What Are Compensatory Damages?

Compensatory Damages Explained in Less Than 5 Minutes

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Compensatory damages are monetary awards granted to a plaintiff that are intended to compensate them for any loss or injury.

Learn more about what compensatory damages are, the types of compensatory damages, and how they differ from punitive damages. 

Definition and Examples of Compensatory Damages

Compensatory damages are awarded to plaintiffs to compensate for their loss or injury. They include coverage for expenses resulting from harms like physical injuries and breaches of contract, or from intangible harms like emotional distress and humiliation. 

Alternate name: Remedial damages or actual damages

The type of award depends on the type of loss and its effect on the victim. For instance, if your job transfer is a result of deliberate discrimination by your employer, the remedy may include reinstatement with back pay or the restoration of job-related benefits you’d have received, like retirement benefits. 

Compensatory damages are only intended to make amends for a loss, not to enrich a victim or punish unlawful conduct. 

How Compensatory Damages Work

Compensatory damages are among the three main legal remedies for a breach of contract or a violation of duty. (The others are restitution or restoring something to its rightful owner, and injunction, or restraining a party from certain acts.)

In civil cases, damages—the amount of money the law imposes for violating some right or a breach of duty—are a common remedy. The monetary compensation helps offset the losses caused by another person’s conduct or breach of a contractual relationship. 

A court uses compensatory damages to try to place the victim in the position they would have been in if they had not suffered a violation of rights or breach of contract. 

The victim or non-breaching party may not always recover compensatory damages since it’s their duty to minimize or mitigate damages to a reasonable extent. In other words, you won’t be awarded compensatory damages for losses you could have avoided without undue burden or risk. 

You can only recover damages for losses that you can prove beyond a reasonable doubt. You can’t recover losses that are purely speculative. 

Types of Compensatory Damages

General Damages

General damages, in contract law, are damages that cover losses that are direct and immediate consequences of a violation or breach of contract.

Consider this example: ABC Furnitures delivered the wrong office chairs to Apex Limited. Upon discovering the oversight, Apex Limited insists that ABC Furnitures collect the wrong furniture and deliver the right office chairs. ABC Furnitures declines to pick up the office chairs and says it couldn’t supply the right chairs since they were out of stock. In this case, Apex Limited may sue for breach of contract the receive general damages to cover:

  • A refund of the money it had prepaid for the office chairs. 
  • Reimbursement of any expenses incurred when sending back the office chairs.
  • Payment for any increased cost of procuring the right office chairs.

In tort law, general damages refer to awards for losses that are difficult to quantify, such as pain and suffering, lower quality of life, disfigurement, and mental anguish.

Special Damages

Special or consequential damages cover losses that are not a direct and immediate consequence of a breach of contract. The breach of contract may be due to special circumstances or conditions that are not predictable. To recover damages for this loss, you must prove that the breaching party had full knowledge of the requirements or special circumstances when the contract was written

For example: ABC Company procures an ERP system from XY Computers. The software fails to operate properly and ABC Company employees revert to manual processes, resulting in $20,000 spent in overtime work compensation. In this case, ABC may sue to recover the $20,000 as consequential damages. 

Compensatory damages cover losses resulting from past out-of-pocket expenses, future out-of-pocket expenses, and emotional harm.

In tort law, special damages refer to damages that can be easily quantified, for example with receipts, bills, written estimates, or contracts.

Compensatory Damages vs. Punitive Damages

In contrast to compensatory damages, which aim to pay a victim for their loss, punitive damages have a different purpose. They are awarded to punish willful misconduct and deter the wrongdoers and other people from engaging in malicious or fraudulent acts in the future.

Punitive damages are not intended to remedy a breach of contract, but they may be awarded if it’s proven that the breach was deliberate. 

Compensatory Damages Punitive Damages
Are awarded to compensate a victim for injury or loss Are awarded to punish and deter unlawful conduct 
Awarded when there is a breach of contract Do not apply to a breach of contract, except when it’s proven the breach was deliberate
Are awarded alone. Awarded in addition to compensatory damages

Key Takeaways

  • Compensatory damages cover the losses a victim incurs when there is a breach of contract. 
  • Compensatory damages shouldn’t be overpaid since they are supposed to help maintain the victim’s position as it were before the contract was breached. 
  • You can’t recover compensatory damages for losses that could have been fairly avoided following the breach of contract.