Limitations of Remedies Clauses

1. Limitations of Remedies Clauses • Kearney & Trecker involves a contract with two clauses limiting remedies: • A repair/replace clause (substituted remedies clause) • A clause limiting consequential damages • Both are governed by UCC 2-719 – but by different parts of that statute • We saw yesterday that a repair/replace clause can lose its “exclusivity” as the only available remedy if it “fails of its essential purpose.” • 2-719 – drafters comment notes that there should be some quantum or remedy available so that buyers have a remedy if they are sold a defective product; • E.g., a typical Repair & Replace clause fails because the S is unable or unwilling to repair/replace the goods in a timely manner and refuses to give a refund.

2. Buyer’s Remedies After Clause “Fails of its Essential Purpose” • Does the “failure of essential purpose” standard really protect a non-breaching party? What if parties agree to a clause that states that the “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 fail proof? Is there any way Buyer can get around such a problem? • What remedies are available to Buyer if a Substituted Remedies clause fails?

3. Limitations on 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 evidencepertaining to the general commercial practices, needs of a particular case and the operation of the clause against P. You really need to pay attention to the circumstances at the time of contract in such cases.

4. When both clauses are in a contract and the substituted remedies clause fails: • In K&T, the substituted remedies clause failed thus giving the Buyer access to all remedies under the code. Except there is a clause limiting consequential damages so Seller argues that Buyer can go after all damages EXCEPT consequentials. Buyer argues that the failure of the first clause also invalidates the second. • 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 as a limit on those damages (unless it fails on its own as unconscionable). • (1) The tests for striking the clauses down are different; should treat them separately • (2) Sellers rely on disclaimers of consequentials when bargaining – this is reflected in the K price and striking disclaimers down without an independent judgment skews bargained-for risk allocation • Minority approach – Both clauses (substituted remedies & clause limiting consequential damages) fail and plaintiff has all possible remedies under the code. • Wouldn’t have consequential damages but for the a failure of the substituted remedies clause; unfair to limit consequentials as a result.

5. Liquidated Damages • Defined: clauses where parties agree that breaching party will pay a sum certain in damages if one party breaches. • Purposes: • To allow risk allocation in situations where damages are often difficult to measure. • Avoid lengthy litigation regarding damages. • To compensate plaintiff (roughly) for losses. • Due to the fixed nature of liquidated damage awards, questions arise as to whether liquidated damages clauses operate as a penalty. • Courts will NOT enforce them if the clauses are operate as a penalty.

6. Liquidated Damages & Penalty Analysis • Most common standard applied by courts (In re TWA): • 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.” • What does this standard mean? • Applied as a sliding scale – The harder it is to estimate actual damages at the time of contract, the less carefully one has to prove that liquidated damages & anticipated damages actually approximate one another. The easier it is to estimate actual damages at the time of contract, the more closely courts will scrutinize the approximation between liquidated and anticipated damages • Missouri courts apply a standard nearly identical to the In re TWA standard • “Are damages a reasonable forecast of just compensation in event of breach and are actual damages difficult to accurately estimate at time of contract”

7. More on standards re liquidated damages • Restatement (Second) of Contracts §356 & UCC 2-718 – are worded slightly differently from the TWA/Missouri standards • Both allow liquidated damages if the provision reasonably approximates anticipated damages OR actual damages • 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 are often applied as the TWA court applied its standard.

8. Why was Sec. 17 of the contract a penalty in In re TWA? • TWA 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.” • What did the L.D. clause provide? • What were Interface’s anticipated damages?

9. Applying the Rules of Liquidated Damages • Cale, who had 15 years experience in the jewelry business working with others, decided to open his own company. He acquired some land in a commercial business area and contracted with Johanna’s Engineering Co. to construct a building for his store. Cale wanted the building completed by 9/1 in order to take advantage of the historically strong jewelry sales that occur in the last quarter of the calendar year. Accordingly, the parties agreed that Johanna would pay $200/day for every day past 9/1 that the building was not completed. This amount represented a rough estimate of Cale’s daily lost profits while the store wasn’t open. • Johanna was two weeks late finishing the construction of the building. Cale wants to enforce the clause. Can he – i.e., is it a valid clause? • Assume the liquidated damages clause called for the amount (initially $200) to double each day that the work was not finished. Johanna was two weeks late finishing the construction of the building. Cale wants to enforce the clause. Can he?

10. A few twists on the rules – Cale & Johanna, cont’d: • Assume the clause called for $200/day liquidated damages (a reasonable estimate of potential losses at the time of contract). Also assume Johanna finished the building two weeks late. But because Cale took and filled sale orders over the Internet, he worked during those weeks anyway. Thus, there is strong evidence that his actual damages were $0. Cale wants to enforce the clause. Can he under the most common approach? • It depends. Some courts would enforce the clause if it was a reasonable estimate of damages when the contract was entered and actual damages were hard to estimate. BUT: • “Second look courts”:Some jurisdictions require P’s actual and anticipated damages to be roughly proportionate – when actual damages are much lower than anticipated/liquidated they won’t enforce the clause • “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 in total damages would allow him to invoke the clause.

11. Exclusivity and Liquidated Damages Clauses • With limited remedies clauses (2-719), the UCC required that they be expressly exclusive to be enforced as the sole remedy. Is that also true of liquidated damages clauses? • Not necessarily. Courts take different approaches depending on the clause. • 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