Ryan C. Young
Richmond | Business Law | Attorney
When a small business enters into a contract, it must meet certain obligations. If the business isn’t able to uphold its part of the deal, the other parties involved in the contract can bring legal action against the business, which may result in damages. To protect itself from unreasonable costs, a business should always limit damages in a contract.
Types of Contract Damages
The four primary types of damages include nominal, compensatory, consequential and punitive. Nominal damages are awarded to a party when breach of contract didn’t cause a monetary loss. When nominal damages are awarded, the court has decided to punish the party that broke the contract even though the breach didn’t cause financial harm.
Compensatory damages are damages awarded to compensate an injured party for direct losses. For example, if a delivery service destroys a company’s shipment, the delivery service must pay the company the cost of the lost goods. Consequential damages, on the other hand, compensate the injured party for indirect losses. In the previous example, consequential damages would require the delivery service to not only compensate for the cost of the lost goods, but also for any profits the company lost because of the incident.
Finally, punitive damages are damages awarded in excess of the amount that would compensate an injured party for direct and indirect losses. In most cases, a court awards punitive damages to punish the party that breached the contract or deter the party from breaching future contracts.
How to Limit Damages in a Contract
Three types of contractual provisions exist to limit damages. One such provision involves limiting the types of damages a party may recover. For example, while most contracts allow a party to collect compensatory damages, some may limit or prohibit consequential damages. Many contracts also forbid either party from seeking punitive damages.
Another provision that limits damages involves detailing the types of contractual breaches that can trigger an award of damages. For example, if an innocent oversight by one party leads to a small loss for the other, this provision would prevent the injured party from seeking damages.
The third provision that businesses can use to prevent damages is a damages cap. By placing a cap on damages, businesses can limit the amount of compensation the other party can seek to either a dollar amount or a set percentage of the contract’s value.
Why Limit Damages?
For small businesses, the damages from breach of contract can be crippling. By limiting damages, small businesses can decrease the risk of financial ruin. When writing a contract that limits damages, it’s wise to consult a qualified attorney. Only an attorney with experience in such contracts can ensure that your business is protected.
Law Office of Ryan C. Young, PLLC | Richmond, Virginia | Contract Law