Compensation due to a contract breach


In some contracts, compensation is expressly provided for in the event of a party breaching the terms of the contract. This means that if one party breaches the contract, the other party can sue them for compensation under the contract.

When is compensation due?

In commercial contracts, compensation can be recovered for all losses that a party has suffered as a result of the other party’s breach of contract. This could include:

  • Loss of profit
  • Sales
  • Damage to reputation

As can be imagined, compensation claims for breach of contract in commercial scenarios can be extremely high value. Due to this fact, it is common for parties to attempt to limit their liability under contracts they enter into. Exclusion and limitation of liability clauses can be drafted into contracts in order to achieve this.

However, exclusion and limitation of liability clauses can be particularly difficult to draft. They will not be considered legally enforceable, if they are considered to be:

  • Too broad in scope
  • Unfair
  • Unreasonable

If they are deemed to be unenforceable, the amount of compensation awarded to a party for breach of contract may not be limited.

This underlines the importance of seeking expert legal advice when attempting to limit liability under contracts. Compensation pay-outs can have a crippling effect on the profitability of a business. Therefore, all attempts to limit liability for breaches of contract should be made by any business which regularly enters into commercial contracts with other businesses.

What is a breach of contract?

If you have received an incompetent service from someone, you may be entitled to compensation. Contract law may provide you with a remedy against the person who provided the service. Here's a brief example:

Improving your house

You instruct a builder to carry out a loft conversion in your house. They agree to supply all the materials required to complete the conversion and finish the conversion within six weeks. In return for the service, you agree to pay them £18,000 upon completion of the conversion.

You have a contract for ‘work and materials’ with the builder. The contract is governed by the Supply of Goods and Services Act.

If the builder carries out the work incompetently, and/or takes longer than six weeks to complete, you may have a claim for compensation. Contract law will give you a remedy for breach of contract. The builder breached the contract by:

  • Carrying out the work incompetently
  • Taking longer than agreed to complete the job

If something similar to the above has happened to you, you may be entitled to compensation. Contract law damages and compensation are awarded by judges in civil courts. You should contact a solicitor if you think you have a compensation claim. They will be able to assess the strengths and weaknesses of your case and may be able to help you reach an out-of-court settlement with the other side which may be beneficial to both you and your opponent. 

For further general advice on the law of contracts, see our guidance page on contract law.

Has a party to your contract breached the contract, resulting in some financial loss? Contact Law can recommend specialist contract lawyers for any area of law your case concerns. We will discuss the case with you and then make a free recommendation on the basis of the details you provide. Please call us on 0800 1777 162 or complete the web-form above.

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