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Liquidated Damages & Penalty Analysis

Liquidated Damages & Penalty Analysis. Courts will enforce bargained-for liquidated damages provisions UNLESS they amount to a penalty to the defendant. The most common standard applied by the courts is seen in In re TWA :

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Liquidated Damages & Penalty Analysis

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  1. Liquidated Damages & Penalty Analysis • Courts will enforce bargained-for liquidated damages provisions UNLESS they amount to a penalty to the defendant. • The most common standard applied by the courts is seen in In re TWA: • Liquidated damages provision will be sustained if the amount “bears a reasonable proportion to the probable loss and the amount of actual loss is incapable or difficult of precise estimation.” • Applied from parties’ perspective at time of contracting

  2. A Few Twists on the Penalty rules: • Construction problem from last week: L.D. clause called for $200/day liquidated damages for each day the building was late. Johanna finished the building two weeks late. But Cale filled sale orders over the Internet without a building so there is strong evidence that his actual damages were $0. Can Cale enforce the clause against Johanna for the two weeks she was late? • It depends – many courts will enforce the clause if it was a reasonable estimate of damages when K was entered and damages were hard to estimate. BUT: • “Second look courts”:Require P’s actual & anticipated damages to be roughly proportionate for the clause to be enforced – if actual damages are much lower than liquidated, courts won’t enforce L.D. clause (even if it seemed ok in light of anticipated damages) • “Actual loss” requirement: Some jurisdictions require actual economic harm before a party can invoke a liquidated damages clause. • Here Jordan has no harm. Even $100 damages would allow him to invoke the L.D. clause.

  3. Exclusivity & Liquidated Damages Clauses If clause is expressly “exclusive:” Courts will enforce it as the exclusive remedy. If clause is expressly “non-exclusive:” Courts usually treat the liquidated damages as an optional remedy and allow P to pursue actual damages. If clause is silent as to exclusivity: Courts are split. • Some will enforce it as the exclusive remedy • Others will allow P to pursue actual damages instead

  4. The Doctrine of Avoidable Consequences General Rule:Judicially imposed doctrine holding that D is not liable for the consequences of his/her wrongdoing that the P reasonably could have avoided. • Similar to comparative fault - both doctrines are concerned w/ causal responsibility at loss. But avoidable consequences is concerned with P’s actions AFTER loss not before. Some particulars: • Applies to general and consequential damages • But P need not take reasonable measures to avoid general damages that are SET at the time of injury • Applies in both contract and tort situations • Burden of proof is on D to show P could have avoided the consequences for which P is seeking redress

  5. S.J. Groves & Sons – the facts • +S.J. Groves (P) gets subcontract to place concrete decks for bridges • +S.J. Groves Ks with Warner (D) to provide ready mix concrete in the mornings at bridge site • +As early as 1971, Warner’s delivery is erratic – P incurs substantial overtime labor costs as a result • +In 1971 Groves considers and rejects getting an alternative source of supply of ready mix concrete – Trap Rock presents special problems • +Warner continues to be erratic – On 6/14/72, Groves approaches Trap Rock who refuses to come down to Warner’s price. • +On 6/21/72 DOT halts construction on bridge until they figure out what to do about Warner. Warner gives assurances and work resumes on 6/26/72. Warner’s performance improves but is uneven until the project finishes in 10/72. • +On 7/11/72, Trap Rock is certified to do work for the state and agrees to provide cement at Warner’s price but Groves decides not to use them (and continues to incur overtime costs as a result). • +DCT refuses to award damages incurred after 7/11/72 • +3rd Circuit says Groves is entitled to all overtime costs even after 7/11/72

  6. S.J. Groves & Sons – the results • Why should Groves be able to recover all damages for overtime, even those post-7/11/72, when there is perfectly good cement available next door from Trap Rock (at the same price)? • What would court award if it knew with certainty that Groves had suffered $100,000 in damage but could have avoided $65,000 of those damages if it had acted reasonably? What facts would create such a scenario?

  7. What are “reasonable” efforts to avoid the consequences of defendant’s wrongdoing? • Another big law firm? Small law firm? Government job? Feds? State? Pub Defender? Solo Practice? Do you have to move to St. Louis? Jeff City? Springfield? D.C.? • What if the only available job in KC is for substantially less pay? • What if you find a job in St. Joseph’s for comparable pay but your spouse has a job in KC already? Same scenario re spouse but you find a job in St. Louis for comparable pay • How long can you look for legal jobs only – must you eventually look for non-law jobs? Suppose Shook, Hardy & Bacon (in KC) breaches its employment contract to hire you. What kind of job should you have to take in order to satisfy the “reasonableness” requirement?

  8. General Formulation of “reasonableness” requirement Employment context: • P must use “reasonable diligence in finding other suitable employment. Although the un- or underemployed claimant need not go into another line of work, accept a demotion, or take a demeaning position, he forfeits his right to backpay if he refuses a job substantially equivalent to the one he was denied.” • Textbook p. 89 n.4 – lower courts suggest you can’t keep looking forever though Bodily Injury Claims • “A person injured by another’s wrong is obliged to exercise “ordinary care” to seek medical or surgical treatment so as to effect a cure and minimize damages.” . . . However the injured person is regarded as having a right to avoid if she chooses peril to life, however slight, and undue risks to health and anguish that goes beyond the bounds of reason.”

  9. Offsetting Benefits The requirement of offsetting benefits is a judicially imposed requirement that P’s damages should be reduced by amount of any benefit that D conferred upon plaintiff as a result of D’s wrong. • The notion of offsetting benefits is related to the concept of avoidable consequences in that judges use it to reduce P’s damages. But that reduction comes as a result of D’s actions rather than P’s.

  10. Offsetting Benefits – Some Examples in both Tort & Contract Tort: Defamation P alleges lost income. D may show that P has large lecture fees as a result of the defamation that essentially replace lost income. • But offset applies only to “benefits to the interest of P that was harmed” • Ex. # 2 – P sues D for defamation alleging lost income. D can reduce P’s damages by showing that D’s defamatory statements made P in demand on the paid lecture circuit, thus bringing in large amounts of money. BUT if P also sues for intentional infliction of emotional distress, D cannot use the paid lecture fees to offset emotional distress damages as the benefit does not go to the interest that was harmed. Contract: P/Seller contracts with D/Buyer for sale of goods that will bring in a certain profit. D/Buyer breaches. P resells and realizes higher profits on resale than under the original contract. P/Seller must credit D/Buyer’s damages with net gain of additional profit on resale.

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