Contract Remedies Presented by Greg Tolbert Mark Lyon

Contract Remedies Presented by Greg Tolbert & Mark Lyon

Contract Remedies 2 Agenda § Table Setting § Introduction to Contract Damages § Strategies & Tips § Contract Negotiating § Contract Drafting § Contract Administration § Takeaway Messages § Additional Resources

Contract Remedies GOALS 3

Contract Remedies 4 Avoid Power. Point Poisoning

Contract Remedies 5

Contract Remedies Stay Awake 6

Contract Remedies 7 Remember to preface my personal legal questions with “Say, I have a friend who …”

Contract Remedies 8

Contract Remedies Our Goals § Overview of contract damages and remedies § Identify problem areas § Suggest some practical tips 9

Contract Remedies TABLE SETTING Government Contracts & Remedies 10

Contract Remedies Public Expectation Efficient Effective Accountable 11

Contract Remedies The Reality § Contracts often can be § Complicated § Nuanced § Adversarial § Protracted 12

Contract Remedies Government Contracts 13

Contract Remedies Government Contracting 14

Contract Remedies Government Contracts § Types § Goods § Services § Public works § Real Property § Deal side § Government usually is the buyer 15

Contract Remedies Strategic Implications § Focus efforts § Minimize deal risk § Minimize transactional risk § Incentivize performance § Think about counterparty perspective § Their risk containment strategy 16

Contract Remedies INTRODUCTION TO CONTRACT DAMAGES 17

Contract Remedies 18 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 Typical Contract § Party A has a duty to perform: § Deliver goods § Provide a service § Construct a building § Convey real estate § Party B has a duty to pay money. 19

Contract Remedies Breach of Contract § 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 payment 20

Contract Remedies 21 Type of Breach § Material breach § Undermines the substantial benefit of the bargain § Right to suspend performance obligation & sue for damages § Minor breach § Slight deviation from promised performance § Sue for damages

Contract Remedies Distinction 22

Contract Remedies 23 When Have You Breached? § What constitutes breach of contract? § Failure to perform § Breach 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 Defenses § Capacity § Interference § Impossible performance § Mutual mistake § Fraud § Duress § Doctrine of unconscionability § Accepted performance § Illegal purpose or act 24

Contract Remedies Doctrine of Impracticability § Contractual defense § A court may refuse to enforce a contract if it becomes truly impossible for one of the parties to perform 25

Contract Remedies 26 Doctrine of Unconscionability § Contractual defense § Court may refuse to enforce a contract because it is extremely unfair to one of the parties

Contract Remedies Not Defenses § Failure to read the agreement § Did not understand the agreement § Unilateral mistake 27

Contract Remedies 28 Remedies § Upon breach: Nonbreaching party can choose one or more remedies § Damages are the primary remedy for breach of contract § General rule: Unless damages would be inadequate, courts will award money damages

Contract Remedies 29 Contract Provisions Limiting Remedies § Exculpatory clauses § Provisions stating that no damages can be recovered § Limitation of liability clauses § Provisions that affect the availability of certain remedies § Liquidated damages § Contract provides a specific amount to be paid as damages in the event of future default or breach of contract

Contract Remedies 30 Most Common Remedies § Rescission and restitution § Specific performance § Reformation § Recovery based on quasi contract § Damages

Contract Remedies 31 Rescission & Restitution § Rescission § A 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 32 Specific Performance § Equitable remedy § Requires performance of the act promised in the contract § Special remedy § Used in cases where the consideration is unique or scarce § Not allowed § Remedy not available in contracts for personal services

Contract Remedies 33 Reformation § Equitable remedy § Court reforms (rewrites) the contract to reflect the parties true intentions § Available when an agreement is imperfectly expressed in writing

Contract Remedies Recovery Based on Quasi Contract § Equitable theory § Party seeking quantum meruit must show the following: § A benefit was conferred to the other party § Party 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. 34

Contract Remedies Damages – Potential Problem 35

Contract Remedies 36 Purpose of Damages § 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. Daly, 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.

Contract Remedies 37 Limitation on Damages § Damages must have been reasonably foreseeable. § This is a significant limitation on damages § Damages that are NOT recoverable: § Speculative damages § Remote damages § Avoidable damages

Contract Remedies 38 Contract Damages: Measure of Recovery Expectation Interest Reliance Interest Restitution Interest

Contract Remedies 39 Expectation Interest § This is the general rule. “Benefit of Bargain” § Party injured by breach of contract is entitled to recover: 1. All damages that accrue naturally from the breach; and 2. 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. 2 d 30 (1984)

Contract Remedies 40 Expectation, cont. § 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. 2 d 824 (1950)

Contract Remedies Reliance Interest § 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. 2 d 105 (1985) § Note: Lost profit is not recoverable § Based on Cost; not Value 41

Contract Remedies Restitution Interest § 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) 42

Contract Remedies 43 Example Greg 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 44 Possible Damages Measure of Damages Total Damages 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 Theory of recovery

Contract Remedies CONTRACT DAMAGES 45

Contract Remedies Types of Damages Compensatory Consequential Incidental Liquidated Nominal Punitive 46

Contract Remedies 47 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 Terminology § Also known as § Actual damages § Direct damages § Includes § General damages § Special damages 48

Contract Remedies 49 Compensatory Damages Measure § Measured by the loss in value of the promised performance. § Difference between the promised performance and the actual performance.

Contract Remedies 50 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 Terminology § 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. 51

Contract Remedies 52 Recoverable When: 1. The consequential damages were in the contemplation of the parties when the contract was made; 2. The consequential damages were the proximate result of the breaching party’s nonperformance; and 3. The amount of the consequential damages is proven with reasonable certainty. Farm Crop Energy v. Old Nat’l Bank, 109 Wn. 2 d 923 (1988)

Contract Remedies Key Test § The breaching party must know (or have reason to know) that special circumstances will cause the additional loss. Hadley v. Baxendale, 9 Exch. 341 (1854). 53

Contract Remedies Do Not Panic § Consequential damages do NOT include § Remote losses § Speculative losses 54

Contract Remedies Examples § Lost profits § Lost use § Damage to business reputation § Business interruption § Material escalation costs § Additional energy costs § Personal injury 55

Contract Remedies Why the Fuss? § Why do parties seek to preclude consequential damages? § Limit potential risk § Reduce uncertainty § Reduce incentive of the nonbreaching party to escalate the dispute 56

Contract Remedies 57 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 Terminology § Also known as – § Stipulated damages § Agreed damages § Unlike other damages 58

Contract Remedies 59 Allowed § Liquidated damages are favored in Washington and are enforceable if they do not constitute a penalty or are unlawful. Jenson v. Richens, 74 Wn. 2 d 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)

Contract Remedies Test for Enforceability § Two-part test for valid liquidated damages provision: 1. When the contract was entered into, was it apparent that damages would be difficult to ascertain in the event of a breach? 2. Was the amount set as damages a reasonable estimate? § If the answer to both questions is yes, the provision may be enforced. 60

Contract Remedies 61 Risk Costs are More than Just Contract Price § Liquidated damages are intended to cover things that can be hard to prove: § New procurement posts § Lost opportunity costs § Sunk resource costs § Administrative costs § Reputational or “political” costs of failed project § Public or third-party costs § Enforcement or collection costs

Contract Remedies Cannot Be A Penalty § 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. 2 d 95 (1975) 62

Contract Remedies 63 Example § Provision requiring a construction contractor to pay $100/day for every day she is late in completing the construction.

Contract Remedies Incidental Damages § 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 breach 64

Contract Remedies 65 Seller’s Incidental Damages § 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 breach

Contract Remedies 66 Buyer’s Incidental Damages § 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 breach

Contract Remedies 67 Nominal Damages § When no actual damages result from a breach of contract; just a technical injury § Typically $1

Contract Remedies Punitive Damages § 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. 2 d 572 (1996); Kammerer v. Western Gear Corp. , 96 Wn. 2 d 416 (1981) 68

Contract Remedies 69 STRATEGIES &TIPS For Negotiating, Drafting, & Administering Contractual Damage Provisions

Contract Remedies The Rules § 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. 70

Contract Remedies Seriously, Words Matter 71

Contract Remedies 72

Contract Remedies CONTRACT NEGOTIATIONS Strategies & Tips for Negotiating Contractual Damage Provisions 73

Contract Remedies 74 Professor Jagger Had it Right

Contract Remedies Have A Plan § Know your goals § Structure the negotiations § Be proactive 75

Contract Remedies Value for Effort § Focus negotiating effort where you can move the dial: § Money § Risk § Don’t over buy 76

Contract Remedies 77 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 Key Questions § What 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? 78

Contract Remedies 79 Process Matters § Don’t just ‘split the difference’ § Agreements should be purposeful § Have a discussion

Contract Remedies 80 Mutuality Myth § 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 majeure

Contract Remedies Why Limit Damages? § To manage deal risk § Revenue recognition 81

Contract Remedies 82 Damage Limitation Should Make Sense § 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 different

Contract Remedies CONTRACT DRAFTING Strategies and Tips for Drafting Contractual Damage Provisions 83

Contract Remedies Negotiate the Deal First § Before you start drafting the agreement, negotiate the deal § Consider § Using a term sheet § Using a letter of intent 84

Contract Remedies Best Practices § 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 contracts 85

Contract Remedies Include ‘Intermediate Remedies’ § Steps short of termination: § Delay credits § Performance Incentives § Payment holdbacks 86

Contract Remedies Beware of Embedded Limitations § Examples § Warranty clauses and limitations § Dispute resolution clause § Definition 87

Contract Remedies Variables § 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 circumstances 88

Contract Remedies Things to Avoid § Ignorance § Don’t ignore the issue § Understand the deal § Understand how and why the agreement allocates risk and reward § Formatting Fever § Don’t just ‘cut and paste’ the ‘legal stuff’ 89

Contract Remedies Form Agreements § 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” terms 90

Contract Remedies Drafting § Be clear & precise 91

Contract Remedies 92 Default & Remedies § Define what will constitute default under the agreement § Be specific § Notice requirement? § Cure period? § Specify remedies available to non- defaulting party

Contract Remedies Limiting Damages § Be very precise about what damages are being excluded § Incidental? § Consequential? § Is there a business basis to exclude certain categories of damages? 93

Contract Remedies Precluding Consequential Damages § 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. 94

Contract Remedies Actual Damages § (True/False): A provision specifying that only “actual” damages are recoverable limits recovery to direct or general damages. 95

Contract Remedies Lost Profits § (True/False): Lost Profits are always consequential damages. 96

Contract Remedies 97 Liquidated Damages § 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 penalty

Contract Remedies 98 CONTRACT ADMINISTRATION Strategies & Tips for Administering Contracts When Breach and Damages Occurs

Contract Remedies Declaring Breach § Contract breach can be okay § Who declares? § Options other than breach 99

Contract Remedies What to Do When Breach Occurs § Develop a strategy for resolution § Enforce agreement § Modify agreement § Do nothing § Action Plan § Act promptly § Provide notice § Mitigate damages § Think end game § Contact your attorney 100

Contract Remedies 101 What You Must Do § Mitigate damages. Avoidable damages are not recoverable. Westland Construction Co. v. Christ Berg, Inc. , 35 Wn. 2 d 824 (1950) § Comply with contract – e. g. , § Notice § Dispute resolution

Contract Remedies TAKEAWAY MESSAGES 102

Contract Remedies Remember § Contracts are business tools § Plan ahead § Be prepared § Know your limits 103

Contract Remedies 104 ADDITIONAL RESOURCES

Contract Remedies 105 Terms: Damages Term Compensatory Damages Consequential Damages AKA § Actual Damages § Direct Damages § Indirect Damages Incidental Damages Examples • Direct losses & costs • • • Lost profits Lost use Damage to business reputation • Any reasonable expenses incident to the breach Nominal Damages § Symbolic Damages • Punitive Damages § Exemplary Damages Liquidated Damages § Stipulated Damages § Agreed Damages • $1 $100/day of delay

Contract Remedies THANK YOU 106