Main

September 29, 2008

Contract Remedies - Consequential Damages

Hello Entrepreneurs! 

The protagonist in my previous post included a liquidated damages provision in its business contract, but also included a cumulative remedies provision in the boilerplate section of the contract.  As a result when it breached the contract, the other party claimed a litany of other remedies, including consequential damages even after it had been compensated by the liquidated damages.  Which party prevails of course depends on the detailed facts of the case, governing law, jurisdiction, etc. 
 
In contract law, the general goal of money damages is to compensate an aggrieved contract party for damages suffered as a result of a breach.  Money damages compensate the non-breaching party for direct damages as well as indirect damages suffered as a result of the breach.  A basic way to explain the calculation of direct damages is you take the value of any partial performance (if any) received and subtract it from the market or contract value of the performance promised.  The resulting number is the direct damage suffered by the non-breaching party as a result of the contract breach.  For example, if you are a manufacturer and your parts supplier fails to deliver the parts you require to make your products, direct damages will compensate you for the incremental cost of going out there and purchasing the parts from a substitute supplier.  You have the duty to mitigate your damages, so you'll have to shop around, but if after reasonable research you find that it costs more to purchase replacement parts, you can claim the difference in the breach of contract claim.
 
Consequential Damages are a main subcategory of indirect damages. These include the recovery of lost revenues or profits suffered as a result of the breach.  If your vendor ships you a defective component that causes you to lose the sale to your customer, the profit you would have made had you been able to ship compliant goods constitutes consequential damages.  Other types of consequential damages frequently claimed include loss of production, opportunity costs, loss of anticipated cost savings, lost business and lost good will.   As you might imagine, this opens up quite a can of worms, so most obligors will try to limit them by contract.  Here is some sample contract language.
 
"NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY INDIRECT, INCIDENTAL, CONSEQUENTIAL OR SPECIAL DAMAGES SUFFERED BY SUCH OTHER PARTY, INCLUDING, BUT NOT LIMITED TO, LOST REVENUES OR LOST PROFITS, WHETHER ARISING IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY, BREACH OF STATUTORY DUTY OR OTHERWISE, AND REGARDLESS OF ANY NOTICE OF THE POSSIBILITY OF SUCH DAMAGES."

Had the protagonist included such language in its business contract, it might have staved off at least the claim for consequential damages.

Posted by VarsityLawBlogger at 09:54 AM | | Comments (0) | TrackBacks (0)
Hosting by Yahoo!

September 26, 2008

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.

For more information about me, or to contact me directly, please leave a post or visit ContractAdviser.com

Posted by VarsityLawBlogger at 08:02 AM | | Comments (0) | TrackBacks (0)
Hosting by Yahoo!

September 25, 2008

Contract Remedies - Cumulative versus Exclusive Remedies

The remedies provisions are often glossed over during business contract negotiations.  But these are the first places a court will look to for guidance in a contract dispute, so it can better understand the intent of the parties.  Therefore, it's important to carefully review your contract's remedies provisions, and seek professional help to help you negotiate them.
 
Most courts today recognize that remedies are cumulative (in the absence of contrary contract language).  “Cumulative” means that the non-breaching party is permitted to initially simultaneously pursue all available remedies (contract remedies, monetary damages, equitable relief, you name it) against the breaching party, even if the alternative theories of recovery are inconsistent.  This is the legal equivalent of throwing everything against the wall and seeing what sticks.  No worries though, in contract litigation, the court generally isn’t going to allow the non-breaching party to be made “more than whole”, so sometime during the proceedings it will pick or require the claimant to pick its remedy.
 
Despite widespread court recognition of the cumulative remedies concept, many business contracts take a belt and suspenders approach to remedies and include a cumulative remedies provision for good measure.  Here is an example…
 
“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.”
 
This works as long as the parties actually intend for the remedies to be cumulative, which usually isn't the case if the parties include an exclusive remedy provision somewhere else in the contract.  An exclusive remedy is intended by the parties to be the only remedy to compensate an aggrieved party for a particular type of breach.  Liquidated damages are an example of an exclusive remedy - something to the effect of "if you breach this provision, pay me X dollars, and we'll call it even."  It's common sense that somebody who agrees to sumbit to pay liquidated damages doesn't want to find out later that it's also liable for other types of damages or relief.  But this is exactly what may happen if you spend a lot of time negotiating an exclusive remedy, but then neglect the cumulative remedies provision still hanging around in the boilerplate section of the hand-me-down form contract you're using.  In the next few columns, I’ll discuss the consequences of doing so, and some possible work-arounds.  

For more information about me, or to contact me directly, please leave a post or visit ContractAdviser.com

Posted by VarsityLawBlogger at 08:59 AM | | Comments (0) | TrackBacks (0)
Hosting by Yahoo!