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Contract Remedies - Cumulative versus Exclusive Remedies (Liquidated Damages)

Hello Entrepreneurs! 

Yesterday, we asked what might happen if the parties to a contract agree to a liquidated damages provision.  The label doesn't matter.  It could be a termination fee, a deal kill fee, a commitment fee, a fee to be charged for each day of performance delay or default, basically any pre-agreed monetary amount to be paid that gives a contract party the right to walk away or "breach" the contract without further liability.  In this case, let's keep it simple and say that the liquidated damages provision calls for a flat fee to be paid by Party A to Party B each time Party A breaches a particular provision.

In this hypothetical, the parties are working off a contract form from another transaction, and they neglect to carefully review the boilerplate section, which contains various and sundry "miscellaneous" provisions, including the following cumulative remedies provision.

 “All rights and remedies provided in this Agreement are cumulative and not exclusive of any other rights or remedies that may be available to the parties, whether provided by law, equity, statute, in any other agreement between the parties or otherwise.”
 

Somewhere down the line, Party A breaches the contract and forks over the liquidated damages fee to Party B.  Party A returns to business as usual, thinking that this episode is done.  One week later, it receives a letter from Party B demanding additional monetary damages, plus lost profits caused by Party A's breach.  Perplexed and angry, Party A calls Party B to find out why it sent the letter when the parties clearly agreed to the "exclusive remedy" of liquidated damages.  And what's the deal with the lost profits?  Party B responds that it's entitled to the additional damages because of the cumulative remedies provision.  As far as the lost profits, explains Party B, these are consequential damages, which the parties did not specifically exclude in the contract.  The parties proceed to litigation.  No lawyer can predict with certainty how a court would rule in a case like this.  That depends on the detailed facts of the case, plus the governing law of the contract, plus where the litigation takes place, etc.

That being said, Party B will still try to exploit the ambiguity in the contract to its advantage, if not only to extract additional cash or perhaps concessions on another deal point.

Regardless of the intent of the parties, the contract is ambiguous.  On the one hand it provides for the exclusive remedy of liquidated damages.  On the other hand, it contains a boilerplate cumulative remedies provision authorizing all remedies - it's there in black and white; a court cannot simply ignore it.

A little more care in reviewing the contract at the outset might have helped to avoid this situation.  One possible work-around could be to add the underlined language to the cumulative remedies provision.

"All rights and remedies provided in this Agreement are cumulative and not exclusive of any other rights or remedies that may be available to the parties, whether provided by law, equity, statute, in any other agreement between the parties or otherwise.  However, the [Liquidated Damages provided for in Section __ of this Agreement] is Party B's exclusive remedy for Party A's breach of Section __ of this Agreement."

This means that Party B is not entitled to relief for the specified breach beyond the agreed to  liquidated damages.  Keep in mind that both parties are still entitled (under this language) to cumulative remedies for other types of breaches.  If the parties want to carve out other exclusive remedies, they'll need to consider the same drafting approach outlined in this column.

In the next column, I'll talk about consequential damages.

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