What is the purpose of compensatory damages in a legal context?

Compensatory damages are designed to restore the injured party to the position they would have been in had the breach of contract not occurred. This principle is rooted in the idea of making the wronged party whole, rather than imposing penalties or enforcing stricter terms. The primary focus of compensatory damages is on covering actual losses incurred due to the breach, which may involve direct costs and consequential damages that were a foreseeable result of that breach.

For example, if a contractor fails to complete a project on time, compensatory damages would cover the extra costs the other party incurs as a result of the delay. The emphasis is on financial restitution to eliminate the harm caused rather than to punish the other party or create an opportunity for profit, ensuring that the innocent party is neither enriched nor impoverished by the breach. This aligns with the fundamental goal of compensatory damages in the legal system.