When your company is entering into a contractual relationship with another party, it is important to set forth what will happen if there is a breach of the agreement. A “breach” is the failure of a party to perform its duties or obligations under the contract. When a breach occurs, the contract should provide the breaching party’s liability for the damages incurred by the other party.

When a breach of contract occurs, there are three major types of contract damages or compensation available to the non-breaching party. In order to make the injured party “whole,” the contract may allow for a combination of damages. The three primary types of contract damages are:

• Compensatory. The non-breaching party is entitled to recover its direct or actual damages incurred. Compensatory damages compensate the injured party directly for its loss.
• Incidental. Incidental damages are expenses incurred by the non-breaching party as a result of the other party’s breach. This type of damages must be reasonably associated with, or related to, the injured party’s actual damages.
• Consequential. As the name suggests, this type of damages includes those that do not flow directly and immediately from the breach, but from the consequences of the breach. They are more indirect in nature and they are sometimes referred to as “special damages.”

If you are the seller of a product, it is important to confer with legal counsel on ways to limit your liability in the contract. Failure to do so could result in you being liable for the above types of damages if you breach the contract. Let us review the transaction before it is executed and add the necessary language to limit the scope of your potential liability. The most common way this is done is to exclude your liability for incidental or consequential damages and specify that your maximum liability under the contract is limited to the purchase price of the product at issue in the deal.

To ensure that your contract provides you with the most protection from liability available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.