Consequential Damages – Buck v. Morrow

Two years into 5-year lease of pasture land to Buck (lessee), Morrow (lessor) breached.

o What is the measure of Buck’s direct contract damages?

o What are Buck’s other damages?

oTerminology:o General/Direct Damages: Refers to the value of what plaintiff lost from

the original impact of defendant’s acts.

o Consequential Damages: Refers to those damages that can (but do not have to) occur as a consequence of the initial loss.

Standards for Consequential Damages – Common Law

Tort: Plaintiff can recover only those damages for which she can show D’s 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.

o What facts support Buck’s award of consequentials under this standard?

When does the distinction between general and consequential damages still matter?

Historic hostility to consequentials - thought to be more speculative and more avoidable than general damages.

o But - unclear that market value measures are really easier to prove/value than consequential damages.

o Furthermore, the standards plaintiffs must meet to obtain consequential damages take care of some of the above concerns

Why, then, is there any reason to distinguish between consequential and general damages – especially if they are necessary to put P in rightful position?

o Special pleading requirements in FRCP and state analogso Bargained-for remedies/limitations clauses/damage disclaimers

Consequential Damages Under the UCC

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

o BUT every section we discussed last class provides for such damages

Buyer’s Remedies – UCC 2-715o Buyer gets incidentals under 2-715(1) and consequentials under 2-

715(2)o What is the difference between the two and why are they

treated differently?

Seller’s Remedies – UCC 2-710o Seller get’s incidental damages but not consequentials – why?

Meinrath – Consequential Damages Stemming from Failure to Pay Money

P & D entered “Purchase and Sale Agreement.” D breached agreement by failing to pay certain “bonus compensation”

o P seeks $300,000 in bonus compensation (general damages)o 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?

Meinrath, cont’d

Why do courts refuse to give consequentials for failure to pay money?

Erosion of the Meinrath rule:

o Contracts to loan moneyo Insurers – bad faith refusal to settle

o Majority rule in both instances is that P’s can get consequential damages from initial breach (even though they involve a failure to pay money)

REVIEW PROBLEM Ellen is moving from Columbia to L.A for a new job. She signed a contract with Jack to rent an apartment at $1,500 a month for 12 months beginning immediately. She told Jack that she would return to Columbia to gather her stuff and move it immediately. Ellen hired a service to move her belongings from Columbia to L.A. for $4,500. Upon arrival in L.A., Ellen discovered that Jack had rented the apartment to someone else for $2,100 a month.

While looking for new apartment Ellen checked into a hotel for seven days at a nightly rate of $125 while looking for a new apartment and stored her belongings at U-Store-It for $300. After searching all week, she found an apartment comparable to the first for $2,000/month (the going rate for such apartments). Ellen signed a one year lease.

Ellen sued Jack for breach of contract. What kind and amount of damages is Ellen entitled to recover and why?

 

Limits on Restoring Plaintiff to Rightful Position – Bargaining out of Rightful Position

Default rules are rules a court applies to determine how to restore P to his rightful position.

But parties in contract situations may bargain out of these rules. Although P has bargained out of the default rules, their bargain can also be considered P’s rightful position.

We will consider two bargained-for remedies and their legal limits◦ Limitations on Remedies Clauses (UCC 2-719)◦ Liquidated Damages Clauses (UCC 2-718); Restatement (2d) of

Contracts

Limitations on Remedies Clauses – UCC 2-719

Clauses that try to prevent non-breaching party from recovering all remedies the law would normally provide. They explicitly:1. limit non-breaching parties to certain remedies specified in the

contract, or2. 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., repair/replace clause in Kearney & Trecker – 2nd part of indented

para

◦ Limitations on consequential damages – attempt to disclaim liability for consequential damages stemming from breach of contract

◦ E.g., Kearney & Trecker – 1st part of indented para

Substituted Remedies Clauses

Under 2-719(1)(b) 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)

2.The substituted remedies clause does not fail of its essential purpose◦UCC 2-719(2)

Why did the substituted remedies clause fail in Kearney & Trecker?

Buyer’s Remedies When Substituted Remedies Clauses “Fail of Their Essential Purpose”

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.”

◦Isn’t that clause fail proof? 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?

Limitations on Consequential Damages

There was also a limitation on consequential damages in K&T. UCC 2-719(3) allows parties to limit consequential damages.

Courts uphold clauses limiting consequential damages if 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.◦ Every case depends on the circumstances and evidence pertaining 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.