Damages for Breach of Contract: Legal Meaning, Types and Remedies

Under Australian contract law, when one party fails to perform their contractual obligations, the non-defaulting party may be entitled to financial compensation. Damages for breach of contract are the primary civil remedy available, designed not to punish the wrongdoer but to place the innocent party, as far as money can do so, in the position they would have occupied had the contract been properly performed.

This guide explains how damages operate in Australian law, how they are calculated, and what types of damages courts commonly award.

What Are Damages for Breach of Contract?

In Australian civil law, damages refer to a monetary award granted by the court to a party that has suffered loss due to another’s failure to perform contractual obligations.

The purpose is restitutionary and compensatory — restoring the economic position that the innocent party reasonably expected under the contract. Damages are not punitive unless fraud or another independent tort is proven.

The guiding principles stem from the English decision Hadley v Baxendale (1854), which remains influential in Australian jurisprudence. It established that recoverable losses must either:

1. Arise naturally from the breach of contract
2. Be losses that both parties could reasonably foresee at the time the contract was made.

How Are Damages Calculated?

When assessing damages, Australian courts apply established common-law principles and require the claimant to prove actual financial loss. Three principal measures are often considered:

• Expectation damages: Compensation for the value of the promised performance — the “benefit of the bargain.”
• Reliance damages: Recovery of expenses reasonably incurred in reliance on the contract.
• Restitutionary damages: Restoring unjust gains obtained by the breaching party.

Courts also require compliance with the duty to mitigate. The claimant must take reasonable steps to reduce the loss suffered — for example, by obtaining alternative goods or services. Any avoidable losses will not be recoverable.

Types of Damages Recognised in Australian Law

Australian courts distinguish several types of damages depending on the nature and scope of the breach:

• Compensatory Damages: Awarded to make good the loss directly caused by the breach. This is the default measure in most contract disputes. Example: A builder fails to complete works on time, causing the client to hire another contractor at higher cost.
• Consequential (Indirect) Damages: Losses flowing from special circumstances known to both parties when the contract was formed, such as loss of profit or business reputation.
• Liquidated Damages: A sum pre-agreed in the contract as a genuine pre-estimate of likely loss. Courts enforce these clauses if they are reasonable and not penal in nature.
• Nominal Damages: A symbolic amount acknowledging breach where no quantifiable financial loss is proven.
• Punitive (Exemplary) Damages: Rarely available in contract law, but may be awarded in conjunction with tortious wrongdoing such as deceit or fraud.

Mitigation of Loss

The duty to mitigate is a fundamental limitation on damages. The law requires a claimant to act prudently once a breach occurs, taking all reasonable measures to prevent further loss.

For instance, if a supplier fails to deliver goods, the purchaser should seek a substitute supply within reasonable time rather than incur escalating losses. Failure to mitigate may reduce the amount of damages recoverable.

Actual vs Liquidated Damages

The key distinction lies in timing and proof:

• Actual damages are assessed by the court after the breach, based on proven loss.
• Liquidated damages are predetermined by the parties and automatically payable upon breach.

Australian courts scrutinise liquidated damages clauses closely. If the stipulated sum is extravagant or disproportionate to the anticipated loss, it will be treated as a penalty and rendered unenforceable, as affirmed in Andrews v ANZ Banking Group Ltd (2012) and Paciocco v ANZ Banking Group Ltd (2016).

Compensatory vs Punitive Damages

Contract law in Australia is primarily compensatory. Courts aim to correct loss, not penalise misconduct. Punitive or exemplary damages are awarded only in exceptional cases involving intentional wrongdoing or statutory breaches that overlap with tort law.

This distinction reflects the civil nature of contract enforcement — to uphold commercial certainty rather than moral sanction. For parties wondering whether a breach of contract is civil or criminal, it is almost always a civil matter, unless it involves fraudulent or criminal intent. In such rare cases, guidance from a specialist in breach of contract civil or criminal matters may be essential.

Specific Performance as an Equitable Remedy

When monetary damages cannot adequately compensate for the loss — for example, where the contract concerns unique property such as land or irreplaceable goods — a court may grant specific performance, ordering the defaulting party to carry out their contractual obligations.

This equitable remedy is discretionary and typically unavailable if damages provide a sufficient alternative. If the breach concerns a property transaction, it is advisable to find a property lawyer with experience in contractual enforcement and conveyancing law.

Evidence Required to Claim Damages

A successful claim for damages must establish four essential elements:

1. A legally enforceable contract existed.
2. The defendant breached its terms.
3. The breach caused measurable loss.
4. The loss was not too remote and was reasonably foreseeable.

Evidence may include financial statements, invoices, correspondence, witness testimony, and expert valuation reports quantifying the extent of loss and demonstrating mitigation efforts. The burden of proof lies on the claimant on the balance of probabilities.

Consequential Damages in Business Disputes

In commercial contracts, consequential damages — such as lost profits, reputational harm, or business interruption — are common sources of litigation.

Courts assess whether these losses were within the reasonable contemplation of both parties at contract formation. Many business contracts now include limitation of liability clauses restricting recovery for such damages, provided they are drafted clearly and do not breach the Australian Consumer Law (ACL) provisions on unfair terms.

Defences to a Damages Claim

A defendant may resist or limit liability for damages by raising the following legal defences:

• Force majeure or frustration: The breach resulted from events beyond control rendering performance impossible.
• Remoteness: The claimed losses were unforeseeable or speculative.
• Failure to mitigate: The claimant did not take reasonable steps to limit loss.
• Contract invalidity: The agreement was void, voidable, or discharged by operation of law.

These defences are fact-specific and depend on the contractual terms and surrounding circumstances.

FAQs: Damages for Breach of Contract

Understanding how damages operate under Australian law often raises practical questions. The following address some of the most common.

What Compensation Can Be Claimed for a Broken Contract?

The claimant may recover direct losses, foreseeable consequential losses, and reasonable costs incurred because of the breach. The amount depends on proof of actual financial harm.

How Are Contract Damages Calculated?

Courts assess damages by comparing the financial position the claimant would have been in had the contract been fulfilled against their current position after the breach. Expert evidence is often required.

What Is the Difference Between Actual and Liquidated Damages?

Actual damages are calculated post-breach. Liquidated damages are agreed in advance. The latter provides commercial certainty but must reflect a genuine pre-estimate of loss to remain enforceable.

Can Small Businesses Claim Damages?

Yes. Small businesses may recover losses such as lost revenue, increased operational costs, or lost opportunities, provided the damages are proven and not speculative.

What Evidence Is Needed to Support a Claim?

Documentary proof such as financial records, contracts, correspondence, and expert assessments is crucial. Courts require objective evidence that links the breach to the claimed loss.

Conclusion

Under Australian contract law, damages for breach of contract serve a restorative purpose — ensuring commercial fairness and protecting parties’ expectations. The courts maintain a consistent approach: compensation is awarded only for foreseeable, proven losses, subject to the claimant’s duty to mitigate.

Whether seeking recovery or defending a claim, early legal advice from LegalFinda can help clarify your rights, evidence requirements, and potential exposure.