So last week I discussed about the main types of damages that you would likely ask for in a breach of contract lawsuit. While that post covered compensatory, consequential, and liquidated damages there are few other types of remedies in a lawsuit that you should be aware of when you enter into the calculus of whether to sue or not, or if you are entering into a shaky contractual relationship that may expose you to the risk of a lawsuit. So let’s get to it for this week!
Penalty (Punitive) Clauses: Don’t Hide Masquerade Them as a Liquidated Damages Clause
So remember last week that I mentioned that a often times in sophisticated contracts that the parties know what is the value of the deal, and would like to prevent the other side from non-performing. Many times this clause is a Liquidated Damages clause that says if Party A does not perform it will owe Party B X amount of dollars because of non-performance. Sometimes, overzealous business owners, fearful that a valuable deal will go under try to turn a Liquidated Damages Clause into a penalty provision. They would rather punish the other side for their non-performance. Penalty (also known as punitive) damages are virtually NEVER enforced.
Let me say this in all caps to be clear: A LIQUIDATED DAMAGES CLAUSE THAT IS ACTUALLY A PENALTY CLAUSE WILL NOT BE ENFORCED UNDER HAWAII STATE LAW. Kona Hawaiian Assocs. v. Pacific Group, 680 F.Supp. 1438, 1449 (D.Haw.1988). Furthermore, under Hawaii law, liquidated damages contained in a contract can only be enforced if there is a “reasonable relation” between the liquidated damages and the amount of the party’s actual damages. Shanghai Inv. Co. v. Alteka Co., 92 Hawai’i 482, 993 P.2d 516, 528 (2000),
Bottom line: when calculating how much the deal is worth to you and reducing it to a written agreement be “reasonable” in your assessment of what the other side will owe you in non-performance, as you don’t want to pay for an expensive contract that is not going to be enforced. Also don’t let emotions get the better of you, as you trying to put the hurt on the other side because they broke the deal and it will hurt your honor is not something that is a part of contract law.
Statutory Damages: The Government is on Your Side
Statutory damages are legal penalties . . . I know what you are thinking, he just wrote that you can’t get punitive damages. Yes, that is absolutely right under contract law. However, in many instances the breach of contract is not the only claim that is brought in a lawsuit.
A good attorney gave me a great analogy for the way the court system works. The goal of the plaintiff’s attorney is to throw a plate of spaghetti at the wall, this represents the claims that the injured party (the plaintiff) is making against the other side. The goal of the defendant’s attorney is to take the spaghetti off the wall, that is defend from each claim and argue why they should not “stick” to the defendant. Let me add to this analogy, imagine that the noodles represents certain kinds of claims (in this case contracts) and the meatballs are another set (torts). Without getting into further legalese, suffice it to say each claim works in a different way, and if the plaintiff’s claims remain successfully “stuck” on the defendant’s wall, they must pay.
For contract claims, we have already gone through the four. However, as I just said you will likely not just see a breach of contract claim in an expensive lawsuit. A plaintiff will likely bring in other claims, such as fraud, misrepresentation, interference of contractual relationship, etc . . . . All of these claims are not ones directly on the contract, but the surrounding facts that could be argued that the defendant owes the plaintiff more. You see the government has created some of these laws (statutes) to deter certain kinds of behavior. The government, for the sake of business health, it would rather not see people lie or intentionally damage the other side’s reputation. Therefore, statutory damages represents a deterrence and compensation.
Bottom line: the facts in a breached contract situation may give rise to statutory claims due to the other side’s misdeeds,but these are NOT a part of the contract law. Notice, that for all the contract damages you can only recover so much (as they are stipulated under the contract), but non-contractual claims are not bound by the agreement, and may give the non-breaching side greater damages.
That’s it for this week. Next week we will cover another set of remedies, such as can you make the court force the breaching side to actually perform under the contract as originally agreed upon? See you then!
[author] [author_image timthumb=’on’]http://www.alohastartups.com/wp-content/uploads/2011/09/RyanKHew.png[/author_image] [author_info]I am a practicing attorney in Honolulu, HI helping small businesses with their transactional and compliance needs. Contact Me Today: Web| 808.944.8400 @RKHewEsq Ryan K. Hew, Attorney At Law[/author_info] [/author]
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.