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
Common Law
Consequential
Damages
–
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 analogs
o 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 2-715
o Buyer gets incidentals under 2-715(1) and consequentials under 2715(2)
o What is the difference between the two and why are they
treated differently?
Seller’s Remedies – UCC 2-710
o 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 money
o 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, 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., 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 nonbreaching 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 2719(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.