DRAFTING CONTRACT REMEDIES

First Run Broadcast: October 25, 2017

Live Replay: September 7, 2018

1:00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes)

A contract is only as good as it is enforceable and, on breach, as good as a party can recover

damages. Damages are complex business. There are issues of what type of damages –

compensatory, consequential, non-economic – are available, which often turns on the type of

underlying contract, its express terms, and the limitations of law. There are also issues of the

measure of those damages – how much can a party recover? Planning also plays an important

party, including the use of liquidated damages provisions and techniques for enhancing their

enforceability, such as the use of personal guarantees, liens or escrow arrangements. Closely

related to damages are equitable remedies - specific performance or even rescission. This

program will provide you with a practical guide to drafting contract remedies to limit damages or

enhance collectability.

• Types of contact damages, measure of damages, and implied or express limits

• Compensatory damages – general economic and consequential/special damages

• Liquidated damages – triggering events, collectability, and other issues

• Non-performance and delay damages in construction contracting

• Rarity of non-economic damages in contract breaches

• Role of secured interests, personal guarantees and escrow to ensure enhance damages

collection

• Importance of choice of law provisions

• Equitable relief – rescission, specific performance, and restitution

Speaker:

Shannon M. Bell is a member with Kelly & Walker, LLC, where she litigates a wide variety of

complex business disputes, construction disputes, fiduciary claims, employment issues, and

landlord/tenant issues. Her construction experience extends from contract negotiations to

defense of construction claims of owners, HOAs, contractors and tradesmen. She also represents

clients in claims of shareholder and officer liability, piercing the corporate veil, and derivative

actions. She writes and speaks on commercial litigation, employment, discovery and bankruptcy

topics. Ms. Bell earned her B.S. from the University of Iowa and her J.D. from the University of

Denver.

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Drafting Contract Remedies Teleseminar

September 7, 2018 1:00PM – 2:00PM

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Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 7, 2018 Seminar Title: Drafting Contract Remedies Location: Teleseminar - LIVE Credits: 1.0 MCLE General Credit Program Minutes: 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

CONTRACT DAMAGES:

THERE’S A BREACH

NOW WHAT?

SHANNON BELL

SBELL@KELLYWALKERLAW.COM (720) 236-1797

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CONTRACT DAMAGES

The five basic remedies for breach of contract include the following: money damages,

restitution, rescission, reformation, and specific performance. The goal in breach of contract

cases is to place the party injured by a breach in the position they would have been in but for the

breach. The type of breach governs the type and extent of damages that may be available.

I. Compensatory (Money) Damages: Compensatory damages (also called “actual

damages”) cover the loss the non-breaching party incurred as a result of the breach of

contract. The amount awarded is intended to make good or replace the loss caused by the

breach. They are general damages meant to cover the loss directly and necessarily

incurred by the breach of contract. Calculations are usually straightforward as they are

based on the contract itself, market values, or other readily ascertainable damages.

A. The calculation of compensatory damages depends on the type of contract that

was breached and the type of loss that was incurred. Some general guidelines are:

Standard Measure. The standard measure of damages is an amount that would

allow the nonbreaching party to buy a substitute for the benefit that would have

been received if the contract had been performed. In cases where the cost of the

substitute is speculative, the nonbreaching party may recover damages in the

amount of the cost incurred in performing that party’s obligations under the

contract.

Contracts for the Sale of Goods. The damages are measured by the difference

between the contract price and the market price when the seller provides the

goods, or when the buyer learns of the breach.

B. Examples:

Example A: Jane Doe signs a contract agreeing to pay for ten hours of

painting services from ABC Painting for $30.00 an hour. Ms. Doe breaks the

contract and does not use any of ABC Painting’s services, the compensatory

damages paid to ABC Painting would be $300.00, which is the economic loss

suffered by ABC Paining.

Example B: ABC Toys pays Big Deal Manufacturer $1,000.00 for delivery of

100 robots by Black Friday. Big Deal Manufacture fails to deliver the robots;

ABC Toys is entitled to $1,000.00 for the goods it paid for but did not receive.

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C. What They Are Not:

Compensatory damages are not meant to be punitive in nature. In other words,

the goal is not to punish the breaching party for “immoral” conduct, but rather

to put the non-breaching party back into the position he or she would have

been in, had the contract been performed.

They are not intended to create a windfall.

II. Special (“Consequential”) Damages: Special damages cover any loss incurred by the

breach of contract because of special circumstances or conditions. To recover special

damages the nonbreaching party must prove that the breaching party knew of special

circumstances or requirements at the time the contract was made. These are intended to

reimburse the injured party for indirect damages other than contractual loss. The injuries

must "flow from the breach," i.e. be a direct result of the breach and be reasonably

foreseeable to both parties when they entered into the contract Put differently,

consequential damages aim to address the flow of problems that reasonably result from a

party’s breach of contract.

Consequential damages can include everything from the loss of profits due to the

interruption of normal business practices, to the loss of customers due to delays or

cancellations. The vast variety in the type of consequences which may trigger damage

recovery creates a lot of risk to the breaching party.

A. Examples:

Example A: In the painting scenario above, if Jane Doe knew that ABC Painting

ordered a unique color paint for her specific project, the damages for breach of

contract could include all of the damages awarded in the scenario above, plus:

• payment for the special paint ABC Painting ordered at Ms. Does’ request.

Example B: ABC Toy example above. Now ABC Toys has to hire a different

manufacturer, and at premium, to rush the manufacturing of the 100 robots so ABC

can have them in time for the Christmas season.

In this example, the direct damages are the initial costs that ABC Toys paid to

Manufacturer for the robots. The consequential damages are the costs that ABC Toys

had to pay to the new toy maker – and at a significantly higher, rush rate – to do the

job Big Deal Manufacturer was contracted to do in the first place. ABC Toys can now

sue Big Deal Manufacturer for both direct and consequential damages due to Big

Deal Manufacturer’s breach of contract.

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B. Contractual Limitations: Exposure for consequential damages may be reduced or

eliminated by a limitation of liability clause. These may set a maximum limit for

the breaching party’s exposure; limit liability to the price of the contract; or

exclude certain damages.

EXAMPLE: NEITHER PARTY SHALL BE LIABLE TO THE OTHER

FOR ANY SPECIAL, CONSEQUENTIAL, INCIDENTAL, PUNITIVE,

OR INDIRECT DAMAGES ARISING FROM OR RELATING TO ANY

BREACH OF THIS AGREEMENT, REGARDLESS OF ANY NOTICE

OF THE POSSIBILITY OF SUCH DAMAGES.

III. Liquidated Damages

An amount contractually stipulated as a reasonable estimation of actual damages

to be recovered by one party if the other party breaches. • If the parties to a

contract have properly agreed on liquidated damages, the sum fixed is the

measure of damages for a breach, whether it exceeds or falls short of the actual

damages.

DAMAGES, BLACK’S LAW DICTIONARY (10th ed. 2014)

A. Enforceability of Clause: Must be a reasonable forecast of just compensation,

cannot be greatly disproportionate to the presumable loss or injury. The

determination of whether a contractual provision for damages is a valid

liquidated damages provision or an unenforceable penalty clause is a question of

law. There is no fixed rule applicable to all liquidated damage agreements, and

each one must be evaluated by its own facts and circumstances. Many states

follow the Restatement (Second) of Contracts (1981), section 356, which

provides as follows:

damages for breach by either party may be liquidated in the

agreement but only at an amount that is reasonable in the light of

the anticipated or actual loss caused by the breach and the

difficulties of proof of loss. A term fixing unreasonably large

liquidated damages is unenforceable on ground of public policy as

a penalty.

United States v. Bethlehem Steel Co., 205 U.S. 105 (1907); Stock Shop, Inc. v.

Bozell & Jacobs, Inc., 126 Misc. 2d 95, 481 N.Y.S.2d 269 (N.Y. Sup. Ct. 1984).

B. Benefits: Liquidated damages can be a good substitute for “consequential”

damages. Both parties know up front what the damages will be for the

applicable breach. If enforceable, no need to prove damages. Using liquidated

damages is usually less expensive than proving actual damages.

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C. Optional Liquidated Damages Clauses

1. Non-defaulting party has the option to seek liquidated damages

2. Case Study / Avery v. Hughes, 661 F.3d 690 (1st Cir. 2011)

If BUYER shall default in the performance of their obligation under this

Agreement, the amount of the deposit may, at the option of SELLER,

become the property of SELLER as reasonable liquidated damages.

3. Enforceability depends on jurisdiction

4. More risky

D. Beware of windfall versus “unreasonable liquidated damages”

a. In C&M Realty, another real estate purchase case, the parties agreed that

Seller had the option to keep the $100,000 deposit as liquidated damages

in the event of the buyers breach

b. The parties agreed to a purchase price of $1,325,000

c. The court held the sellers loss of the $1,325,000 sufficient to justify the

$100,000 liquidated damages clause

IV. Delay Damages: Clearly, the most efficient way for an owner (or contractor looking to a

sub) to collect for delay occurs through an enforceable liquidated damages provision.

Typically seen in construction contracts and expressed in terms of a per diem rate for

each day of project delay, the use of stepped or escalating per diem amounts has also

been recognized. These provisions offer an easy method for allocation of damages

associated with construction disputes, documentation of firm expectations for all parties

involved, and avoidance of significant proof issues.

A. Exclusion Clauses: No-damages-for-delay provisions are common and generally

enforceable. Clear and unequivocal no-damage-for-delay clauses are recognized

as valid in most jurisdictions; however, if there is any ambiguity in the

exculpatory language, the no-damage-for-delay clause likely will be adjudged

inapplicable or unenforceable.

In at least nine states, no-damage-for-delay clauses in public contracts are void

and unenforceable. See Cal. Pub. Cont. Code § 7102 (West 1985); Colo. Rev.

Stat. § 24 91-103.5; La. Rev. Stat. Ann. § 38:2216(H); Minn. Stat. Ann. § 15.411

(West 2002); Mo. Ann. Stat. § 34.058 (West); N.C. Gen. Stat. Ann. § 143-134.3

(West 1997); N.J. Stat. Ann. § 18A:18A-41 (West 2000); Or. Rev. Stat. Ann. §

279C.315 (West 2003); Va. Code Ann. § 2.2-4335 (West 2001). In at least two

states, a contractual provision permitting damages for delay is mandated (see

Ariz. Rev. Stat. Ann. § 34-221(F) (2006); Mass. Gen. Laws Ann. ch. 30, § 39O

(West 1973)),and in another two states, the clauses are unenforceable in both

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public and private contracts (see Ohio Rev. Code Ann. § 4113.62 (West 1998);

Wash. Rev. Code Ann. § 4.24.360 (West 1979)).1

Who is at fault for the delay can affect the enforceability of a liquidated damages

provision. Most courts follow the “modern rule,” which allows the courts to

apportion the delay between the contractor and the owner. Robinson v. United

States, 261 U.S. 486 (1923); Hutton Contracting Co. v. City of Coffeyville, 487

F.3d 772 (10th Cir. 2007); Calumet Const. Corp. v. Metro. Sanitary Dist. of

Greater Chi., 178 Ill. App. 3d 415, 533 N.E.2d 453 (1988). If it is impossible for

the court to apportion delay between the owner and contractor, no liquidated

damages may be assessed. Ex parte Desmare, 1873 WL 9308 (U.S. 1873);

Buckley & Co. v. State, 140 N.J. Super. 289, 356 A.2d 56 (N.J. Ch. 1975). A rule

even more hostile to the imposition of liquidated damages holds that if the party

seeking them contributed to the delay at all, it cannot recover them. Glassman

Const. Co. v. Md. City Plaza, Inc., 371 F. Supp. 1154 (D. Md. 1974); Gen. Ins.

Co. v. Commerce Hyatt House, 5 Cal. App. 3d 460, 85 Cal. Rptr. 317 (1970),

Busfield v. Unemployment Comp. Bd. of Review, 191 Pa. Super. 43, 155 A.2d 436,

437 (1959); Grand Rapids Asphalt Paving Co. v. City of Wyoming, 29 Mich. App.

474, 185 N.W.2d 591 (1971); Mars Assocs., Inc. v. Facilities Dev. Corp., 124

A.D.2d 291, 508 N.Y.S.2d 87 (1986); V. L. Nicholson Co. v. Transcon Inv. & Fin.

Ltd., Inc., 595 S.W.2d 474 (Tenn. 1980).2

V. Punitive (“Exemplary”) Damages. Punitive damages are awarded to punish or make an

example of a wrongdoer who has acted willfully, maliciously or fraudulently. Unlike

compensatory damages that are intended to cover actual loss, punitive damages are

intended to punish the wrongdoer for egregious behavior and intend to punish the

breaching party and to deter him or her from committing any future breaches to deter

others from acting in a similar manner. Punitive damages are neither economic nor non-

economic damages, as they are not awarded to compensate any loss and as such they are

awarded in addition to compensatory damages.

It is rare for a court to assess punitive damages in breach of contract lawsuits. For the

most part, courts do not like to punish parties for breaching standard commercial

contracts, absent some sort of additional malicious or harmful conduct.

VI. Non-economic Damages: Non-economic damages refers to compensation for

subjective, non-monetary losses such as pain, suffering, inconvenience, emotional

distress, loss of society and companionship, loss of consortium, and loss of enjoyment of

life. The common belief is that non-economic damages are unavailable in contract cases.

1 Kevin Long and Eric Van Schyndle, An Overview of Three Major Delay Damages Issues, ABA

Section of Litigation Construction Litigation (Feb. 9, 2015)

http://apps.americanbar.org/litigation/committees/construction/articles/winter2015-delay-

damages.html 2 Id.

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A. Know your State: Some states use a “natural result” instruction in contract

cases that may allow recovery for non-economic damages.

VII. Contract Rescission: “Rescission” implies the entire abrogation and undoing of

a contract from the beginning, and in case of rescission, ordinarily; a party may not seek

damages arising out of breach of a contract, such as benefit of the bargain and special

damages, but may recover special damages in case of rescission of a contract due to

fraud.

A. Requires mistake, fraud, undue influence, or duress may seek to have the contract

set aside or have the terms of the contract rewritten to do justice in the case.

Rescission terminates the contractual duties of both parties.

a. Example: Montana statute allows rewriting of contract even with

fraud. M.C.A. § 28-2-1611

VIII. Contract Reformation: Reformation is the means by which the instrument is made to

conform to the intention of the parties. It is applicable to cases of mistake and fraud. If

there is mistake on one side and fraud on the other, reformation is the remedy. Mistake

exists when a person, under some erroneous conviction of law or fact, does or omits to do

some act which but for the erroneous conviction he would not have done or omitted. It

may arise either from unconsciousness, ignorance, forgetfulness, imposition, or

misplaced confidence. Where it arises from imposition or misplaced confidence, relief

may be had on the ground of fraud. Where it arises from unconsciousness, ignorance, or

forgetfulness, no fraud exists, and redress must be on the basis of mistake. The mistake

must be one that is mutual, material, and not induced by negligence.

IX. Nominal Damages: These are damages that are awarded when the injured plaintiff does

not actually incur a monetary loss, but the judge wants to show that the winning party

was in the right. These are typically rarely awarded in contract cases because breaches of

contract usually involve some sort of loss to one party, however they might be awarded in

tort cases that cross over with a breach of contract case.

X. Equitable Remedies: Equitable remedies are typically awarded when monetary

damages will not properly remedy the situation. They involve the court ordering the

parties to act or to refrain from acting. Types of equitable remedies include:

A. Restitution: These are not really legal damages per se, but rather are an equitable

remedy awarded to prevent the breaching party from being unjustly enriched. For

example, if one party has delivered goods but the other party has failed to pay, the

party that delivered the goods may be entitled to restitution, i.e. the cost of the

delivered goods, in order to prevent the unjust enrichment.

B. Quantum Meruit: Quantum meruit is translated from Latin, the term means "as

much as he deserved.” A court can award one party payment for what they

deserve for any work that she performed before the other party breached the

contract or for work performed in the absence of a contract. Generally however

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quantum meruit is unavailable when there is an express contract covering the

dispute.

C. Specific Performance: A court decree that requires the breaching party to perform

their part of the bargain indicated in the contract. For example, if one party has

paid for a delivery of goods, but the other party did not ship them, a specific

performance decree might require the goods to be properly delivered.

For example, imagine that you enter into a written agreement to purchase a

person's house at a specific price and on exact terms. If the seller then gets

cold feet and refuses to sell after the contract is signed, you may be able to

bring a lawsuit to force him or her to sell at the agreed-upon price.

Specific performance is usually available when the contract involves some

kind of unique goods or other unusual benefit to the other party, and ordinary

money damages are not sufficient to make the aggrieved party whole. Real

estate is often the subject of specific performance because, in most cases, each

piece of property is unique.

Specific performance may also be applied in the sales of one-of-a-kind items

such as antiques, or items of special personal value.

Generally not enforceable in the context of employment contracts

XI. Mitigation: An important limitation on the award of damages is the duty to mitigate.

Damages cannot be recovered for losses that could have been reasonably avoided or

substantially limited after the breach occurred. The nonbreaching party’s failure to

use reasonable diligence in mitigating the damages will generally reduce the amount

of recovery by that amount which could have been reasonably avoided.

XII. Election of Remedies Doctrine

Start of legal proceedings versus trial

Recession/Damages: A party injured by a breach of contract may treat the

contract as rescinded and, if he or she has advanced money on it, may bring an

action for its recovery, or may treat the contract as still in force and maintain

an action for damages for the breach, but a party cannot do both because they

are inconsistent. One is based on disaffirmance of a contract and the other is

based on affirmation of the contract.

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Liquidated damages and actual damages are, absent express language

permitting recovery of both, mutually exclusive remedies, so that where an

election is permitted, the election of one remedy bars pursuit of the other.

Election may be express or by conduct

XIII. Collectability

Consideration should be given as to collectability in the event of a default. There are

several ways this can be addressed during the contract negotiations:

Seeking a secured interest in assets and/or real property;

Obtaining a personal guarantee;

Escrowing funds

XIV. Choice of Law

Consider which states may apply to a dispute

If one of the contracting parties is incorporated in the state chosen by choice-

of-law provision, then all contracting parties have substantial relationship to

that state for choice-of-law purposes

Thank you for listening. If you have any follow up questions, please feel free to contact me.

SHANNON BELL

KELLY & WALKER LLC

1512 LARIMER STREET, SUITE 200

DENVER, COLORADO 80202

SBELL@KELLYWALKERLAW.COM

(720) 236-1797