Understanding Contract Damages: A Quick Guide to Key Types

Keeping track of the damage types and what they mean has always been hard for me. I have trouble remembering which is which. The fact that many have two names makes it even harder.

I remember best when I have a visual, so I created a chart showing how the main types of damages relate to each other. Here's the flow of it.

We need to ask three questions to understand the relationships between them:

Punitive vs. Compensatory Damages

The first question is whether we want the damage to punish a wrongdoer or compensate the harmed party. Punitive (aka exemplary) damages punish, but the rest are compensatory.

Direct Damages vs. Indirect Damages

Within compensatory damages, is it indirect or direct? Direct (aka general) damages are straightforward. They are the natural and typical damages that flow from the breach. Indirect damages are all damages that are not direct.

Consequential Damages vs. Incidental Damages

Within indirect damages, is it consequential or incidental? Consequential (aka special) damages are not typical and flow from the known special circumstances of the harmed party. Incidental damages are costs and expenses that are incurred because of the breach.

This is very general and doesn't account for jurisdiction-specific rules. But hopefully, it helps.

Other Resources on Limitation of Liability Clauses 

• How to Contract
  • Limitation of Liability Training Hub, including our limitation of liability free checklist
  • Courses on limitation of liability agreement provisions
• Other articles
  • "Ten Ways Your Limitation of Liability Provision Is Actually Ineffectual" by Alexandra J. Gage and Sara E. Potts, Attorneys of Doerner, Saunders, Daniel & Anderson, LLP 
  • Limitation of Liability Sample Clauses from Law Insider