Liquidated Damages & Penalty Analysis

1. Liquidated Damages & Penalty Analysis • Courts will enforce bargained-for liquidated damages provisions UNLESS they amount to a penalty to the defendant. • The most common standard: • Liquidated damages provision will be sustained if the amount “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

2. No. Illinois Gas – a twist on Liquidated Damages • What are P’s actual versus liquidated damages? • Under UCC 2-718, how would P avoid enforcement of this under-compensatory liquidated damages clause? • So how does P argue that the liquidated damages clause should not be enforced? • How does the court respond to P’s argument? • Is the court’s bright line distinction between clauses covered by 2-718 and 2-719 sensible?

3. Situations like N.I. Gas often turn on whether the LD clause is exclusive - How do courts handle? If clause is expressly “exclusive:” Courts will enforce it as the exclusive remedy. If 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: Courts are split. • Some will enforce it as the exclusive remedy • Others will allow P to pursue actual damages instead

4. Doctrine of Avoidable Consequences General Rule:Judicially imposed doctrine holding that D is not liable for the consequences of his/her wrongdoing that the P 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 • But P need not take reasonable measures to avoid general damages that are SET at the time of injury • Applies in both contract and tort situations • Burden of proof is on D to show P could have avoided the consequences for which P is seeking redress

5. S.J. Groves & Sons – the facts • 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 6/14/72, Groves approaches Trap Rock who refuses to come down to Warner’s price. • On 6/21/72 DOT halts construction on bridge until they figure out what to do about Warner. Warner gives assurances and work resumes on 6/26/72. Warner’s performance improves but is uneven until the project finishes in 10/72. • On 7/11/72, 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

6. S.J. Groves & Sons – the results • Why should Groves be able to recover all damages for overtime, even those post-7/11/72, when there is perfectly good cement available next door from Trap Rock (at the same price)? • What would court award if it 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? What facts would create such a scenario?

7. What are “reasonable” efforts to avoid the consequences of d’s wrongdoing? • What if small law firm specializing in plaintiffs’ product liability litigation breaches its contact to hire you in its KC office. What kind of job must you take to satisfy the “reasonableness” requirement? • Any other law firm? Government job? Feds? State? Pub Defender? Solo Practice? Do you have to move to St. Louis? Jeff City? Springfield? D.C.? • What if the only available job in KC is for substantially less pay? • What if you find a job in St. Joseph’s for comparable pay but your spouse has a job in KC already? • How long can you look for legal jobs only – must you eventually look for non-law jobs?

8. General Formulation of “reasonableness” requirement Employment context: • P must use “reasonable diligence in finding other suitable employment. Although the un- or underemployed claimant need not go into another line of work, accept a demotion, or take a demeaning position, he forfeits his right to back pay if he refuses a job substantially equivalent to the one he was denied.” • Lower courts suggest you can’t keep looking forever though Bodily Injury Claims • “A person injured by another’s wrong is obliged to exercise “ordinary care” to seek medical or surgical treatment so as to effect a cure and minimize damages.” . . . However the injured person is regarded as having a right to avoid if she chooses peril to life, however slight, and undue risks to health and anguish that goes beyond the bounds of reason.”

9. Offsetting Benefits 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 P as a result of D’s wrong. • The notion of offsetting benefits 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 (at least theoretically).

10. Offsetting Benefits – Some Examples in both Tort & Contract Tort: Defamation P alleges lost income. D may show that P has large lecture fees as a result of the defamation that essentially replace lost income. • But offset applies only to “benefits to the interest of P that was harmed” • Ex – P sues D for defamation alleging lost income. D can reduce P’s damages by showing defamatory statements made P in demand on the paid lecture circuit. 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 of goods 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. • Note there is no similar requirement of “benefit to P’s interest” here

11. Collateral Source Rule – Tort Situations • The Rule: • Plaintiff may recover damages that include amounts for which plaintiff has already received compensation from sources independent of and collateral to the defendant. • That is, D is not entitled to admit as evidence or reduce P’s damages with compensation P receives from independent sources. • Classic examples of collateral sources: • Insurance payouts • Benefits programs (Medicare, SS, Disability, etc.) – tricky? • Sick leave plans • But not payments from joint tortfeasors

12. Policy re Collateral Source Rule • Why did courts devise the collateral source rule? • What are the reasons for arguing against it?