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Contract drafters and reviewers sometimes get confused about what constitutes “consequential damages” excluded by a limitation of liability. A federal district court recently proposed this recap, with extensive citations:

Defendant’s brief frequently discusses foreseeability, and it is true in some sense that predictability is relevant to determining whe­ther damages naturally flow from a breach and are considered direct or indirectly result and are considered consequential.

But that definition has never been very instructive for analyzing particular damages, and foreseeability is the limit of all contract damages, not the distinction between direct and consequential damages.

Rather than turning on foreseeability, the difference between direct and consequential damages depends on whether the damages represent (1) a loss in value of the other party’s per­form­­ance, in which case the damages are direct, or (2) collateral losses following the breach, in which case the damages are consequential.

Direct damages refer to those which the party lost from the contract itself—in other words, the benefit of the bargain—while consequential damages refer to economic harm beyond the immediate scope of the contract.

So direct damages are the costs of a plaintiff getting what the defendant was supposed to give—the costs of replacing the defendant’s performance.

Other costs that the plaintiff may not have incurred if the defendant had not breached, but that are not part of what the plaintiff was supposed to get from the defendant, are consequential.

Even this more developed definition is not precise, so it is im­port­ant to remember that the goal of contract interpretation is to give effect to the parties’ intent and that the primary guide to determining their intent is the actual language of the agreement.

Jay Jala, LLC v. DDG Construction, Inc., No. 15-3948, slip op. at 3-5 (E.D. Pa. Nov. 1, 2016) (partially granting defendant’s motion for summary judgment on damages) (emphasis and extra paragraphing added, internal quotation marks and extensive citations omitted).

The Jay Jala court’s formulation has some appeal; I’m mulling over how it might relate to a different test articulated by the Texas supreme court in a number of cases, such as one from 2012:

Direct damages are the necessary and usual result of the defendant’s wrongful act; they flow naturally and necessarily from the wrong…. Consequential damages, on the other hand, result naturally, but not necessarily.

Arthur Andersen & Co. v. Perry Equip. Corp., 945 S.W.2d 812, 816 (Tex. 1997), quoted in El Paso Marketing, L.P. v. Wolf Hollow I, L.P., 383 S.W.3d 138, 144 (Tex. 2012) (internal quotation marks and footnote omitted, alterations by the El Paso Marketing court, emphasis added).

Hmm … if I had to litigate a consequential-damages case, and I had to choose between the Jay Jala court’s recap and the Texas supreme court’s Arthur Andersen test, I suspect that the Texas defini­tion might provide a brighter line, one that could well be easier for the jury to use in deciding the case.

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A Fifth Circuit opinion, issued yesterday, reminds contract drafters that if a forum-selection clause specifies the courts of a state or county as the exclusive forum, that might well preclude removal to federal court.  See Grand View PV Solar Two, LLC v. Helix Electric, Inc., No. 16-20384 (5th Cir. Feb. 1, 2017) (affirming remand to state court because forum-selection provision had granted “sole and exclusive” jurisdiction to state courts). The forum-selection clause read as follows:

The Parties hereto hereby irrevocably and unconditionally consent to the sole and exclusive jurisdiction of the courts of Harris County in the State of Texas for any action, suit or proceeding arising out of or relating to this Agreement or the Proposed Transaction, and agree not to commence any action, suit or proceeding related thereto except in such courts.

The Parties hereto further hereby irrevocably and unconditionally waive any objection to the laying of venue of any action, suit or proceeding arising out of or relating to this Agreement in the courts of Harris County in the State of Texas, and hereby further irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such action, suit or proceeding brought in any such court has been brought in an inconvenient forum.

Id., slip op. at 2-3 (emphasis and extra paragraphing added). The court held:

Plaintiffs correctly allege that Helix Electric waived its removal rights by agreeing in the [Agreement] to “the sole and exclusive jurisdiction of the courts of Harris County in the State of Texas for any action, suit or proceeding arising out of or relating to this Agreement or the Proposed Transaction.”

The [forum-selection clause] is “clear and unequivocal”: It gives Harris County state courts exclusive jurisdiction over disputes such as the one plaintiffs brought in that county. Because Helix Electric, L.L.C., agreed to the [Agreement]’s terms, it cannot remove, and neither can its co-defendants.

Id., slip op. at 4 (footnote omitted, extra paragraphing added).

This wasn’t an unusual result; see, e.g., Doe 1 v. AOL, LLC, 552 F.3d 1077, 1081-82 (9th Cir. 2009) (per curiam) (also holding that forum-selection provision was unenforceable for unrelated reasons).

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Baseball-style dispute resolution is underutilized as a tool to motivate contracting parties to be reasonable in their settlement proposals.  (In that process, each party proposes one or two possible res­ol­u­tions and the judge or arbitrator decides which of the proposals is closest to the “correct” one.)  The process can work nicely:  Last week, my hometown Houston Astros and one of their starting pitchers were about to go to arbitration of the pitcher’s salary. The team proposed $3 million, the pitcher proposed $3.9 million, and the arbitral tribunal would have to pick one of the two proposals. The parties elected not to go forward with the arbitration; instead, they agreed to split the difference at a salary of $3.45 million.   See Jake Kaplan, Astros avoid arbitration with starting pitcher Mike Fiers, Houston Chronicle, Jan. 19, 2017.  “The Astros have still yet to reach settlements with starting pitcher Collin McHugh, super utility man Marwin Gonzalez and relief pitcher Will Harris. If the sides are unable to find common ground, an arbiter will decide between the salary figures proposed last week.” Id.

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Some services contracts include no-poaching / no-solicitation pro­vis­ions saying, in effect, “Customer won’t hire Provider’s em­ployees, and vice versa.”  A blanket agreement like that, not in conjunction with a contract of that kind, caused serious trouble for a number of Silicon Valley companies. Now, the Justice Department and FTC have announced a policy of bringing criminal charges against employers and individuals involved in certain agreements of that nature. Excerpt:

Naked wage-fixing or no-poaching agreements among employers, whether entered into directly or through a third-party intermediary, are per se illegal under the antitrust laws.

That means that if the agreement is separate from or not reasonably necessary to a larger legitimate collaboration between the employers, the agreement is deemed illegal without any inquiry into its competitive effects.

Legitimate joint ventures (including, for example, appropriate shared use of facilities) are not considered per se illegal under the antitrust laws.

(Emphasis and extra paragraphing added added.)

This, of course, leaves the door open to scrutiny of all no-poaching provisions under a rule-of-reason analysis.

So, drafters and reviewers of services contracts will want to give careful thought to proposing or agreeing to include such provisions.

(Hat tip:  this ABA update.)

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A British court provides a nice training exercise for contract-drafting students. I’ve modified the facts somewhat.

  • Investor and Developer enter into a contract:  De­vel­op­er is to acquire property and then build and operate a shop­ping center; Investor is to put up the necessary funding.
  • The contract is somewhat tentative, because Developer must first complete a variety of prerequisite tasks such as acquiring the land; sec­ur­ing gov­ern­ment permits; etc. It’s not clear whether all of these tasks are feasible.
  • For four of these tasks, the contract obligates De­vel­oper to make reasonable efforts to complete the tasks. The contract also says, though, that “if all these tasks are not com­ple­ted by March 31, then either party may cancel this Agree­ment by giving writ­ten notice to the other party.”
  • On April 1, three of the four tasks have been completed. That morning, Investor sends to Developer, by courier, a written can­cel­lation notice; the notice is delivered to De­vel­oper early that afternoon.
  • But Developer doesn’t want to abandon the project.  After dis­cus­sions reach an impasse, Developer sues Investor, seeking a de­clar­­atory judgment that the contract is still in effect.
  • Developer’s reasoning is this:
    • The right to cancel the contract doesn’t arise, says Developer, unless all of the tasks are not completed.
    • Here, says Developer, only one of the tasks is still incomplete, and so Investor did not have the right to cancel the contract.
  • Investor responds that the clear in­tent was that either party could cancel if any of the four tasks was not completed.

QUESTION 1: What result did the UK court reach?

(Scroll down for answer.)

 

A UK court held that similar contract language was ambiguous, and consequently that summary judgment in favor of the investor was improper. See Dooba Developments Ltd. v. McLagan Investments Ltd., [2016] EWHC 2944 (Ch) (allowing developer’s appeal).

(Hat tip: Ken Adams.)

This is potentially a significant pain in the [neck] for the parties: Unless they can settle the case, they’ll have to go back to the lower court and incur the expense and inconvenience of getting ready for trial.

QUESTION 2: How could this cancellation right have been drafted more clearly, so as to avoid the need for a trial?

(Scroll down for one possible answer.)

 

 

The cancellation right could have been worded, for example: “if any of these tasks has not been met by March 31, then either party may cancel this Agreement by giving written notice to the other party.”

VARIATION:

Suppose that:

  • Investor did not give notice of cancellation until five years had passed, with no action by either party to move forward with the development project.
  • Developer makes the same objection to cancellation.
  • Investor responds that this is ridiculous in view of the circumstances.

QUESTION 3: How could the drafters have tried to avoid this difficulty?

(Scroll down for one possible answer.)

 

  • The drafters could have stated a deadline or sunset for exercise of the cancellation right — this is an example of the principle that drafters should always think about how particular rights or ob­lig­a­tions will come to an end.
  • The drafters could have built in further cancellation rights that would arise if additional stated milestones were not met.
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