What it means
The guiding principle is restoration, not reward. A court adds up what the claimant genuinely lost, subtracts anything they saved or recovered, and awards the difference, which is why exaggerated claims tend to be cut down at trial.
Lawyers split the award into two buckets. Special damages are the calculable, receipted losses such as lost revenue, replacement costs and medical bills, while general damages cover harder to quantify losses such as pain and suffering, reputational harm or loss of amenity.
In a business dispute the arithmetic is usually about lost profit rather than lost revenue. If a supplier fails to deliver and you lose $1,000,000 of sales, your loss is the contribution you would have earned on those sales, not the full sales figure, because you also avoided the cost of fulfilling them.
Claimants also carry a duty to mitigate. If you could reasonably have limited your loss by finding a substitute supplier or returning to work sooner, the court will reduce the award by what reasonable mitigation would have achieved, whether or not you actually took those steps.
For finance teams the practical relevance is provisioning and disclosure. A probable claim with a reliably estimable amount is recognised as a provision, a possible but less likely claim is disclosed as a contingent liability, and the difference between the two often turns on the strength of the compensatory damages calculation.
In practice
Real-world examples.
Example
A restaurant group's freezers fail because an installer used the wrong compressor. The court awards $85,000 for spoiled stock, $40,000 for lost trading over the closure and $12,000 for emergency replacement hire, a total of $137,000 in compensatory damages.
Example
A logistics business is defamed by a former contractor who falsely tells clients it is insolvent. It proves the loss of two contracts worth $310,000 in annual contribution and recovers compensatory damages for the lost profit plus $18,000 spent on corrective communications with customers.
Example
A cyclist injured by a delivery van recovers medical costs of $46,000 and lost earnings of $52,000 as special damages, plus a general damages award for pain and suffering. The insurer's reserve is built from the two components separately because the special damages are documented and the general damages are estimated from comparable awards.
Formula
Calculation
Compensatory damages = special damages + general damages - costs avoided through mitigation.
A packaging supplier fails to deliver components, forcing a manufacturer to halt a production line for six weeks. The manufacturer proves lost profits of $260,000, the cost of hiring replacement equipment of $120,000, and $40,000 of expedited freight to catch up on late orders.
Special damages = $260,000 + $120,000 + $40,000 = $420,000.
Costs avoided during the shutdown, such as unused power and consumables, total $20,000.
Compensatory damages = $420,000 - $20,000 = $400,000.
If the contract contained an enforceable clause limiting liability to the value of the goods supplied, say $150,000, the recoverable award would fall to that cap even though the proven loss was $400,000.Case study
Seen in the real world.
Ferngate Brewing is an illustrative, fictional craft brewery whose bottling line was supplied with defective caps that caused a batch to spoil in the trade. The situation is invented to show how a compensatory damages claim is actually assembled.
The fictional brewery documented three heads of loss: $180,000 of destroyed and recalled stock at cost, $150,000 of lost contribution on orders it could not fill during the eight week disruption, and $70,000 of extra costs for emergency re-bottling and customer credits, giving $400,000 in total. It then deducted $30,000 of ingredient and utility costs it had avoided while the line was down, bringing the claim to $370,000.
The supplier's defence argued that Ferngate had failed to mitigate by not sourcing caps from an alternative vendor in week two, and the parties settled at $295,000. The finance director's note recorded the useful lesson: the heads of loss backed by invoices survived almost untouched, while the contribution claim, which relied on forecast orders, was where most of the reduction happened.
Watch out
Common mistakes.
- Claiming lost revenue instead of lost profit. Courts award the contribution you would have earned, so the costs you avoided by not fulfilling the sales are deducted from the claim.
- Confusing compensatory damages with punitive damages. Compensatory sums restore the claimant's position, while punitive sums punish the defendant and are rare in commercial contract disputes.
- Ignoring the duty to mitigate. A claimant who does nothing to limit the loss will see the award reduced to what reasonable steps would have achieved, regardless of the actual figures incurred.
Questions
People also ask.
What is the difference between special and general damages?
Special damages are calculable, documented losses such as lost profits and medical bills, while general damages cover non-financial harm such as pain, suffering or reputational damage.
Can a contract limit compensatory damages?
Yes, liability caps and exclusion clauses are common and are usually enforced between commercial parties, although courts scrutinise them where they would leave a claimant with no meaningful remedy.
How should a defendant account for a claim?
A probable loss that can be reliably estimated is recognised as a provision in the accounts, while a possible but less likely loss is disclosed as a contingent liability instead.
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