Updated: Sep 21

Damages means financial compensation paid by a wrongdoer to someone who has suffered loss, damage, injury, or harm because of the wrongdoer’s wrongful behaviour.


Damages are a form of legal remedy, usually awarded by a court, and their main purpose is to try to compensate someone for some kind of harm or loss they have suffered because of someone else’s wrongful behaviour. The wrongful behaviour might be, for example, a breach of contract or the commission of a tort [1]. ‘Damages’ refers to financial compensation – in other words, money. In this post, we will look at some of the language and issues concerning damages in relation to commercial contracts.

If a party breaches a commercial contract, the financial consequences of this can be very serious. Depending on the type of contract, and its purpose, different kinds of losses can be caused. The basic purpose of damages in contract cases is to put the injured party in the position they would have been in if the contract had been performed properly. In other words, damages in contract are ‘forward looking’.

In calculating damages in contract cases, there are three main methods. These are:

· Expectation interest

· Reliance interest

· Restitution interest

Expectation Interest

Parties to a contract enter into it because they have some kind of expectation. For example, in a sale of goods contract, the buyer of goods might have the expectation of receiving goods from the seller which can then be sold at a profit. If the goods do not arrive, or arrive in a damaged condition, this expectation will not be fulfilled, and those expected profits will not be made.

The ‘expectation interest’ method of calculating damages allows the injured party to recover damages for these lost benefits, including loss of profit. It is the most usual method that a court will use when calculating damages. However, it is not always easy to calculate damages on this basis. For example, the injured party may only have had a chance of making a profit from the contract – in other words, the ‘lost profit’ may not be certain or easy to calculate.

Reliance Interest

A court may use the reliance interest method of calculating damages for breach of contract where it is not easy for a claimant to prove, for example, loss of profits. This method of calculation compensates a claimant for expenses incurred in relation to the contract. If this method is used, it is clear that the claimant is being put back into the position they were in before the contract was entered into, rather than in the position they would have been in had the contract been performed properly.

Restitution Interest

This method simply allows the claimant to recover money that has been paid to the defendant. An example of this would be where damaged, or defective, goods have been returned to a seller.

When parties enter into a contract, they do not normally anticipate any problems in performance. Indeed, most commercial contracts are fully performed without a problem. However, when negotiating and drafting a commercial contract, it is always advisable to consider carefully what might happen if problems in performance arise and address what kind of losses may arise. Contract clauses can then be drafted to try to address the issue. One way of doing this, as we have seen in a previous post, is by the incorporation of a liquidated damages clause into the contract. [2]

But there are other possibilities. One of these is to incorporate an exclusion clause into the contract, excluding certain heads of loss [3], such as liability for lost profits, if those lost profits are, for example, difficult to predict. In a future post, we will see how a recent, very important, case in the English High Court had to deal with a situation where an exclusion clause which sought to exclude certain heads of loss.

A claimant who suffers loss because of a breach of contract cannot simply do nothing and let the loss increase. An injured party must take reasonable steps to mitigate their losses.

Text Notes

[1] For a brief introduction to the law of torts, you can see the first part of our series here:


[3] ‘Heads of loss’ essentially means ‘categories of loss’.


Collocations are very important in legal English. From the list below, choose a verb (or phrasal verb), which best completes each of the following five sentences.

calculated awarded incurred entered into suffered

1. Because the seller breached the contract, the buyer …………………… loss.

2. The claimant brought legal proceedings against the defendant and the court ………………………… £5,000 in damages.

3. The court ………………………… damages on the basis of the claimant’s expectation interest.

4. When the parties …………………….. the contract, they incorporated a liquidated damages clause into it.

5. Using the reliance interest basis, the claimant was compensated for the expenses she had ………………………… in relation to it.


1. suffered

2. awarded

3. calculated

4. entered into

5. incurred

Note: This material is for study and educational purposes only. It is not intended as legal advice. If you need legal advice, you should consult with an appropriate lawyer or legal advisor.

© Cambridge Legal English Academy 2021

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