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
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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
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Contract Remedies5Slide6
Stay AwakeContract Remedies
6Slide7
Remember to preface my personal legal questions with “Say, I have a friend who …”Contract Remedies
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Contract Remedies8Slide9
Our GoalsOverview of contract
damages and remedies
Identify
problem areasSuggest some practical tips
Contract Remedies
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Table SettingGovernment Contracts & Remedies
Contract Remedies
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Public Expectation
Contract Remedies
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The RealityContracts often can beComplicated
Nuanced
Adversarial
Protracted
Contract Remedies
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Government Contracts
Contract Remedies
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Government Contracting
Contract Remedies
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Government ContractsTypesGoods
Services
Public works
Real PropertyDeal sideGovernment usually is the buyer
Contract Remedies
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Strategic ImplicationsFocus effortsMinimize deal riskMinimize transactional risk
Incentivize performance
Think about counterparty perspective
Their risk containment strategy
Contract Remedies
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Introduction to Contract Damages
Contract Remedies
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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
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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
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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
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DistinctionContract Remedies
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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
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DefensesCapacityInterference
Impossible performance
Mutual mistake
FraudDuress
Doctrine of unconscionabilityAccepted performanceIllegal purpose or act
Contract Remedies
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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
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Doctrine of UnconscionabilityContractual defense
Court may refuse to enforce a contract because it is
extremely
unfair to one of the parties
Contract Remedies
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Not DefensesFailure to read the agreementDid not understand the agreement
Unilateral mistake
Contract Remedies
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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
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Most Common RemediesRescission and restitutionSpecific performance
Reformation
Recovery based on quasi
contractDamages
Contract Remedies
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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
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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
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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
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Damages – Potential Problem
Contract Remedies
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Purpose of DamagesContract Remedies
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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
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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
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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
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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
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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
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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
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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
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Contract DamagesContract Remedies
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Types of Damages
Contract Remedies
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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
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TerminologyAlso known as - Actual damagesDirect damages
Includes
General damages
Special damages
Contract Remedies
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Compensatory Damages MeasureContract Remedies
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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
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TerminologyContract Remedies
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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
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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
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Do Not PanicConsequential damages do NOT includeRemote losses
Speculative losses
Contract Remedies
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ExamplesContract Remedies
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Lost profits
Lost use
Damage to business reputation
Business interruption
Material escalation costs
Additional energy costs
Personal injurySlide56
Why the Fuss?Contract Remedies
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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
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TerminologyAlso known as – Stipulated damages
Agreed damages
Unlike other damages
Contract Remedies
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AllowedContract Remedies
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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
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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
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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
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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
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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
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The RulesContract Remedies
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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
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Contract Remedies72Slide73
Contract NegotiationsStrategies & Tips for Negotiating Contractual Damage Provisions
Contract Remedies
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Professor Jagger Had it Right
Contract Remedies
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Have A PlanKnow your goalsStructure the negotiations
Be proactive
Contract Remedies
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Value for EffortFocus negotiating effort where you can move the dial:Money
Risk
Don’t over buy
Contract Remedies
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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
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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
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Process MattersDon’t just ‘split the difference’Agreements should be purposeful
Have a discussion
Contract Remedies
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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
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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
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Negotiate the Deal FirstBefore you start drafting the agreement, negotiate the dealConsider -
Using a term sheet
Using a letter of
intentContract Remedies
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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
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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
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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
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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
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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
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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