Method Used to Determine Legal Settlement Amount for a Breach of Contract

by Kevin Doran
A negotiated settlement can reduce the time and expense of a trial.


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When a party to a contract believes that the other party is not living up to his obligations, she may bring a lawsuit for breach of contract. Pursuing a lawsuit from filing to judgment can be very time-consuming and expensive. It can take years for a case to work its way through the system and thousands of dollars of lawyer’s fees. Even then, it is uncertain what the result will be. As a result, it is often more efficient and cost effective to settle the dispute before trial.

Breach of Contract

A contract is, in essence, an exchange of promises. A breach of contract occurs when one party violates a contractual obligation by failing to perform one of the things they had promised to do. A breach usually results in some harm to the non-breaching party whether the breach involves a failure to pay or perform or a substandard performance.

Expectation Damages

Most contracts involve an exchange of goods or services and the contracting parties agree to give up something of value, cash or otherwise, in exchange for something else of value. If the other side does not deliver on their end of the bargain, then the party is not getting the benefit they expected when they signed the contract. The clearest example would be if one party performed work for another and did not receive payment for the work they did. The measure of damages here is the amount promised in the contract.

Partial Performance and Opportunity Cost

Sometimes a party cancels or repudiates the contract before either party completes their performance. This is also a kind of breach. However, because neither party has totally completed their obligations, they are not entitled to the full value of the contract. Instead, the parties can value the work already completed. Additionally, if the non-breaching party can show that they missed out on another contract by virtue of the breached contract, they may be entitled to some compensation for that missed opportunity, called opportunity cost.

Liquidated Damages

Some contracts come with provisions where the parties agree beforehand on a set amount of damages that will be awarded if a party breaches the contract. These clauses called liquidated damages clauses and can help reduce risk by creating an upper limit of a potential damage award. Liquidated damages are generally limited to expectation damages or other compensatory damages. Courts often look unfavorably on liquidated damages clauses that contain punitive damages as this may indicate that the parties did not have equal bargaining power.

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