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What You Need to Know about Contract Breaches

May 5th, 2021

The most common remedy for breach of a contract is an award of money damages. Different types of damages may be available depending on the terms of the contract and the circumstances of the breach.

Compensatory Damages

Generally, as a plaintiff in a breach of contract case, the measure of damages to which you’re entitled if you prevail is the amount necessary to compensate you for what you lost as a result of the breach. In other words, you are entitled to an award sufficient to put you in the position you would have been in if the contract had been performed. Such damages are called “compensatory damages.” For example, if you pay a business to provide a service that it fails to perform, and you cannot find anyone else to perform the same service except at a higher price, you may be able to sue that business for the amount you paid it in addition to the amount of the increase in price.

There is, however, an important limitation on compensatory damages: you may not recover for damages beyond those that should be foreseeable as a result of a particular breach. If, because of special circumstances, a breach of a contract causes you a cascade of costly problems, you may not be able to recover your losses unless the parties to the contract had reason to foresee them, when the contract was formed, as probable consequences of the breach.

Consider a situation in which equipment that you use in the course of your business breaks down, and you hire a contractor who agrees to repair it at a certain time. The contractor doesn’t show up as promised, the repairs are delayed, and your business loses profits during the delay. The question of whether your business could recover lost profits from the contractor will likely depend on the specific circumstances of the agreement, including the extent to which the contractor had reason to be aware of the nature of your business and the situation you were in due to the breakdown.

Another limitation on compensatory damages is the “duty to mitigate.” As a party to a contract that has been breached, you are expected to take reasonable steps to minimize the damage caused by the breach. For example, a landlord whose tenant has broken a lease who makes no effort to re-let the property for the remainder of the term of the lease may not be awarded the full amount of unpaid rent in a lawsuit against the breaching tenant.

Liquidated Damages

Some contracts set predetermined amounts as damages for particular breaches. These amounts are called liquidated damages, and they are often used in situations where the actual damages caused by a breach would be difficult to measure. For example, a former employee’s agreement not to compete with, or not to disparage, a former employer may involve a liquidated damages clause, since the precise financial consequences to a business of a breach of those agreements might be practically impossible to quantify.

However, liquidated damages provisions are not always enforceable; under Colorado law, liquidated damages will only be awarded when certain conditions are met. First, at the time the contract was made, the actual damages that the breach would cause must have been difficult to measure; second, the parties must have mutually intended to set liquidated damages in advance; third, the amount of liquidated damages must have been a reasonable estimate, at the time the contract was made, of the actual damages that the breach would cause.

Disputes over enforceability are common in litigation involving liquidated damages provisions, and Colorado courts will not enforce them if the party challenging liquidated damages can show that the requirements are not met.

Attorney Fees

In Colorado, reimbursement for your attorney fees is generally not part of the damages you can seek as a plaintiff in a breach of contract case. However, it is common for contracts to include provisions requiring the losing party in a lawsuit to reimburse the attorney fees of the prevailing party (usually only to the extent that the amount of such fees is “reasonable”). The question of whether a contract entitles you to recover attorney fees from a breaching party may determine whether it is economical for you to hire an attorney to pursue litigation over a breach.

Occasionally, these fee-shifting provisions are written to benefit one party to a contract and not another. In that case, one side in a suit may face the risk of having to pay the other side’s fees without being entitled to any such reimbursement in the case of a win. These unilateral fee-shifting provisions are generally enforced in Colorado.

If you are a party to a contract that has been breached, we can evaluate and advise you about the damages you may be able to seek, as well as the potential costs and risks of litigation. Please fill out our contact form or give us a call.