Compensation for damage

What it means

Compensation for damage is the duty of whoever breached a contract or the law to make good the harm the injured party suffered as a result. Both actual loss, by how much assets decreased, and lost profit, by how much they would have grown without the breach, are compensated.

The Commercial Code makes liability between businesses strict: fault is not required, only a breach of duty, the damage and a causal link. Liability can be avoided only through circumstances excluding liability, such as force majeure.

Compensation for damage differs from a contractual penalty, which is payable regardless of damage, and from unjust enrichment, where the benefit is returned. Where performance is defective, it combines with liability for defects.

How it works in practice

When making a claim, proving the amount of loss is the hardest part. We recommend gathering evidence from the start: repair invoices, replacement purchases, calculations of lost sales and correspondence. Lost profit is harder to prove, and courts demand convincing evidence.

Contracts between businesses often limit liability, for example with a cap or by excluding lost profit. The Commercial Code allows compensation to be limited only in part and does not permit some arrangements in advance, so the wording is worth checking.

In the books, compensation is income for the injured party once the claim is accepted or awarded, and an expense for the party at fault. Its deductibility for the party at fault depends on the circumstances, and where liability insurance covers the damage, the insurance payout is recorded too.

What to watch out for

A common mistake is assuming the contractual penalty covers everything. Unless the contract says otherwise, the penalty is set against the compensation, and loss above it must be proven separately. In important contracts the relationship between penalty and compensation should be spelled out.

The second risk is limitation. A damages claim becomes time-barred within periods that start when the injured party learned of the damage and who caused it. Waiting to “settle amicably” can defeat the claim.