Jigsaw piece puzzle

Compensatory Damages: Definition, Example and Related Terms

What are Compensatory Damages ?

Compensatory damages are financial payments awarded to a party in a legal dispute to compensate for a loss, injury, or damage that they have incurred. In the context of contract law, compensatory damages aim to make the injured party whole again by covering direct losses and costs associated with the breach of contract.

For example, if one party fails to deliver goods as promised in a contract, the other party might incur expenses to find an alternative supplier. Compensatory damages would cover these additional expenses, ensuring that the non-breaching party is not financially disadvantaged due to the breach.

Compensatory damages can include a range of financial losses such as lost profits, costs of obtaining substitute goods or services, and any other expenses directly resulting from the breach of contract. They do not, however, include punitive damages, which are intended to punish the breaching party rather than to compensate the injured party.

Understanding compensatory damages is crucial for anyone involved in drafting, negotiating, or managing contracts. They help enforce the terms of the contract and provide remedies when agreements are not honored. Knowing what types of damages can be claimed and how to prove these losses is essential for effective contract management and dispute resolution.

Example(s)

  • Scenario Description
    A supplier fails to deliver raw materials on time, causing a manufacturing halt for a week. The manufacturer could claim compensatory damages for lost profits during the downtime and additional costs incurred to source materials from a different supplier.
    A venue cancels a booked event last minute, leading to relocation costs for the event organizer. The event organizer could seek compensatory damages for the extra costs incurred in finding and booking a new venue, as well as any additional advertising required to inform attendees of the change.