What is the difference between direct and indirect loss?

Direct loss is the immediate consequence of a breach of contractual obligations, such as costs incurred or lost revenue. Indirect loss is more remote, for example loss of profit, and compensation may depend on the contract and applicable legal rules.

When can damages be claimed for breach of contract?

Damages can be claimed when a party fails to perform its contractual obligations and this causes proven loss. The claimant typically needs to show the loss and a causal link between the breach and the damage.

Damages

Q: Who bears the burden of proof for a damages claim?

The claimant generally bears the burden of proof and must show that a loss occurred, that the counterparty caused it, and that there is a direct causal link between the act or omission and the damage.

Damages are an economic compensation payable when a party causes loss in breach of a contract or statute.

Explained – what are damages?

Damages are a legal duty to compensate a party that has suffered loss as a result of an act or omission. In contract law, damages can arise where a party breaches contractual terms and thereby causes economic loss or other harm. The rules are set out, inter alia, in the Tort Liability Act (1972:207) and principles of commercial contract law. Damages may cover direct loss such as costs or lost revenue, and in some cases indirect loss including loss of profit. This is the core of damages in contract law and how liability for breach of contract is addressed.

When does the issue of damages arise?

The question of damages becomes relevant when a contractual relationship has been broken or where a party has acted contrary to the rights and obligations arising under the agreement. Examples include late delivery, defective services, or a failure to fulfil payment obligations. In some situations a third party may also suffer harm and bring a third party claim for damages.

Lawyer explaining damages and compensation to a client, reviewing legal documents on a computer screen after a breach of contract.

Key considerations on damages

When managing damages within a contractual relationship, several factors should be assessed.

Check whether the contract contains specific provisions on damages liability and any limitation of liability or exclusion of liability.
Assess whether the loss is a direct loss or an indirect loss, as this affects entitlement to compensation and the scope of damage.
Document the damage carefully, including dates, extent of loss and proof of causation.
Consider the limitation period for claims for damages under applicable law.
Consider alternative solutions such as settlement before bringing legal action for damages.
Ensure the claim is addressed to the correct party, is in writing, and that proof of damage supports the duty to compensate.

Handling damages correctly protects both economic and legal interests and helps avoid prolonged disputes.

Damages

Why damages matter

Damages play a central role in commercial contract law because they incentivise performance of contractual obligations and protect against economic loss. They are the principal remedy to restore the claimant to the financial position they would have been in had the breach of contract not occurred, i.e. damages for breach of contract reflecting the extent of loss.

From a business perspective, clear rules on damages support predictability and reduce the risk of disputes. Companies that work with a lawyer specialising in contracts can ensure contracts are drafted with robust limitation of liability clauses and balanced contractual risk allocation as part of sound commercial contract drafting.

In the long term, correct handling of damages strengthens business relationships and trust between contracting parties. It demonstrates that the company acts responsibly and in line with good business practice, and it clarifies how damages in contract law operate in practice.

Direct loss is the immediate consequence of a breach of contractual obligations, whereas indirect loss comprises more remote consequences, for example loss of profit.

Damages can be claimed where a party fails to perform its contractual obligations and this causes economic compensation to be payable due to proven loss. The claimant must show the loss and a causal link.

The calculation typically reflects the economic loss suffered. It may include:

Costs to remedy the defect
Lost revenue
Additional costs arising from the breach of contract, including the calculation of loss of profit

A limitation of liability clause reduces the risk of disproportionate claims and brings clarity on what applies in case of damage. This is particularly important in higher-risk sectors and should be tailored to the contractual relationship.

The claimant must prove that loss occurred, that the counterparty caused it, and that there is a direct causal link between the act or omission and the damage.

Before issuing proceedings, you should:

Analyse the contract and applicable legal rules
Collect documentation and evidence
Assess the extent of loss
Attempt to reach a settlement
Consult a contracts lawyer for business legal advice and, where appropriate, hire a contract lawyer or hire a business lawyer

Engaging early with specialist advice on damages for breach of contract helps shape strategy, supports proof of causation and can prevent disputes escalating.