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Compensatory Damages: In addition to general (or direct) damages caused by injury to the very thing that was hurt (tort) or the subject of the agreement.

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Presentation on theme: "Compensatory Damages: In addition to general (or direct) damages caused by injury to the very thing that was hurt (tort) or the subject of the agreement."— Presentation transcript:

1 Compensatory Damages: In addition to general (or direct) damages caused by injury to the very thing that was hurt (tort) or the subject of the agreement (contract), in order to be restored to their rightful position, plaintiffs often need to recover consequential damages as well. Common Law Standards: Tort: Plaintiff can recover only those damages for which she can show Ds actions are the proximate cause. Contract: Plaintiff can only recover those losses which are reasonably within the contemplation of the parties as a probable result of the breach.

2 Historically, the hostility to consequentials because they were thought to be more speculative, less certain, more remote, and more avoidable than general damages. Its unclear the extent to which market value measures are easier to prove or value than consequential damages. Furthermore, the standards plaintiffs must meet in order to obtain consequential damages take care of some of the above concerns As do certain other doctrines we will discuss later Why, then, is there any reason to distinguish between consequential and general damages? Special pleading requirements in FRCP and state analogs Bargained-for remedies/limitations clauses/damage disclaimers

3 UCC 1-305(a) expresses an ambivalence to consequential (or incidental) damages similar to the common law. UCC 1-305(a) allows recovery only if such damages are specifically provided for by UCC or other rule of law BUT every section we discussed last week provides for such damages Buyers Remedies – UCC 2-715 Buyer gets incidentals under 2-715(1) and consequentials under 2-715(2) What is the difference between the two and why are they treated differently? Sellers Remedies – UCC 2-710 Seller gets incidental damages but not consequentials (unlike buyer) – why not?

4 P & D entered Purchase and Sale Agreement. D breached agreement by failing to pay certain bonus compensation P seeks $300,000 in bonus compensation (general damages) P seeks $770,000 in losses of invested capital and decline in the net worth of the businesses as a result of failure to pay the bonus compensation (consequential damages) What does the court award instead of consequential damages?

5 Why do courts refuse to give consequentials for failure to pay money? Erosion of the Meinrath rule: Contracts to loan money Insurers – bad faith refusal to settle Majority rule in both instances is that Ps can get consequential damages from initial breach (even though they involve a failure to pay money)

6 So far weve been looking at default rules – i.e., the rules a court normally applies to determine the damages necessary to restore P to his rightful position. But it is possible for parties in contract situations to bargain out of these default rules. These bargains take P out of their rightful position as the default rules conceive of that position. Although because P has bargained for this particular remedy, their position can also be considered Ps rightful position. We will consider 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

7 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) – 2 nd 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) – 1 st part of indented paragraph

8 Substituted Remedies clauses are enforceable as the exclusive remedy for breach of contract if two conditions are met: 1.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. 2.The substituted remedies clause does not fail of its essential purpose UCC 2-719(2) - where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided by this Act Why did the substituted remedies clause fail in Kearney & Trecker?

9 Does the failure of essential purpose standard really protect non-breaching parties? What if both parties to a contract agree to a clause that states: 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.? Isnt that clause failproof? Is there any way plaintiff can get around such a problem? What remedies are available to P if the substituted remedies clause is found to be unenforceable?

10 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 notunconscionable 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 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 at the time of contract in such cases.

11 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? Minority approach – Both clauses (substituted remedies & clause limiting consequential damages) fail Why this approach?

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