Limits on Restoring Plaintiff to Rightful Position – Bargaining out of Rightful Position

1. 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 amount of damages necessary to restore P to his rightful position. • It is possible, however, for parties in contract situations to bargain out of these default rules. These bargains take P out of their rightful position in the sense that the default rules conceive of that position. Although, because P has bargained for it, that position can also be considered P’s rightful position. This unit considers 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

2. 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

3. 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. • Note – it must be reasonably clear from the language use that the parties intend for the agreed upon remedy to be exclusive. The word “exclusive” does not have to be used • The substituted remedies clause does not fail of its essential purpose – UCC 2-719(2) • E.g. – Repair & Replace clause “fails of its essential purpose” if S is unable or unwilling to repair/replace the goods in a timely manner and refuses to give a refund. • Note the argument in K&T regarding whether the failure of the machine was S’s fault for unwillingness to repair/replace or B’s fault for failing to maintain a complex and delicate machine – these cases aren’t always easy.

4. Buyer’s Remedies When Substituted Remedies Clauses “Fail of Their Essential Purpose” • A question may arise in your mind as to whether the “failure of essential purpose” standard really protects non-breaching party? • What if parties agree to a clause that “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.” • Courts usually strike such “failproof” clauses as unconscionable (see UCC 2-719 comment 1). • Why? Because we don’t want S to make outlandish warranty claims and then hide behind a limited remedy to get out from under warranty • What remedies are available to P if the substituted remedies clause “fails of its essential purpose” or is found “unconscionable? • P (i.e., the non-breaching party) is entitled to resort to any available remedy for breach under the UCC (default rules are effectively put back into place)

5. Clauses Limiting Consequential Damages • Remember 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. • Also note how much any case depends on the circumstances and evidence that 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 here.

6. 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? Courts reason that (1) The tests for striking the clauses down are different (look at the clauses at different points in the process) and it makes sense to treat them separately; (2) Sellers really count on disclaimers of consequentials when bargaining – reliance on lack of liability is reflected in the K price and striking them down without an independent judgment skews bargained-for risk allocation • Minority approach – Both clauses (substituted remedies & clause limiting consequential damages) fail • Why this approach? Courts reason that P wouldn’t have experienced consequentials if the substituted remedies clause hadn’t failed. Both are inextricably linked in cases where P has consequential losses, so both should be struck

7. Liquidated Damages Clauses • These are different from the clauses involved in K&T. • Liquidated Damages clauses are defined as “clauses where parties agree that breaching party will pay a sum certain in damages if one party breaches” • Purposes: • To allow risk allocation where damages are often difficult to measure. • Avoid lengthy litigation regarding damages. • To compensate P (roughly) for P’s losses. • Due to the fixed nature of liquidated damage awards, questions arise as to whether they operate as a penalty to D • Courts will NOT enforce liquidated damages clauses if they are operate as a penalty.

8. Liquidated Damages & Penalty Analysis • Common law - Most common standard applied by courts (as seen in In re TWA p. 74) finds that: • Liquidated damages provision is NOT a penalty if it “bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.” • Applied from parties’ perspective at time of contracting • What does this standard mean? • Applied as a sliding scale – The harder it is to prove damages, the less carefully one has to prove the proportions between liquidated damages and anticipated harm at the time of contracting (i.e., little proof is needed as to how closely anticipated damages and the liquidated damages actually approximated one another)

9. More on Standards re Penalty Analysis • Missouri courts apply a standard nearly identical to In re TWA • “Are damages a reasonable forecast of just compensation in event of breach” and actual damages are difficult to accurately estimate at time of contract” • Restatement (Second) of Contracts § 356 & UCC 2-718 – slightly different from In re TWA and Missouri • Both allow liquidated damages if (1) the liquidated damages provision reasonably approximates anticipated damages OR actual damages and (2) proof of loss is difficult • It is not unusual for court’s to interpret the Restatement & the UCC in light of the prevailing common law approach. So even though the test’s look sort of different they can be applied the same as in TWA.

10. Why was Sec. 17 of the contract in In re TWA a penalty? • TWA leased two planes from Interface for $160,000/month. • L.D. clause in lease agreement – If TWA breaches lease agreement, Interface gets $5.5 or $7.2 million (difference between termination and resale/market value of the planes in 1992) • Anticipated Damages – Anywhere between $160,000 & $9.6 million depending on when TWA breached (plus consequentials). If TWA breached in the last month of the lease, Interface would be out only one month rent; if TWA breached early, the loss of rents is MUCH higher. • Court found liquidated damages clause an unreasonable penalty: • There are scenarios in which actual damages could be very low so clause isn’t a reasonable approximation of estimated damages. • Also actual damages are EASY TO MEASURE – so court will require closer proportionality. • Lesson – with installment/rental-type contracts, it is best to use a formula for calculating damages in the liquidated damages provision that tries to capture the differing times/nature of breaches

11. Applying the Rules of Liquidated Damages – Some Twists on the Standard Rules • Jordan, who had a lot of experience in the jewelry business, decided to open his own company. He acquired a small tract of land in a commercial business area and entered into a contract with Rowan’s engineering firm to construct a building for his store. Jordan wanted the building completed by 9/1 in order to take advantage of the strong jewelry sales that occur in the last quarter of the calendar year. The parties agreed that Rowan would pay $200 a day for every day past 9/1 that the building was not completed. This amount represented a rough estimate of Jordan’s daily lost profits for every day his store wasn’t opened. • Rowan was 2 weeks late finishing the building. Jordan wants to enforce the clause but he took and filled sale orders over the Internet and worked during those weeks anyway. So there is evidence that his actual damages were $0. What will courts do? • Depends – many courts will enforce the clause if it was a reasonable estimate of damages when K was entered and damages were hard to estimate. BUT: • Second look courts:Require P’s actual & anticipated damages to be roughly proportionate for the clause to be enforced – if actual damages are much lower than liquidated (as they are with Jordan), courts won’t enforce clause (even if it seemed ok in light of anticipated damages); OR • “Actual loss” requirement: Some jurisdictions require actual economic harm before a party can invoke a liquidated damages clause. • Here Jordan has no harm. Even $100 damages would allow him to invoke the L.D. clause.

12. Exclusivity and Liquidated Damages Clauses • Remember how important the issue of “exclusivity” was to limited remedies was under UCC 2-719 (i.e., they had to be expressly exclusive in order to be the exclusive remedy).When do courts enforce liquidated damages clauses as the exclusive remedy? • If liquidated damages clause is expressly “exclusive:” Courts will enforce it as the exclusive remedy. • If liquidated damages clause is expressly “non-exclusive:” Courts usually treat the liquidated damages as an optional remedy and allow P to pursue actual damages. • If clause is silent as to exclusivity (it happens more than you think): Courts are split. • Some will enforce it as the exclusive remedy, reasoning that the parties wouldn’t have used a liquidated damages clause unless they meant for it to be the exclusive remedy. • Others will allow P to pursue actual damages instead, reasoning that the parties would have said if they meant for the clause to be exclusive

13. Judicial & Statutory Limits on Plaintiff’s Rightful Position • So far, we have seen “bargained for” or contractual limits on the default damage rules that courts would normally use to put P in their rightful position. • Now we are going to look at other sources of limits on P’s rightful position – these come from court’s or legislatures • Specifically, we will discuss: • Doctrine of avoidable consequences • Requirement of offsetting benefits • Attempts to limit the “collateral source” rule

14. The Doctrine of Avoidable Consequences • General Rule: Defendant is not liable for the consequences of his/her wrongdoing that the plaintiff reasonably could have avoided. • Similar to comparative fault - both doctrines are concerned w/ causal responsibility at loss. But avoidable consequences is concerned with P’s actions AFTER loss not before. • Some particulars: • Applies to general and consequential damages • P need not take reasonable measures to avoid general damages that are SET at the time of injury (but must try to avoid general damages that accrue over time – such as wages) • Applies in both contracts and torts situations • Burden of proof is on D to show by a preponderance of evidence that P could have avoided the consequences for which P is seeking redress

15. S.J. Groves & Sons – Facts (p. 85) • S.J. Groves (P) gets subcontract to place concrete decks for bridges • S.J. Groves Ks with Warner (D) to provide ready mix concrete in the mornings at bridge site • As early as 1971, Warner’s delivery is erratic – P incurs substantial overtime labor costs as a result • In 1971 Groves considers and rejects getting an alternative source of supply of ready mix concrete – Trap Rock presents special problems • Warner continues to be erratic – On June 14, 1972, Groves approaches Trap Rock who refuses to come down to Warner’s price. • On June 21, 1972 DOT halts construction on bridge until they figure out what to do about Warner. Warner gives assurances and work resumes on June 26, 1972. Warner’s performance improves but is uneven until the project finishes in October 1972. • On July 11, 1972, Trap Rock is certified to do work for the state and agrees to provide cement at Warner’s price but Groves decides not to use them (and continues to incur overtime costs as a result). • DCT refuses to award damages incurred after 7/11/72 • 3rd Circuit says Groves is entitled to all overtime costs even after 7/11/72

16. S.J. Groves & Sons – The Doctrine of Avoidable Consequences in Application • Why should P be able to recover all damages for overtime, even those post-July 12, when there is perfectly good cement available next door from D (at the same price as P’s erratic provider (Warner))? • Court – If P reasonably chooses between two alternatives, courts should not second guess them in order to find any losses “avoidable”; Uncertainty is resolved against D • P had many choices as to how to deal w/ delays; one wasn’t clearly better than the other. Given this uncertainty, P’s choice to continue w/ Warner was “reasonable” and P can recover losses (See discussion at pp. 86-87) • What would court award if we knew with certainty that Groves had suffered $100,000 in damage but could have avoided $65,000 of those damages if it had acted reasonably? • P would get $35,000 because the doctrine of avoidable consequences. • Can view this as a rule that prevents P from realizing its rightful position OR that envisions rightful position differently from “original” position ($100,000 loss) because of P’s actions

17. Offsetting Benefits – Note at p. 93 • The requirement of offsetting benefits is a judicially imposed requirement that P’s damages should be reduced by amount of any benefit that D conferred upon plaintiff as a result of the wrong. (See Oden p. 95) • It is related to the concept of avoidable consequences in that judges use it to reduce P’s damages. But that reduction comes as a result of D’s actions rather than P’s.

18. Offsetting Benefits Applies in Both Tort & Contract - Examples • Tort: Defamation P alleges lost income. D may show that P has large lecture fees as a result of the defamation. • But offset applies only to “benefits to the interest of P that was harmed” • Example # 2 – P sues D for defamation alleging lost income. D can reduce P’s damages by showing that D’s defamatory statements made P in demand on the paid lecture circuit, thus bringing in large amounts of money. BUT if P also sues for intentional infliction of emotional distress, D cannot use the paid lecture fees to offset emotional distress damages as the benefit does not go to the interest that was harmed. • Contract: P/Seller contracts with D/Buyer for sale that will bring in a certain profit. D/Buyer breaches. P resells and realizes higher profits on resale than under the original contract. P/Seller must credit D/Buyer’s damages with net gain of additional profit on resale.

19. Collateral Source Rule – Torts only • Common law rule that holds: • P may recover damages that include amounts for which P has already received compensation from sources independent of and collateral to the defendant • Upshot - D is not entitled to use the compensation P receives from independent sources as evidence or to directly reduce P’s damages • Classic examples of collateral sources: • Insurance payouts • Benefits programs (Medicare, SS, Disability, etc.) – can be a bit tricky (o your research) • Sick leave plans • But payments from joint tortfeasors do not count as collateral sources

20. Statutory Limits on Collateral Sources • Tort reform battles have resulted in many statutory limits on collateral sources in different states. • See NY statute’s mandatory offset for collateral source payments in personal injury, property injury or wrongful death cases (Oden, p.96 top) • Reasoning for such statutory limits: • P’s shouldn’t be allowed to recover twice for their injury – allowing damages & collateral sources is double recovery • Given the what we know about the rightful position rule – why did court’s use collateral source rule? • Many reasoned that insurance companies required subrogation so that P’s would not get to keep damages if they were compensated by their insurers • Many also reasoned it was unfair for D (the wrongdoer) to benefit from P’s foresight in buying insurance. Better D pay than benefit. • Judges can read even statutory limits on collateral source limits pretty narrowly – note how Oden court parses NY statute to see what is/is not an offsetting collateral source