The core concept of this compensatory principle involves placing the non-breaching party in the position they would have occupied had the contract been fully performed. This typically involves determining the difference between the value of the promised performance and the value of the actual performance (or lack thereof). For instance, if a supplier agreed to deliver 100 widgets at $10 each, but only delivered 50, the direct loss would be $500 (50 widgets * $10). Additional losses, such as lost profits resulting from the inability to resell those widgets, might also be considered depending on the circumstances and the foreseeability of such losses at the time of contract formation.
This legal mechanism is crucial for upholding the integrity of contracts and promoting commercial certainty. By providing a quantifiable remedy for breach of contract, it discourages opportunistic breaches and incentivizes parties to fulfill their contractual obligations. Historically, the development of this principle reflects a shift from punitive measures to a focus on restoring the injured party to their rightful position. This emphasis on compensation rather than punishment promotes efficient markets and encourages reliance on contractual agreements.