Standards for Consequential Damages – Common Law

1. Standards for Consequential Damages – Common Law • Compensatory Damages: • In addition to general (or direct) damages caused by injury to the very thing that was hurt (tort) or the subject of the agreement (contract), in order to be restored to their rightful position, plaintiffs often need to recover consequential damages as well. • Common Law Standards: • Tort: Plaintiff can recover only those damages for which she can show D’s actions are the proximate cause. • Contract: Plaintiff can only recover those losses which are reasonably within the contemplation of the parties as a probable result of the breach.

2. Why does the distinction between general and consequential damages still matter? • Historically, the hostility to consequentials because they were thought to be more speculative, less certain, more remote, and more avoidable than general damages. • It’s unclear the extent to which market value measures are easier to prove or value than consequential damages. • Furthermore, the standards plaintiffs must meet in order to obtain consequential damages take care of some of the above concerns • As do certain other doctrines we will discuss later • Why, then, is there any reason to distinguish between consequential and general damages? • Special pleading requirements in FRCP and state analogs • Bargained-for remedies/limitations clauses/damage disclaimers

3. Consequential Damages Under the UCC • UCC 1-305(a) expresses an ambivalence to consequential (or incidental) damages similar to the common law. UCC 1-305(a) allows recovery only if such damages are specifically provided for by UCC or other rule of law • BUT every section we discussed last week provides for such damages • Buyer’s Remedies – UCC 2-715 • Buyer gets incidentals under 2-715(1) and consequentialsunder 2-715(2) • What is the difference between the two and why are they treated differently? • Seller’s Remedies – UCC 2-710 • Seller get’s incidental damages but not consequentials (unlike buyer) – why not?

4. Meinrath – Consequential Damages Stemming from Failure to Pay Money • P & D entered “Purchase and Sale Agreement.” D breached agreement by failing to pay certain “bonus compensation” • P seeks $300,000 in bonus compensation (general damages) • P seeks $770,000 in losses of invested capital and decline in the net worth of the businesses as a result of failure to pay the bonus compensation (consequential damages) • What does the court award instead of consequential damages?

5. Meinrath, cont’d • Why do courts refuse to give consequentials for failure to pay money? • Erosion of the Meinrath rule: • Contracts to loan money • Insurers – bad faith refusal to settle • Majority rule in both instances is that P’s can get consequential damages from initial breach (even though they involve a failure to pay money)

6. Limits on Restoring Plaintiff to Rightful Position – Bargaining out of Rightful Position • So far we’ve been looking at default rules – i.e., the rules a court normally applies to determine the damages necessary to restore P to his rightful position. • But it is possible for parties in contract situations to bargain out of these default rules. These bargains take P out of their rightful position as the default rules conceive of that position. Although because P has bargained for this particular remedy, their position can also be considered P’s rightful position. • We will consider two such bargained for remedies and their legal limits • Limitations on Remedies Clauses (UCC 2-719); some common law but not nearly as well developed • Liquidated Damages Clauses (UCC 2-718; Restatement (2d) of Contracts – UCC & common law are equally well developed

7. Limitations on Remedies Clauses – UCC 2-719 • Clauses that attempt to prevent a non-breaching party from recovering all remedies that the law would normally provide. They explicitly: • (1) limit the non-breaching parties to certain remedies specified in the contract, or • (2) exclude certain available common law remedies upon breach. • Most common kind of limitations clauses: • Substituted remedies clause – i.e., one that seeks to substitute a certain remedy for those available at common law • E.g., the repair and replace clause in Kearney & Trecker (p. 68) – 2nd half of indented paragraph • Limitations on consequential damages – attempt to disclaim liability for consequential damages stemming from breach of contract • E.g., also one of these in Kearney & Trecker (p.68) – 1st part of indented paragraph

8. Substituted Remedies Clauses • Substituted Remedies clauses are enforceable as the exclusive remedy for breach of contract if two conditions are met: • The parties expressly agree that the substituted remedy is exclusive • UCC 2-719(1)(b)- resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which case it is the sole remedy. • The substituted remedies clause does not fail of its essential purpose • UCC 2-719(2) - where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided by this Act • Why did the substituted remedies clause fail in Kearney & Trecker?

9. Buyer’s Remedies When Substituted Remedies Clauses “Fail of Their Essential Purpose” • Does the “failure of essential purpose” standard really protect non-breaching parties? • What if both parties to a contract agree to a clause that states: “Buyer agrees to assume the sole risk of loss due to failure of the machine except that Seller will try to repair in good faith.”? • Isn’t that clause failproof? Is there any way plaintiff can get around such a problem? • What remedies are available to P if the substituted remedies clause is found to be unenforceable?

10. Clauses Limiting Consequential Damages • There was also a limitation on consequential damages in K&T as well. UCC 2-719(3) allows contracting parties to limit consequential damages. • Clauses limiting consequential damages will be upheld as long as they are not “unconscionable” • Unconscionable = whether under circumstances existing at the time K formed in light of the general commercial background and commercial needs of a particular case, the clause is so one-sided as to be oppressive. • Unconscionability is a difficult standard to meet so clauses like this are not often struck down. • Every case depends on the circumstances and evidencethat P can show regarding, general commercial practices, needs of a particular case and how the clause in this contract operates against P so as to be very, very bad. You really need to pay attention to facts at the time of contractin such cases.

11. What happens when both clauses are in a contract and the substituted remedies clause fails? (This was the actual issue in Kearney & Tracker) • There appear to be two major approaches by the courts (See K&T pp. 85-86): • Majority approach (maybe only just a bare majority)– If the substituted remedies clause fails, the clause limiting consequential damages still stands (unless it fails on its own as unconscionable) • Why this approach? • Minority approach – Both clauses (substituted remedies & clause limiting consequential damages) fail • Why this approach?