November 30, 2022
As commercial lawyers, we spend more than half of our time living and breathing contracts. You could say we make a living out of the “small print.” Whether it is in drafting, negotiating or litigating contracts, any commercial lawyer can tell you that the old adage “Buyer Beware” has some painful and real consequences in the world of contract interpretation.
Not only are people bound by contracts they execute to which they may not have completely read or even understood, one of the more pronounced impacts is that the contract may limit a party’s time for remedying problems, the type of remedy or even the amount of remedy. Although common, not all of these limitations are the same or have the same impact, but they may be quite effective.
Most contracts for services and goods have a clause which limits the liability of one or more of the parties. It is typically in all capital letters or bolded print and essentially states that the party “DOES NOT MAKE, AND HEREBY DISCLAIMS, ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO. . .” This clause, which is typically upheld (except in certain consumer transactions), allows a party to say you are only getting what is stated in this agreement and nothing more. Basically, “if it is not on the page, it’s not on the stage.”
Contracts also frequently contain another paragraph, which states that “IN NO EVENT SHALL SELLER BE LIABLE TO CUSTOMER FOR ANY LOST PROFITS OR REVENUE, OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, PUNITIVE OR SIMILAR DAMAGES, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.”
The dirty cousin to this clause is a limitation clause which limits the total amount of the damages. It generally states “IN NO EVENT SHALL THE TOTAL LIABILITY UNDER ALL CLAIMS MADE UNDER THIS AGREEMENT EXCEED THE TOTAL AMOUNT OF FEES PAID UNDER THIS AGREEMENT BY CUSTOMER.”
In commercial contracts and some consumer transactions, these clauses are enforced and have the impact of limiting the ability of the nonbreaching party to be made whole and recover all of the financial consequences of a breach. For instance, you may be prohibited from recovering your loss of revenue while they fix the problem or additional money you spend while waiting for the fix. These clauses can be fought depending on the specific facts of the dispute, but frequently these are enforced and effectively prohibit any recovery for damages other than those directly related to the good or service purchased. The effectiveness may vary by state as well and the approach taken by various courts to addressing them.
The best practice when presented with these agreements is to assess the realistic liability and costs should a breach occur and then agree to something which reasonably covers those risks or keeps the risk of breach fairly balanced between the parties.
Limiting Remedies or Timing of Remedy
Many contracts also state “THE ONLY REMEDY AVAILABLE FOR BREACH, AT THE OPTION OF THE SELLER, IS TO REPAIR OR REPLACE.” Assuming such a clause doesn’t undermine the entire purpose of the agreement, the Courts may enforce such a clause.
Similar contract language which states “NO ACTION ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT MAY BE BROUGHT MORE THAN ONE (1) YEAR AFTER THE FIRST TO OCCUR OF (A) THE TERMINATION OR EXPIRATION OF THIS AGREEMENT OR (B) THE EVENT GIVING RISE TO SUCH CAUSE OF ACTION.” Although consumer transactions generally will not enforce clauses such as this which effectively shorten the timeframe for remedying a problem, they are frequently enforced in commercial contexts.
There may also be contractual language which seeks to limit the damages to a specific defined amount or formula which are known as “liquidated damages.” Generally speaking, these clauses are permitted by law but are narrow in the instances when they may be used. The big question courts answer before enforcing one is whether the parties could not reasonably estimate the damages which would have occurred from a breach at the time they entered into the contract. If the damages are seen as a penalty and not a legitimate effort at damages, the Courts will not enforce them
Limiting the Forum for Pursuing the Remedy
Most well written contracts include a clause stating the applicable state law which applies to interpreting the agreement and the forum (whether in court or in arbitration) for pursuing breaches. Frequently these are enforced but may be modified depending on the circumstances. In any event they need to be understood before signing so that you know whether you may be dragged halfway across the country to obtain justice in a breach situation.
An ounce of prevention truly is worth a pound of cure. Know what you are signing before you enter into a contract. You may not be able to change things but at least you know the consequences and can reasonably assess whether you like the risks. If you need help, we can assist with drafting, negotiating, or litigating your contract dispute.
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