Compensatory Damages for a Business Breach of Contract

 Posted on June 25, 2024 in Business Formation

When a business contract is breached, the injured party may be entitled to compensatory damages. These damages aim to place the non-breaching party in the position they would have been in had the contract been fulfilled. A Texas lawyer can help you understand the types of compensatory damages available to help protect your interests and make informed decisions when faced with a breach of contract.

Direct Damages

Direct damages, also known as general damages, are the most common form of compensatory damages in Texas contract law. These damages flow directly and naturally from the breach itself. Examples include:

• Loss of expected profits: If a breach prevents a business from earning profits it would have otherwise gained, these lost profits may be recoverable.
• Cost of replacement: When a supplier fails to deliver goods, the buyer may recover the additional cost of obtaining replacement goods from another source.
• Diminution in value: If the breach results in a decrease in the value of property or assets, the difference in value may be awarded as damages.

To recover direct damages, the injured party must prove that the damages were foreseeable at the time the contract was made and are calculated with reasonable certainty.

Consequential Damages

Consequential damages, also called special damages, are indirect losses that result from the breach. These damages are more challenging to recover in Texas because they must have been foreseeable by both parties at the time of contract formation. Examples include:

• Loss of future business opportunities: If the breach causes a loss of customer goodwill or future contracts, these losses may be recoverable if they were foreseeable.
• Increased operational costs: Additional expenses incurred as a result of the breach, such as overtime pay or rental of temporary equipment, may be considered consequential damages.
• Third-party claims: Costs associated with defending against or settling claims from other parties due to the breach may be recoverable.

To recover consequential damages, it must be proven that these damages were within the contemplation of both parties when the contract was established.

Incidental Damages

Incidental damages are expenses reasonably incurred by the non-breaching party in connection with the breach. These may include:

• Inspection costs: Expenses for examining non-conforming goods.
• Transportation costs: Costs associated with returning defective goods or obtaining replacements.
• Storage fees: Charges for storing rejected goods.

Incidental damages are generally easier to prove and recover than consequential damages, as they are directly related to the breach and its immediate consequences.

Liquidated Damages

Texas law allows parties to include liquidated damages clauses in their contracts. These clauses specify a predetermined amount of damages in the event of a breach. To be enforceable in Texas, liquidated damages must meet two criteria:

• The harm caused by the breach must be difficult or impossible to estimate.
• The amount of liquidated damages must be a reasonable forecast of just compensation for the harm caused by the breach.

If these criteria are met, Texas courts will generally enforce liquidated damages clauses, which will provide clarity and predictability for both parties.

Limitations on Damages

It is important to note that Texas law imposes certain limitations on compensatory damages:

• Duty to mitigate: The non-breaching party has a duty to take reasonable steps to minimize its losses. Failure to mitigate may result in a reduction of recoverable damages.
• Reasonable certainty: Damages must be proven with reasonable certainty. Speculative or uncertain damages are generally not recoverable.
• Foreseeability: Damages must have been foreseeable at the time of contract formation to be recoverable.
• Contract limitations: Parties may include provisions in their contracts limiting or excluding certain types of damages, such as consequential damages.

Understanding these limitations is crucial for businesses seeking to recover damages for a breach of contract in Texas.

Contact a Fort Worth, TX Business Attorney

The complexities of compensatory damages require a thorough understanding of legal principles and case-specific factors. While this overview provides a foundation, each breach of contract situation is unique and may involve nuanced considerations.

To protect your business interests and ensure you seek the full range of damages you may be entitled to, it is advisable to consult with a Fort Worth, TX business lawyer. Call Gonzalez Law, PLLC at 817-349-7330 for a free, no-obligation consultation.