Definition of compensation for damage in commercial contracts

The Commercial Law 2005 stipulates that “Compensation for damage means that the violating party compensates for the damage caused by the breach of contract to the aggrieved party”.

In order to restore the interests of the party who suffered damage, the party who violated the contract must pay the party who suffered damage a certain amount of compensation. This is an example of property liability.

Purpose of compensation for damage in commercial contracts

Compensation for damage is a form of sanctions aimed at: indemnifying, restoring and compensating for the lost material benefits of the aggrieved party.

Therefore, the purpose of paying compensation is to compensate the aggrieved party who was wronged rather than to penalize the offender. Therefore, there is a requirement: The remedy for damages should be applied so that the aggrieved party is entitled to what they would have received if the contract had not been breached.

Basis for application of compensation for damage in commercial contracts 

The following conditions must all be met in order for liability to be established: 

(1) A violation of the contract has occurred;

(2) There has been actual damage;

(3)  The breach of the contract is the root cause of the damage.

Determine the amount of damage to be compensated 

Actual damage is determined as follows:

(1) The actual and direct loss value caused by the breach of contract;

This value can be defined to include:

Value of lost or damaged goods or property;

Expenses to prevent and limit damage caused by breach of contract such as costs related to repair, restoration, removal of defects of goods, etc.

Penalties for breach of contract or compensation for damages that the aggrieved party has to pay to a third party as a direct consequence of the breach of contract, etc.

(2) The direct benefit that the aggrieved party would have been entitled to if there had been no breach

This profit is understood as the profit that the aggrieved party will receive if the other party carries out their commitments in a proper manner.

Note: It will be more challenging to prove this condition because it calls for meticulous calculations and comparisons to the results of other contracts of the same sort.

Obligations when applying sanctions for compensating damage in commercial contracts

The party requesting compensation for damages is required to fulfill the following obligations in order to apply this remedy:

(1) Prove the damage

“The party claiming damages must prove the loss, the extent of the loss caused by the breach, and the direct profit that the aggrieved party would have been entitled to if there was no breach.”

(2) The obligation to limit losses

“The party claiming damages must take all reasonable measures within its power to limit the loss caused by the breach of contract.”

The relationship between the sanctions for damages and penalties for violations in the Civil Code and the Commercial Law

In a commercial contract, in order to be able to apply the penalty for violation, the parties must have an agreement in the contract and then the parties automatically apply both these regimes simultaneously. If the parties do not agree on a penalty for the violation, they are limited to suing for damages only.

In a civil contract, the violating party will only be required to pay fines for violations if the parties agree on fines for violations but not on the simultaneous application of fines for violations and compensation for damage.

As a result, in a civil contract, the compensation for damage is automatically removed and is no longer regarded as a statutory sanction if the parties merely agree on a penalty for violation.

Above are details of what you need to know about the compensation regime that LHLegal provides to readers. Hope the article is useful. 

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