XII. LIQUIDATED DAMAGES

A. Definition: A "liquidated damages clause" is a provision, placed in the contract itself, specifying the consequences of breach. (Example: Contractor contracts to paint Owner's house for $10,000. In the basic contract, the parties agree that for every day after the deadline that Contractor finishes, the price charged by him will be reduced by $100. This provision is a liquidated damages clause.)

B. General rule: Courts will enforce liquidated damages provisions, but only if the court is satisfied that the provision is not a "penalty." That is, the court wants to be satisfied that the clause really is an attempt to estimate actual damages, rather than to penalize the party for breach by awarding "damages" that are far in excess of the ones actually suffered. Therefore, in order to be enforceable, the liquidated damage clause must always meet one, and sometimes two, requirements:

1. Reasonable forecast: The amount fixed must be reasonable relative to the anticipated or actual loss for breach; and

2. Difficult calculation: In some courts, the harm caused by the breach must be uncertain or very difficult to calculate accurately, even after the fact.

C. Reasonableness of amount: All courts refuse to enforce liquidated damages clauses that do not provide for a "reasonable" amount.

1. Modern view: Courts disagree about the time as of which the amount must appear to be reasonable. Most courts today will enforce the clause if either: (1) the clause is a reasonable forecast when viewed as of the time of contracting; or (2) the clause is reasonable in light of the actual damages which have occurred.

a. Unexpectedly high damages: This means that a clause which is an unreasonable forecast (viewed as of the time of contracting) can still be saved if it turns out that P's damages are unexpectedly high, and therefore in line with the clause.

2. No loss at all: Courts are split about whether to enforce a liquidated damages clause where P has sustained no actual losses at all. The Restatement does not enforce the clause if it turns out that no actual damage has been sustained.

3. Blunderbuss clause: A "blunderbuss" clause stipulates the same sum of money as liquidated damages for breach of any covenant, whether trivial or important. Where the actual damage turns out to be trivial, most courts will not enforce a blunderbuss clause (or will interpret the clause as not applying to trivial breaches).

a. Major loss: But if the breach turns out to be a major one (so that the liquidated amount is reasonable in light of the actual loss), courts are split on whether the blunderbuss should be enforced. The modern view is to enforce the blunderbuss where the actual loss is roughly equal to the damages provided in the clause.

D. UCC rules: The UCC basically follows the common-law rule on when a liquidated damages clause should be awarded. The UCC follows the modern view, by which the party seeking enforcement of the clause will succeed if the sum is reasonable viewed either as of the time the contract is made or viewed in light of the actual breach and actual damages. See UCC §2-718(1) (clause enforceable if "reasonable in the light of the anticipated or actual harm caused by the breach…").

XIII. DAMAGES IN SALES CONTRACTS

A. Where goods not accepted: If the buyer has not accepted the goods (either because they weren't delivered, or were delivered defective, or because the buyer repudiated), the UCC gives well-defined rights to the injured party:

1. Buyer's rights: If the seller fails to deliver at all, or delivers defective goods which the buyer rightfully rejects, the buyer has a choice of remedies.

a. Cover: The most important is his right to "cover," i.e., to buy the goods from another seller, and to recover the difference between the contract price and the cover price from the seller. §2-712(2). The buyer's purchase of substitute goods must be "reasonable," and must be made "in good faith and without unreasonable delay." §2-712(1).

b. Contract/market differential: If the buyer does not cover (either because he can't, or decides he doesn't want to), he can instead recover the contract/market differential, i.e., the difference between the contract price and the market price "at the time when the buyer learned of the breach.…" §2-713(1).

i. Time of breach: Typically, the buyer "learns of the breach" (setting the time for measuring the market price) at the time the breach in fact occurs (either through non-delivery or through receipt of defective goods). But if the breach takes the form of a repudiation in advance of the time for performance, most courts hold that the market price is to be measured as of the time the buyer learns of the repudiation. (See above.)

ii. Probably not available to covering buyer: Probably the buyer may recover the contract/market differential only where he did not cover. This means that if the market price declines between the time the buyer learns of the breach and the time he covers by buying substitute goods, the buyer can't get a windfall — limiting him to the contract/market differential puts him in the same position he would have been in had the contract been fulfilled, not a better one.

c. Consequential and incidental damages: The buyer, regardless of whether he covers, may recover for "incidental" and "consequential" damages.

i. Consequential: Consequential damages include the profits which the buyer could have made by reselling the contracted-for goods had they been delivered. But remember that these profits must be proved with appropriate certainty, and must be shown to have been reasonably foreseeable at the time of the contract.

ii. Incidental damages: "Incidental" damages include such items as transportation expenses, storage expenses, and other small but direct expenses associated with the breach and buyer's attempts to cover for it.

d. Rejection: All of the above are judicial remedies. But the buyer who receives non-conforming goods can also exercise the self-help remedy of rejecting the goods. The buyer thus throws the goods back on the seller and cancels the contract. (Observe that where the buyer has actually made a losing contract, rejection lets him escape his bad bargain.)

2. Seller's damages for breach: Where it is the buyer who breaches, by wrongfully refusing to accept the goods (or repudiating the contract before shipment is even made), the seller has several possible remedies:

a. Contract/resale differential: Normally, the seller will resell the goods to a third party. Assuming that the resale is made in good faith and in a "commercially reasonable" manner, seller may recover the difference between the resale price and the contract price, together with incidental damages.

b. Contract/market differential: If the seller does not resell the goods, he may recover from the breaching buyer the difference between the market price at the time and place for delivery, and the unpaid contract price, together with incidental damages. §2-708(1). (Probably a seller who has resold the goods may not use this contract/market differential, but must use the contract/resale differential.)

c. Lost profits: The contract/resale differential (for a reselling seller) and the contract/market differential (for a non-reselling seller) may not make the seller whole. Where this is the case, §2-708(2) lets the seller recover his lost profits instead of using either of these differentials.

i. "Lost volume" seller: Most importantly, this means that the "lost volume" seller may recover the profit he has lost by reason of the breach. In the usual case of a seller who has resold the item, a "lost volume" seller is one who (1) had a big enough supply that he could have made both the contracted-for sale and the resale; (2) probably would have made the resale anyway as well as the original sale had there been no breach; and (3) would have made a profit on both sales.

Example: Auto Dealer sells cars made by Smith Motors. Auto Dealer can get as much inventory from Smith as Auto Dealer can sell. Auto Dealer contracts to sell a particular 1990 Thunder Wagon to Consumer for $10,000. Consumer repudiates just before delivery. Auto Dealer resells the car for the same $10,000 price to X, a walk-in customer. The traditional contract/ resale differential (here, $0), would not make Auto Dealer whole, since he could have sold cars to both consumer and X and made a profit on each. Therefore, Auto Dealer can recover from Consumer the profit he would have made had the contract with Consumer been fulfilled. Auto Dealer is on these facts a "lost volume" seller.

d. Action for contract price: In a few situations, the UCC allows the seller to sue for the entire contract price:

i. Accepted goods: First, if the buyer has "accepted" the goods, the seller may sue for the entire contract price (though the buyer has a counterclaim for damages for non-conformity). (Example: Buyer orders 10 widgets at $50 each from Seller. Seller ships the goods late, but Buyer keeps the goods for 30 days without saying anything. Buyer will be held to have "accepted" the goods, and Seller can therefore sue for the entire contract price, $500. But Buyer may counterclaim for the damages he has actually suffered due to the late delivery.)

ii. Risk of loss: Second, if the risk of loss has passed to the buyer, and the goods are lost in transit, the seller may sue for the entire contract price. (Example: As per the contract, Seller ships goods "F.O.B. Seller's plant." The goods are destroyed while on the trucking company's truck. Seller can sue for the whole price; Buyer's remedy is against the trucker.)

iii. Unresaleable goods: Lastly, if the seller has already earmarked particular goods as being ones to be supplied under the contract, and the buyer rejects them or repudiates before delivery, seller may recover the entire contract price if he is unable to resell them on some reasonable basis. Most commonly, this applies to perishable goods and custom-made goods.

e. Incidental damages: A seller who pursues and achieves one of the four above remedies (resale, contract/market differential, lost profits, action for price) may also recover "incidental damages." These include such items as transportation charges, storage charges, and other charges relating to the seller's attempt to deal with the goods after the buyer's breach. See §2-710.

f. Consequential damages: Nearly all courts hold that the seller may not recover "consequential damages." This is a big difference from how buyers are treated.

B. Accepted goods: If the buyer has accepted the goods (and has not rightfully revoked this acceptance), then the remedies given to buyer and seller are different:

1. Seller's action for price: If the buyer has accepted the goods, the seller may recover the full contract price. (But if the goods are non-conforming, Buyer may counterclaim for breach of warranty.)

2. Buyer's claim: If the buyer has accepted the goods, and they turn out to be defective, buyer's remedy is to sue for breach of contract.

a. Breach of warranty: Most importantly, buyer may sue for breach of warranty. These may be either express warranties or warranties implied by the UCC. The measure of damages for breach of warranty is "the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount." §2-714(2).

b. Non-warranty damages: Buyer may also be able to recover for non-warranty damages. For instance, damages resulting from seller's delay in shipping the goods, or his breach of an express promise to repair defective goods, may be recovered on top of or instead of breach-of-warranty damages.