.