A sum of money awarded in a civil action by a court to indemnify a person for the particular loss, detriment, or injury suffered as a result of the unlawful conduct of another.
Compensatory damages are intended to provide a plaintiff with the monetary amount necessary to replace what was lost and nothing more. They differ from punitive damages, which punish a defendant for his or her conduct to provide a deterrent to the future commission of such acts. To be awarded compensatory damages, the plaintiff must prove that he or she has suffered a legally recognizable harm that is compensable by a certain amount of money that can be objectively determined by a judge or jury.
Breach of contract
Following a breach of contract by the defendant, the most common approach taken by the judge is to award the sum which would restore the injured party to the economic position that he or she expected from performance of the promise or promises (known as an “expectation measure” or “benefit-of-the-bargain” measure of damages).
When it is either not possible or desirable to award damages measured in that way, a court may award money damages designed to restore the injured party to the economic position that he or she had occupied at the time the contract was entered (known as the “reliance measure”), or designed to prevent the breaching party from being unjustly enriched (“restitution”) (see below).
Some contracts contain a clause whereby the parties agree in advance the amount of damages to be paid to one party if the other party should breach the contract. This is termed Liquidated damages. Under the common law, a liquidated damages clause will not be enforced if the purpose of the term is solely to punish a breach of contract (in this case it is termed penal damages). The clause will however be enforceable if it is a genuine attempt to pre-quantify a loss. Many clauses which are found to be penal are expressed as liquidated damages clauses but are seen by courts as excessive and thus invalid.
Damages in tort are generally awarded to place the claimant in the position he would have been had the tort not taken place. Damages in tort are quantified under 2 headings: general damages and special damages.
General damages compensates the claimant for the non-monetary aspects of the specific harm suffered. This is usually termed ‘pain, suffering and loss of amenity’. Examples of this include physical or emotional pain and suffering, loss of companionship, loss of consortium, disfigurement, loss of reputation, loss or impairment of mental or physical capacity, loss of enjoyment of life, etc. This is not easily quantifiable, and depends on the individual circumstances of the claimant. Judges in the UK base the award on damages awarded in similar previous cases. For example, an accident in which the claimant has suffered the loss of both legs and for which the defendant was legally responsible, will typically attract general damages (at 2006) in the region of $125,000 – $145,000. A list of this are contained in a reference book known as ‘Kemp and Kemp’.
General damages are generally awarded only in claims brought by individuals, when they have suffered personal harm. Examples would be personal injury (following the tort of negligence by the defendant), or in the tort of defamation.
Special damages compensate the claimant for the quantifiable monetary losses suffered by the plaintiff. For example, extra costs, repair or replacement of damaged property, lost earnings (both historically and in the future), loss of irreplaceable items, and additional domestic costs etc. They are seen in both personal and commercial actions.
Special damages can include direct losses (such as amounts the claimant had to spend to try to mitigate problems) and consequential or economic losses resulting from lost profits in a business.
Direct losses and consequential losses
Special damages are sometimes divided into direct losses, and consequential or economic losses.
Direct losses include the costs needed to remedy problems and put things right. The largest element is likely to be the reinstatement of property damage. Take for example a factory which was burnt down by the negligence of a contractor. The claimant would be entitled to the direct costs required to rebuild the factory and replace the damaged machinery.
The claimant would also be entitled to any consequential losses. These are the lost profits that the claimant could have been expected to make in the period whilst the factory was closed and rebuilt.
Comparing damages for breach of contract and damages in tort
Damages in tort are generally awarded to place the claimant in the position he would have been had the tort not taken place. Damages for breach of contract are generally awarded to place the claimant in the position he would have been had the contract not been breached. This can often result in a different measure of damages. In cases where it is possible to frame a claim in either contract or tort, it is necessary to be aware of what gives the best outcome.
If the transaction was a “good bargain’ contract generally gives a better result for the claimant.
As an example, Fred sells Bob a watch for $100. Fred tells Bob it is an antique Rolex. In fact it is a fake, worth $50. If it had been a genuine antique Rolex it would be worth $500. Fred is in breach of contract and could be sued. In contract, Bob is entitled to an item worth $500, but he has only got one worth $50. His damages are $450. Fred also induced Bob to enter into the contract through a misrepresentation (a tort). If Bob sues in tort, he is entitled to damages put himself back to the same financial position place he would have been in had the misrepresentation not been made. He would clearly not have entered into the contract knowing the watch was fake, and is entitled to his $100 back. Thus his damages in tort are $100.
If the transaction was a “bad bargain’, tort generally gives a better result for the claimant. If in the above example Bob had overpaid, paying $750 for the watch, his damages in contract would still be $450 (giving him the item he contracted to buy), however in tort damages are $700. This is because damages in tort put him in the position he would have been in had the tort not taken place, and are calculated as his money back ($750) less the value of what he actually got ($50).
Forseeability and remoteness
Damages are likely to be limited to those reasonably foreseeable by the defendant. If a defendant could not reasonably have foreseen that someone might be hurt by his or her actions, then there may be no liability. This is known as remoteness.
An exception is damages for fraudulent misrepresentation when all damages suffered by the claimant are claimable.
Quantifying losses in practice
It may be useful for the lawyers for the plaintiff and/or the defendant to employ forensic accountants or forensic economists to give evidence on the value of the loss. In this case, they may be called upon to give opinion evidence as an expert witness.
Statutory damages are laid down in law. Mere violation of the law can entitle the victim to a statutory award.
The possible remedies for misrepresentation for example are codified in the Misrepresentation Act 1967.
Generally, punitive damages, which are also termed exemplary damages in the United Kingdom, are not awarded in order to compensate the plaintiff, but in order to reform or deter the defendant and similar persons from pursuing a course of action such as that which damaged the plaintiff. Punitive damages are awarded only in special cases where conduct was egregiously invidious, and are over and above the amount of compensatory damages. Great judicial restraint is expected to be exercised in their application. In the United States punitive damages awards are subject to the limitations imposed by the due process of law clauses of the Fifth and Fourteenth Amendments to the United States Constitution.
In England and Wales, exemplary damages are limited to the circumstances set out by Lord Patrick Devlin in the leading case of Rookes v. Barnard. They are:
- Oppressive, arbitrary or unconstitutional actions by the servants of government.
- Where the defendant’s conduct was ‘calculated’ to make a profit for himself.
- Where a statute expressly authorises the same.
Rookes v Barnard has been much criticised and has not been followed in Canada or Australia or by the Privy Council.
Restitutionary or disgorgement damages
In certain areas of the law another head of damages has long been available, whereby the defendant is made to give up the profits made through the civil wrong in restitution. The plaintiff thereby gains damages which are not measured by reference to any loss sustained. In some areas of the law this heading of damages is uncontroversial; most particularly intellectual property rights and breach of fiduciary relationship.
In England and Wales the House of Lords case of Attorney-General v. Blake opened up the possibility of restitutionary damages for breach of contract. In this case the profits made by a defecting spy, George Blake, for the publication of his book, were awarded to the British Government for breach of contract. The case has been followed in English courts, but the situations in which restitutionary damages will be available remain unclear.
The basis for restitutionary damages is much debated, but is usually seen as based on denying a wrongdoer any profit from his wrongdoing. The really difficult question, and one which is currently unanswered, relates to what wrongs should allow this remedy.
On the other hand, nominal damages are very small damages awarded to show that the loss or harm suffered was technical rather than actual. Perhaps the most famous nominal damages award in modern times has been the $1 verdict against the National Football League (NFL) in the 1986 antitrust suit prosecuted by the United States Football League. Although the verdict was automatically trebled pursuant to antitrust law in the United States, the resulting $3 judgment was regarded as a victory for the NFL. Historically, one of the best known nominal damage awards was the farthing that the jury awarded to James Whistler in his libel suit against John Ruskin. In the English jurisdiction, nominal damages are generally fixed at $2.
Many times a party that has been wronged but is not able to prove significant damages will sue for nominal damages. This is particularly common in cases involving alleged violations of constitutional rights, such as freedom of speech.
In addition to damages, the successful party is entitled to be awarded his reasonable legal costs that he spent during the case. This is the rule in most countries other than the United States. In the United States, a party generally is not entitled to its attorneys’ fees or for hardships undergone during trial.