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What are the penalties for breach of contract?

Promises between businesses typically are expressed in the specific terms of written contracts. When a contract's terms are not followed, it is called a breach of contract.

In this post, we will look at how parties can be penalized when they breach a contract.

Financial remedies

The first category of breach-of-contract remedies deals with money. How much money does the breaching party owe to the other business? These damages are also called "remedies in law."

Here are six categories of money damages:

  • Compensatory damages. The court determines how much money the breaching party must pay, in order to fulfill the contract's promises.
  • Restitution. The court orders the breaching party to pay money back to the injured party.
  • Punitive damages. The purpose of punitive damages is to punish the party that broke the contract. These damages typically are reserved for situations when the breaching party did something morally reprehensible, such as selling a product that it knew was unsafe.
  • Nominal damages. The court awards nominal damages when a breach has occurred but nobody was harmed.
  • Liquidated damages. These are damages that the parties included in the language of the contract. Liquidated damages often are punitive in nature, in order to discourage a party from breaking contract terms.
  • Quantum meruit (meaning "as much as deserved"). The court can order payment to the breaching party for work that was performed prior to the breach.

Non-financial remedies

Money is not the only possible contract remedy. The court can order one party to do something, rather than pay something. These are called "remedies in equity" or "injunctive relief." These remedies can include:

  • Cancellation. The court decides that neither party must follow the contract's terms. The contract is cancelled.
  • Specific performance. This is when the court orders one party to perform a service or deliver goods. This remedy typically is used when the service or product is unique and damages cannot replace what was promised.

If you have a question about business contracts or disputes, contact an attorney who has experience with business law.

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