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Contract Remedies - PPT Presentation

Presented by Greg Tolbert amp Mark Lyon Agenda Table Setting Introduction to Contract Damages Contract Damages Strategies amp Tips Contract Negotiating Contract Drafting Contract Administration ID: 615936

remedies contract breach damages contract remedies damages breach party consequential amp liquidated contracts damage performance reasonable risk goods parties

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Slide1

Contract Remedies

Presented by Greg Tolbert & Mark LyonSlide2

AgendaTable SettingIntroduction to Contract DamagesContract Damages

Strategies & Tips

Contract Negotiating

Contract DraftingContract AdministrationTakeaway MessagesAdditional Resources

2

Contract RemediesSlide3

GoalsContract Remedies

3Slide4

Avoid PowerPoint PoisoningContract Remedies

4Slide5

Contract Remedies5Slide6

Stay AwakeContract Remedies

6Slide7

Remember to preface my personal legal questions with “Say, I have a friend who …”Contract Remedies

7Slide8

Contract Remedies8Slide9

Our GoalsOverview of contract

damages and remedies

Identify

problem areasSuggest some practical tips

Contract Remedies

9Slide10

Table SettingGovernment Contracts & Remedies

Contract Remedies

10Slide11

Public Expectation

Contract Remedies

11Slide12

The RealityContracts often can beComplicated

Nuanced

Adversarial

Protracted

Contract Remedies

12Slide13

Government Contracts

Contract Remedies

13Slide14

Government Contracting

Contract Remedies

14Slide15

Government ContractsTypesGoods

Services

Public works

Real PropertyDeal sideGovernment usually is the buyer

Contract Remedies

15Slide16

Strategic ImplicationsFocus effortsMinimize deal riskMinimize transactional risk

Incentivize performance

Think about counterparty perspective

Their risk containment strategy

Contract Remedies

16Slide17

Introduction to Contract Damages

Contract Remedies

17Slide18

A Contract Is“An agreement between two or more parties creating obligations that are enforceable or otherwise recognizable as law.”

Black’s Law Dictionary

Contract Remedies

18Slide19

Typical ContractParty A has a duty to perform: Deliver goods

Provide a service

Construct a building

Convey real estateParty B has a duty to pay money.

Contract Remedies

19Slide20

Breach of ContractContract Remedies

20

Breach: Any deviation from promised performance

Breach by the performer may take the form of –

Nonperformance

Defective performance

Delayed performance

Breach by payer –

Nonpayment

Partial paymentSlide21

Type of BreachMaterial breachUndermines the substantial benefit of the bargainRight to suspend performance obligation & sue for damages

Minor breach

Slight deviation from promised performance

Sue for damages

Contract Remedies

21Slide22

DistinctionContract Remedies

22Slide23

When Have You Breached?What constitutes breach of contract?Failure to performBreach of representation or warranty

Breach of a restrictive covenant

What does the contract say?

Is it an immediate breach or does it require notice/cure period?

Was the breached waived?Contract Remedies

23Slide24

DefensesCapacityInterference

Impossible performance

Mutual mistake

FraudDuress

Doctrine of unconscionabilityAccepted performanceIllegal purpose or act

Contract Remedies

24Slide25

Doctrine of ImpracticabilityContractual defenseA court may refuse to enforce a contract if it becomes truly impossible for one of the parties to perform

Contract Remedies

25Slide26

Doctrine of UnconscionabilityContractual defense

Court may refuse to enforce a contract because it is

extremely

unfair to one of the parties

Contract Remedies

26Slide27

Not DefensesFailure to read the agreementDid not understand the agreement

Unilateral mistake

Contract Remedies

27Slide28

RemediesContract Remedies

28

Upon

breach: Nonbreaching party can choose one or more

remediesDamages are the primary remedy for breach of contract

General rule: Unless damages would be inadequate, courts will award money

damagesSlide29

Contract Provisions Limiting Remedies

Exculpatory clauses

Provisions stating that no damages can be

recoveredLimitation of liability clausesProvisions that affect the availability of certain

remediesLiquidated damagesContract provides a specific amount to be paid as damages in the event of future default or breach of contract

Contract Remedies

29Slide30

Most Common RemediesRescission and restitutionSpecific performance

Reformation

Recovery based on quasi

contractDamages

Contract Remedies

30Slide31

Rescission & RestitutionRescissionA remedy whereby a contract is canceled and the parties are restored to the original positions that they occupied prior to the transactions

Restitution

Both parties must return goods, property, or money previously

conveyed

Contract Remedies

31Slide32

Specific PerformanceEquitable remedyRequires performance of the act promised in the contractSpecial remedy

Used in cases where the consideration is unique or scarce

Not allowed -

Remedy not available in contracts for personal services

Contract Remedies32Slide33

ReformationEquitable remedyCourt reforms (rewrites) the contract to reflect the parties true intentions

Available when an agreement is imperfectly expressed in writing

Contract Remedies

33Slide34

Recovery Based on Quasi Contract

Equitable theory

Party seeking

quantum meruit must show the following:

A benefit was conferred to the other partyParty conferring did so with the reasonable expectation of being paid

The benefit was not volunteered

Retaining benefit without paying for it would result in unjust enrichment of the party receiving the benefit.

Contract Remedies

34Slide35

Damages – Potential Problem

Contract Remedies

35Slide36

Purpose of DamagesContract Remedies

36

In the context of contract law, the award of direct and consequential damages is intended to compensate the nonbreaching party for the injury suffered as a consequence of the

breach.

Floor Exp., Inc. v. Da

ly, 138 Wn. App. 750 (2007)

Primary purpose of damages for breach of contract is to protect the promisee’s expectation interest in the promisor’s performance

Damages should put the plaintiff is as good a position as if the defendant had fully performed as required by the contract. Slide37

Limitation on DamagesContract Remedies

37

Damages must have been reasonably foreseeable.

This is a significant limitation on damages

Damages that are NOT recoverable:

Speculative damages

Remote damages

Avoidable damagesSlide38

Contract Damages: Measure of Recovery

Contract Remedies

38Slide39

Expectation InterestContract Remedies

39

This is the general rule. “Benefit of Bargain”

Party injured by breach of contract is entitled to recover:

All damages that accrue naturally from the breach; and

An amount sufficient to put the injured party in a position monetarily equivalent to the position she would have been in if the breaching party had performed.

Westlake, LLC v. Engstrom Properties, LLC,

169 Wn. App. 700 (2012);

Eastlake Construction Co. v. Hess

, 102 Wn. 2d 30 (1984)Slide40

Expectation, cont.Contract Remedies

40

Proof of Damages

The amount of damages must be proven with reasonable certainty. Does not have to be precise.

Lester N. Johnson Co. v. Spokane

, 22 Wn. App. 265 (1978)

Duty to Mitigate

Injured party must make reasonable efforts to minimize or avoid damages resulting from another party’s breach. Avoidable damages are not recoverable.

Westland Construction Co. v. Christ Berg, Inc.

, 35 Wn. 2d 824 (1950

)Slide41

Reliance InterestContract Remedies

41

Measure of Recovery:

Expenditures made in preparation for performance or in the course of performance, less any loss the injured party would have incurred had the contract been performed

Family Medical Bldg v. DSHS

, 37 Wn. App. 662 (1984),

rev’d on other grounds

, 104 Wn.2d 105 (1985)

Note: Lost profit is not recoverable

Based on Cost; not ValueSlide42

Restitution InterestContract Remedies

42

Purpose of restitution is the prevention of unjust enrichment

Measure of restitution damages is the reasonable value of the injured party’s performance

Note: Restitution damages are not limited by the contract price

Measure of recovery often is the value of the benefit conferred

Dravo Corp. v. L.W. Moses Co.

, 6 Wn. App. 74 (1971)Slide43

ExampleGreg agrees to pay Mark $50,000 to build a shop. Greg gives mark a deposit of $10,000 and, in reliance on the contract pays an architect $8,000 for plans and permits.

Before work begins, Mark repudiates the contract.

Greg discovers that no one will accept less than $60,000 to do what Mark promised to do.

If Greg sues Mark, what are the damages under various theories?

Contract Remedies

43Slide44

Possible Damages

Measure of Damages

Total Damages

Theory of recovery

Benefit conferred

Other Costs of Reliance

Lost Value of Performance

Restitution

$10,000

Deposit

---

---

$10,000

Reliance

$10,000

Deposit

$8,000

Architect fee

---

$18,000

Expectation

$10,000

Deposit

$8,000

Architect fee

$10,000

Contract difference

$28,000

Contract Remedies

44Slide45

Contract DamagesContract Remedies

45Slide46

Types of Damages

Contract Remedies

46Slide47

Compensatory Damages“Compensatory damages are such as will compensate the injured party for the injury sustained, and nothing more; such as will simply make good or replace the loss caused by the wrong or injury.”

Black’s Law Dictionary

Contract Remedies

47Slide48

TerminologyAlso known as - Actual damagesDirect damages

Includes

General damages

Special damages

Contract Remedies

48Slide49

Compensatory Damages MeasureContract Remedies

49

Measured by the loss in value of the promised performance.

Difference

between the promised performance and the actual performance.Slide50

Consequential Damages“Consequential damages resulting from a seller’s breach of contract include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise, and injury to person or property proximately resulting from any breach of warranty.”

Black’s Law Dictionary

Contract Remedies

50Slide51

TerminologyContract Remedies

51

Also known as –

Indirect damages

Consequential damages:

Damages caused by special circumstances beyond the contract.

Damages that do

not

flow directly and immediately from a breach.

Damages that flow from the consequences, or results, of a breach.Slide52

Recoverable When:Contract Remedies

52

The consequential damages were in the contemplation of the parties when the contract was made;

The consequential damages were the proximate result of the breaching party’s nonperformance; and

The amount of the consequential damages is proven with reasonable certainty.

Farm Crop Energy v. Old Nat’l Bank

, 109 Wn.2d 923 (1988)Slide53

Key TestThe breaching party must know (or have reason to know) that special circumstances will cause the additional loss.Hadley v. Baxendale

, 9 Exch. 341 (1854).

Contract Remedies

53Slide54

Do Not PanicConsequential damages do NOT includeRemote losses

Speculative losses

Contract Remedies

54Slide55

ExamplesContract Remedies

55

Lost profits

Lost use

Damage to business reputation

Business interruption

Material escalation costs

Additional energy costs

Personal injurySlide56

Why the Fuss?Contract Remedies

56

Why do parties seek to preclude consequential damages?

Limit potential risk

Reduce uncertainty

Reduce incentive of the nonbreaching party to escalate the disputeSlide57

Liquidated Damages“Liquidated damages is the sum which party to contract agrees to pay if he breaks some promise and, which having been arrived at by good faith effort to estimate actual damage that will probably ensue from breach, is recoverable as agreed damages if breach occurs.”

Black’s Law Dictionary

Contract Remedies

57Slide58

TerminologyAlso known as – Stipulated damages

Agreed damages

Unlike other damages

Contract Remedies

58Slide59

AllowedContract Remedies

59

Liquidated damages are favored in Washington and are enforceable if they do not constitute a penalty or are unlawful.

Jenson v. Richens

, 74 Wn.2d 41 (1968)

Note

: A party will not be allowed to recover liquidated damages for a breach to which she has contributed.

Baldwin v. Nat’l Safe Depository Corp.

, 40 Wn. App. 69 (1985)Slide60

Test for EnforceabilityContract Remedies

60

Two-part test for valid liquidated damages

provision:

When the contract was entered into, was it apparent that damages would be difficult to

ascertain in

the event of a

breach?

Was the amount set as damages a reasonable

estimate?

If the answer to

both

questions is yes, the provision may be

enforced.Slide61

Risk Costs are More than Just Contract PriceLiquidated damages are intended to cover things that can be hard to prove:

New

procurement posts

Lost opportunity costsSunk resource costsAdministrative costs

Reputational or “political” costs of failed projectPublic or third-party costsEnforcement or

collection costs

Contract Remedies

61Slide62

Cannot Be A PenaltyContract Remedies

62

To be valid and enforceable, liquidated damages cannot constitute a

penalty.

Note

: Too low is okay. That’s not a penalty.

Mahoney v. Tingley

, 85 Wn.2d 95 (1975

)Slide63

ExampleContract Remedies

63

Provision requiring a construction contractor to pay $100/day for every day she is late in completing the construction.Slide64

Incidental DamagesContract Remedies

64

Refers

to

a very limited category of costs incurred by the nonbreaching

party -

Expenses incurred by a

buyer

in connection with rejection

of nonconforming goods.

Expenses incurred by a

seller

in connection with wrongful rejection of delivered conforming

goods.

Example: Safeguarding defective goods until the seller removes them

Such expenses –

Must be commercially reasonable

Must occur in relation to the breachSlide65

Seller’s Incidental DamagesContract Remedies

65

Any reasonable expenses incurred in:

Stopping delivery

Transportation, care, & custody of goods after the buyer’s breach

Returning or reselling goods

Other expenses incident to the breachSlide66

Buyer’s Incidental DamagesContract Remedies

66

Any reasonable expenses incurred in:

Inspection or receipt of goods later

rejected

Care

and custody of goods later rejected

Charges incurred in replacing (covering) the goods

Other expenses incident to the delay or

breachSlide67

Nominal DamagesContract Remedies

67

When

no actual damages result from a breach of contract; just a technical

injury

Typically $1Slide68

Punitive DamagesContract Remedies

68

Also known as

Exemplary damages

Designed to punish

Unless there is an express statutory right, punitive damages are

not

awarded.

Dailey v. North Coast Life Ins. Co.

, 129 Wn.2d 572 (1996);

Kammerer v. Western Gear Corp.

, 96 Wn.2d 416 (

1981)Slide69

Strategies & TipsFor Negotiating, Drafting, & Administering Contractual Damage Provisions

Contract Remedies

69Slide70

The RulesContract Remedies

70

The first rule of contracts is

Think!

The

second rule

of

contracts is

Think!

The third rule of contracts is

Words Matter

.

The fourth rule of contracts is: Remember the first two rules.Slide71

Seriously, Words MatterContract Remedies

71Slide72

Contract Remedies72Slide73

Contract NegotiationsStrategies & Tips for Negotiating Contractual Damage Provisions

Contract Remedies

73Slide74

Professor Jagger Had it Right

Contract Remedies

74Slide75

Have A PlanKnow your goalsStructure the negotiations

Be proactive

Contract Remedies

75Slide76

Value for EffortFocus negotiating effort where you can move the dial:Money

Risk

Don’t over buy

Contract Remedies

76Slide77

What Do We Mean By Risk?What could go wrong?How likely is this to happen?

What are the consequences

?

For you?For the vendor?

What can be done to reduce the frequency or consequences?Tools:

Use formal

assessment

to document your anticipated

risks

Risk is dynamic! update your assessment

regularly

Contract Remedies

77Slide78

Key QuestionsWhat damages does your party think it should be able to recover to make it whole if the counterparty breaches the contract?

What damages does your party think it should be obligated to pay if it breaches the contract?

Contract Remedies

78Slide79

Process MattersDon’t just ‘split the difference’Agreements should be purposeful

Have a discussion

Contract Remedies

79Slide80

Mutuality MythContract Remedies

80

Just because a clause applies to both sides, does NOT mean that it is fair or appropriate – e.g.,

Indemnification

Mutual waiver of consequential damages

Force majeureSlide81

Why Limit Damages?To manage deal riskRevenue recognition

Contract Remedies

81Slide82

Damage Limitation Should Make SenseContract Remedies

82

In a sales transaction

Seller’s principal risk is that the buyer will not pay the purchase price of the goods

Buyer’s risk is that it may lose profit on an expected resale or suffer loss of goodwill if it resells a defective product

Mutual waiver of consequential damages – in most instances – only benefits the seller

Mutual waiver may not be appropriate

Parties’ damages may be very differentSlide83

Contract DraftingStrategies and Tips for Drafting Contractual Damage Provisions

Contract Remedies

83Slide84

Negotiate the Deal FirstBefore you start drafting the agreement, negotiate the dealConsider -

Using a term sheet

Using a letter of

intentContract Remedies

84Slide85

Best PracticesContract Remedies

85

Plan ahead

Is breach likely?

What are the likely consequences of breach?

Choose the right tool(s)

Damage provision

Damage limitation

Damage cap

Liquidated damages

Third party determination

Reps & warranties

Hedge risk

Insurance

Bonding

Split contractsSlide86

Include ‘Intermediate Remedies’Steps short of termination:Delay credits

Performance

Incentives

Payment holdbacks

Contract Remedies

86Slide87

Beware of Embedded LimitationsExamplesWarranty clauses and limitations

Dispute

resolution clause

DefinitionContract Remedies

87Slide88

VariablesContract Remedies

88

The contractual damages provision(s) should depend on:

Goals and objectives of the parties

Risk/return perspective

Relative bargaining power (negotiating leverage)

Market conditions

Type of agreement

Particular circumstancesSlide89

Things to AvoidIgnoranceDon’t ignore the issueUnderstand the deal

Understand how and why the agreement allocates risk and reward

Formatting Fever

Don’t just ‘cut and paste’ the ‘legal stuff’

Contract Remedies

89Slide90

Form AgreementsContract Remedies

90

Can be helpful

But … don’t let a form substitute for thought

Form may be poorly crafted

Form may not be current with case law, prevailing custom, marketplace

Consider whether the form really is the right tool for the particular transaction

Avoid the other side’s “standard” termsSlide91

DraftingBe clear & precise

Contract Remedies

91Slide92

Default & RemediesDefine what will constitute default under the agreementBe specific

Notice requirement?

Cure period?

Specify remedies available to non-defaulting party

Contract Remedies

92Slide93

Limiting DamagesContract Remedies

93

Be very precise about what damages are being excluded

Incidental?

Consequential?

Is there a business basis to exclude certain categories of damages?Slide94

Precluding Consequential DamagesContract Remedies

94

Example –

Notwithstanding any provision to the contrary, neither party shall be responsible or held liable for any consequential losses or damages.

Why?

Sellers wish to limit their risk.

What is being precluded?

Far more than remote or speculative damages.Slide95

Actual Damages(True/False):A provision specifying that only “actual” damages are recoverable limits recovery to direct or general damages.

Contract Remedies

95Slide96

Lost Profits(True/False):Lost Profits are

always consequential damages.

Contract Remedies

96Slide97

Liquidated DamagesContract Remedies

97

Contract cannot just include a liquidated damages provision

Include ONLY if damages meet the two-part test for liquidated damages

Include a precise amount

Never refer to liquidated damages as a penaltySlide98

Contract AdministrationStrategies & Tips for Administering Contracts When Breach and Damages Occurs

Contract Remedies

98Slide99

Declaring BreachContract breach can be okayWho declares?

Options other than breach

Contract Remedies

99Slide100

What to Do When Breach OccursDevelop a strategy for resolutionEnforce agreementModify agreement

Do nothing

Action Plan

Act promptlyProvide noticeMitigate damages

Think end gameContact your attorney

Contract Remedies

100Slide101

What You Must DoContract Remedies

101

Mitigate damages. Avoidable damages are not recoverable.

Westland Construction Co. v. Christ Berg, Inc.

, 35 Wn. 2d 824 (1950)

Comply with contract – e.g.,

Notice

Dispute resolutionSlide102

Takeaway Messages

102

Contract RemediesSlide103

RememberContracts are business toolsPlan ahead

Be prepared

Know your limits

Contract Remedies

103Slide104

Additional Resources

104

Contract RemediesSlide105

Terms: DamagesContract Remedies

105

Term

AKA

Examples

Compensatory Damages

Actual Damages

Direct Damages

Direct losses & costs

Consequential Damages

Indirect Damages

Lost profits

Lost use

Damage to business reputation

Incidental Damages

Any reasonable expenses incident to the breach

Nominal Damages

Symbolic Damages

$1

Punitive Damages

Exemplary Damages

Liquidated Damages

Stipulated Damages

Agreed Damages

$100/day of delaySlide106

Thank You

106

Contract RemediesSlide107