We’ve all done it. Signed a contract, whether with the home improvement company, for a new set of tires or service on our automobile, or for a home entertainment center. The contract that we just signed will likely have the “fine print” spelling out all sorts of rights and likely a provision addressing a limitation on damages which the home repair company, the auto repair shop or the electronics store is willing to pay in the event of a defect in their product or service.
While as a practical matter there may be little that you can do to change the terms of the contract, other than those variables such as price, delivery date and brand, especially if you are doing business with the “big box stores” or a franchise operation, there may be some room to negotiate terms, including contractual damages, if you are dealing with an independent business owner.
Whether you are a business person or homeowner, or a wholesaler, retailer or consumer, knowing your rights before signing on the dotted line will help you evaluate the “deal.” Of course, no matter how good the “deal” appears, if it is too good of a deal, perhaps it is not a good deal after all!
I. Actual and Nominal Damages
Both in Missouri and Illinois the ultimate test for damages is whether an award will fairly and reasonably compensate a plaintiff for the injuries incurred. The basic types of damages in any action are either actual or nominal damages. Actual damages are compensable and are measured by the loss or injury sustained. The amount of damages need not be measured with exactness or precision. An example is that A requests B to deliver a dozen widgets to A’s offices. B delivers the dozen widgets. However, A fails to pay for the widgets. The actual damages are the money owed to B for the delivery of the widgets.
Nominal damages are awarded as recognition of some breach of duty owed by a defendant to a plaintiff. Nominal damages are not a measure of compensation for a loss or injury, because the plaintiff does not sustain an injury or loss. Again, take the above example, but instead B fails to deliver the widgets to A and A gets C to deliver the widgets at the same price and on the same day that B should have delivered. A sustained no damages due to B’s breach of the contract. A would be entitled to nominal damages due to B’s breach. The issue of nominal damages becomes important when a cause of action or lawsuit is also requesting punitive damages. In order to get an award of punitive damages, a court must first award nominal damages.
II. Consequential Damages
Recently it has become boilerplate language to include within contracts language concerning consequential damages. Under both Missouri and Illinois law, consequential damages are limited to those that are within the contemplation of the parties at the time of contracting or are foreseeable to the parties.
In Centerline, a landlord had filed suit against a tenant for breach of a commercial lease. The landlord, to mitigate damages, moved another tenant from the same building into the defaulting tenant’s space. At trial the landlord claimed, and was awarded, damages for the rent of the space that the tenant vacated in the landlord’s building when it moved into the defaulting tenant’s space. On appeal the defaulting tenant argued that holding it liable for rent on a space it did not contract for was, as a matter of law, beyond the contemplation of the parties and unforeseeable. The landlord argued that the defaulting tenant was obligated to pay these rents under the lease because the lease provided that the landlord would be reimbursed for all “direct or consequential” damages due to a default. Furthermore, the landlord argued because the lease required the defaulting tenant to pay “consequential” and “any and all” damages from a breach, the landlord’s recovery should not be limited to damages that are the “natural and direct consequences of the breach.”
The Court agreed with the landlord that including a provision in the lease for “consequential” and “any and all damages” broadened the scope of the damages beyond those that were the “natural and direct consequence” of the breach, but the Court stated even consequential damages are limited. The Court stated that to hold otherwise, and allow recovery for “any and all” damages, no matter how remote, would allow recovery for damages entirely unimagined and unforeseeable by the parties to a contract. The Court held that the law limits consequential damages to those that are “within the contemplation of the parties at the time of contracting or foreseeable to them.”
A party to a contract might at this time be asking, what are damages that are reasonably foreseeable? There is no simple answer to this question and the answer is dependent upon the factual scenario. However, a good rule of thumb is that if the breaching party could reasonably have forecasted or predicted that the damages proven by the non-breaching party would probably occur if a breach happened, then those damages are foreseeable.
III. Incidental Damages
Incidental damages are sometimes confused with consequential or special damages. However, incidental damages are really only allowed under the Uniform Commercial Code (the “UCC”), and specifically Article 2, Sales. Both Missouri and Illinois have adopted the Uniform Commercial Code, Article 2. Under the UCC, incidental damages include any reasonable expense incident to the breach associated with the sale of goods. The UCC defines a seller’s incidental damages to include any commercially reasonable charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach. U.C.C. § 2-710. The UCC defines a buyer’s incidental damages resulting from seller’s breach to include expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach. U.C.C. § 2.-715. Thus, incidental damages are usually reimbursement of expenses incurred by the non-breaching party.
IV. Liquidated Damages
Liquidated damages refer to the amount, at the time of contracting, that the parties agree will be payable in case of a breach. In order for a liquidated damage clause to be enforceable, a two-prong test must be met: (1) actual damages are difficult or impossible to determine, and (2) the amount designated as liquidated damages must bear some relation to the actual loss which the damaged party can reasonably be expected to incur on account of the breach which gives rise to the triggering of the clause. This test for enforceability is applied to the facts that existed at the time the contract was entered and not at the time the breach occurred. If it is determined that the liquidated damage clause was included in the contract to compel performance of a party, then the liquidated damage clause will be unenforceable as a penalty clause.
V. Exemplary or Punitive Damages
Exemplary or punitive damages are imposed for the purpose of punishment and deterrence. Moreover, assessment of punitive damages requires conduct that is outrageous because of the defendant’s evil motive and reckless indifference to the rights of others. The test to be applied in determining if cause exists for the basis of an award of punitive damages is whether the defendant did a wrongful act intentionally and without just cause or excuse. What all this means is that defendant not only intended to do the act which is wrongful but that defendant knew the act was wrongful when he did it. It is not so much the commission of the intentional tort as the conduct or motive. It is the defendant’s state of mind which prompted the acts that forms the basis for a punitive damage award.
As stated above, before the Court reaches the issue to award punitive damages or not, there must be an award of actual or nominal damages. Whether there is sufficient evidence for an award of punitive damages is a question of law that a judge must decide in order to submit the issue of punitive damages to the jury. In order to have a submissible case the evidence, and the inferences drawn from the evidence, must permit a reasonable juror to conclude that it was highly probable that the defendant’s conduct was outrageous because of evil motive or reckless indifference. This is a heavy burden for a plaintiff to overcome. Moreover, if awarded punitive damages, the damages must bear some relationship to the actual harm caused by defendant, otherwise the award of punitive damages will be overturned on appeal.
Conclusion:
Under Missouri and Illinois law, including the Uniform Commercial Code as adopted in both states, parties to a contract may limit or exclude the recovery and/or types of damages allowed due to a breach, unless the limitation or exclusion is unconscionable. There is a presumption of conscionability when the contract is between businessmen in a commercial setting. Courts are loathe to set aside terms of a contract that the parties negotiated as long as there was equal bargaining power and both parties negotiated in good faith.
Therefore, the next time you are entering into a contract which limits your rights of recovery, it is advisable to do a thorough analysis of the extent of the limitation or exclusion of damages in order to determine if such clauses are in your best interest.