Remedies
Reading Assignments
For 9/10, we will continue with the topic of bargaining out of default remedies. Review pp. 53-60
and read pp. 60-68.
Limitations of Remedies Clauses – Kearney & Trecker
1. What requirements must be met for a “substituted remedy” clause to be enforced? Why can’t
parties agree to limit their remedies as they see fit? Why was the substituted remedies clause
in K&T not enforceable?
2. When does the UCC allow parties to limit consequential damages? What is the difference
between that standard and the standard for substituted remedy clauses?
3. The CRITICAL issue in K&T is whether the clause limiting consequentials ALSO fails when
the substituted remedies clause fails. How does the court answer that question? What is its
reasoning? What approach do other courts take? Why?
Liquidated Damages Clauses – In re TWA
1. What is the primary purpose of a liquidated damages clause? To approximate compensation?
Avoid a trial on the damages? Both?
2. Courts will only enforce liquidated damages clauses if they are a reasonable estimate of
possible or actual damages and do not amount to a “penalty.” In In re TWA the court notes
that a provision limiting damages is NOT a penalty “if the amount liquidated bears a
reasonable proportion to the probable loss and the amount of the actual loss is incapable or
difficult of precise estimation.” This rule reflects the typical approach to liquidated damages.
a. Why was §17(c) a penalty in In re TWA?
3. Given the above rule, is the court likely to find the liquidated damages clause enforceable:
a. A, who had 15 years experience in the jewelry business working with others, decided to
open his own company. After acquiring a small tract of land in a commercial business
area he entered into a contract with B’s Engineering Company to construct a building
for his store. A 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 B would pay $200 a day for every day past 9/1 that
the building was not completed. This amount represented a rough estimate of A’s daily
lost profits for every day his store wasn’t opened.
b. Same facts but the liquidated damages clause called for the amount (initially $200) to
double each day that the work was not finished.
c. Assume the clause in (a) was in effect and B was 2 weeks late in finishing the building.
However, because A was able to take sale orders over the Internet and fill them, he
effectively worked during those weeks anyway. Thus, there is strong evidence that A’s
actual damage during this two weeks is $0.
Underliquidated Damages - Northern Illinois Gas
1. In Northern Illinois Gas, would plaintiff prefer damages under the liquidated damages clause
or under the default measure of damages?
2. In trying to get out from under the liquidated damages clause, why does the NIG plaintiff
argue that the clause should be governed by UCC § 2-719 rather than UCC§ 2-718? What is
the court’s response to the plaintiff’s argument? What arguments are there for and against the
court’s approach?