Contract Damages FAQ

California law allows recovery of several types of damages for breach of contract, as governed by Civil Code Sections 3300-3322. Compensatory damages, the most common form, aim to place the non-breaching party in the position they would have been in had the contract been performed. These include general damages (the direct, natural consequence of the breach) and special or consequential damages (indirect losses that were foreseeable at contract formation).

California Civil Code Section 3300 establishes that damages must be proximately caused by the breach and reasonably certain in amount. In limited circumstances, California courts may award nominal damages when a breach occurred but no actual loss is proven, preserving the plaintiff's legal rights. Restitution damages restore any benefit conferred on the breaching party. Unlike tort claims, punitive damages are generally not available in pure contract cases unless the breach also constitutes an independent tort involving fraud, oppression, or malice.

Compensatory damages in California breach of contract cases are monetary awards designed to make the injured party whole by compensating for actual losses suffered due to the breach. Under California Civil Code Section 3300, the measure of damages is the amount which will compensate the party aggrieved for all the detriment proximately caused by the breach, or which in the ordinary course of things would be likely to result therefrom.

There are two primary measures:

• Expectation damages - Give the plaintiff the benefit of their bargain by awarding what they would have received had the contract been performed
• Reliance damages - Reimburse the plaintiff for expenses incurred in reliance on the contract

California courts calculate compensatory damages using various formulas depending on the contract type. For sales contracts, it may be the difference between contract price and market price. For service contracts, it may be the cost to complete the work or the diminution in value. The plaintiff must prove damages with reasonable certainty, not speculation or conjecture.

Consequential damages, also called special damages, are indirect losses that flow from a breach of contract but are not the immediate result of the breach itself. Under California Civil Code Section 3300, consequential damages are recoverable if they were reasonably foreseeable by the parties at the time of contract formation and are proven with reasonable certainty.

The landmark case Hadley v. Baxendale, adopted in California, establishes that consequential damages must either:

• Arise naturally from the breach in the ordinary course of things, OR
• Have been within the contemplation of both parties when the contract was made

Examples include lost profits from a failed business venture due to delayed equipment delivery, or expenses incurred to obtain substitute goods at higher prices. California courts require the plaintiff to demonstrate that the breaching party knew or should have known of the special circumstances creating the potential for consequential damages. Many commercial contracts include limitation of liability clauses that cap or exclude consequential damages, which California courts generally enforce unless unconscionable.

Generally, punitive damages are not recoverable for breach of contract in California. California Civil Code Section 3294 limits punitive damages to cases involving oppression, fraud, or malice, which typically arise in tort claims rather than pure contract disputes.

However, there are important exceptions where punitive damages may be available:

• Fraud in the inducement - When one party deceived the other into entering the contract
• Insurance bad faith - When insurers unreasonably deny valid claims
• Independent torts - When the breach is accompanied by tortious conduct such as intentional interference with contract

The California Supreme Court in Freeman & Mills, Inc. v. Belcher Oil Co. (1995) confirmed that breach of the implied covenant of good faith and fair dealing in non-insurance contracts does not give rise to tort damages, including punitive damages. To recover punitive damages, the plaintiff must prove by clear and convincing evidence that the defendant acted with malice, oppression, or fraud.

California courts allow recovery of lost profits in breach of contract cases when the plaintiff can prove them with reasonable certainty, as required by Civil Code Section 3301. Lost profits are typically categorized as consequential damages and must have been foreseeable at the time of contracting.

California courts use several methods to calculate lost profits:

• Historical analysis - Examining past profit margins and projecting forward based on established performance
• Expert testimony - Forensic accountants or financial analysts establishing calculations
• Market analysis - Using comparable business data and industry standards
• Before-and-after comparison - Comparing profits before and after the breach

The plaintiff must prove both the fact of lost profits and the amount with reasonable certainty—mathematical precision is not required, but speculation is insufficient. New businesses face a higher burden because they lack historical data; however, California courts have allowed lost profit recovery for new businesses when supported by market analysis, comparable business data, and expert testimony. Courts will deduct expenses the plaintiff would have incurred in earning the profits.

Under California law, the injured party in a breach of contract has a duty to mitigate damages by taking reasonable steps to minimize their losses. California Civil Code Section 3358 codifies this principle, stating that damages must be reasonable and that no person can recover damages which they could have avoided by reasonable effort without undue risk, expense, or humiliation.

Key aspects of the mitigation duty include:

• The duty does not require extraordinary measures or substantial expense
• You cannot passively allow damages to accumulate when reasonable alternatives exist
• An employee wrongfully terminated must make reasonable efforts to find comparable employment
• A landlord must reasonably attempt to re-rent a property after tenant breach

The breaching party bears the burden of proving that the non-breaching party failed to mitigate and the extent to which damages could have been reduced. California courts apply an objective reasonableness standard, considering what a reasonable person in the plaintiff's position would have done. Any expenses reasonably incurred in mitigation efforts are recoverable as damages.

Liquidated damages are pre-agreed amounts specified in a contract that become payable upon breach, regardless of actual damages suffered. California Civil Code Section 1671 governs the enforceability of liquidated damages provisions.

Under this section, a liquidated damages clause is valid unless the party seeking to invalidate it proves it was unreasonable under the circumstances existing at the time the contract was made. For consumer contracts, the standard is different: liquidated damages are presumed invalid unless the party seeking to enforce them proves:

• Actual damages would be impracticable or extremely difficult to determine at contracting time
• The amount represents a reasonable endeavor to estimate anticipated damages

California courts will not enforce liquidated damages clauses that function as penalties—amounts grossly disproportionate to the anticipated harm. Real estate contracts often include liquidated damages provisions, typically allowing sellers to retain deposits (limited to 3% of purchase price for residential property under Civil Code Section 1675). Construction contracts, commercial leases, and service agreements frequently use liquidated damages clauses for delayed performance.

The amount you can sue for in a California breach of contract case depends on your actual damages, contract terms, and the court where you file.

Court jurisdiction limits:

• Small Claims Court - Up to $10,000 for individuals, $5,000 for businesses (simplified procedures, no attorneys)
• Limited Civil Court - Up to $25,000
• Unlimited Civil Court - No upper limit for larger disputes

Your recoverable damages include direct losses from the breach, foreseeable consequential damages, and any amounts reasonably spent mitigating your losses. California Civil Code Section 3300 requires that damages be proven with reasonable certainty—you cannot recover speculative or uncertain amounts. If your contract contains a limitation of liability clause, your recovery may be capped regardless of actual damages. Attorney's fees are generally not recoverable unless the contract specifically provides for them or a statute authorizes them under Civil Code Section 1717. Pre-judgment interest may be added at the legal rate of 10% per year under Civil Code Section 3287 if damages were certain or ascertainable.

Expectation damages and reliance damages represent two different approaches to compensating breach of contract victims in California.

Expectation Damages:

• Aim to give the injured party the benefit of their bargain
• Place plaintiff in the economic position they would have occupied had the contract been fully performed
• Include lost profits and the value of the promised performance
• Subtract any costs saved by not having to complete performance

Reliance Damages:

• Reimburse the injured party for expenses incurred in reliance on the contract
• Return the plaintiff to their pre-contract position rather than post-performance position
• Include out-of-pocket costs, preparation expenses, and opportunity costs

California courts typically award expectation damages when they can be proven with reasonable certainty. However, reliance damages become the preferred measure when expectation damages are too speculative to calculate, particularly for new businesses or novel ventures without profit history. Under California Civil Code Section 3300, plaintiffs cannot recover both for the same loss, as this would constitute double recovery.

In California, attorney's fees in breach of contract cases are generally recoverable only if authorized by contract or statute, following the "American Rule" where each party pays their own fees.

California Civil Code Section 1717 is the key statute governing contractual attorney's fees, providing that when a contract allows one party to recover attorney's fees, the prevailing party is entitled to fees regardless of which party the contract originally favored. This creates reciprocity—if your contract says only the seller can recover fees, Section 1717 allows the buyer to recover fees if they prevail.

Key considerations for fee recovery:

• The contract must specifically include an attorney's fees provision
• Courts determine the "prevailing party" based on net recovery and success on claims
• Courts may find no prevailing party if both sides achieve mixed results
• Fee amounts must be reasonable—courts may reduce excessive requests
• Statutory fee provisions exist for certain contract types (consumer protection, construction defect)

Planning your litigation strategy with potential fee recovery or liability in mind is essential for accurate cost-benefit analysis.