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Substituted Remedies Clauses
Substituted Remedies clauses are enforceable as the
exclusive remedy for breach of contract when:
1. The parties expressly agree that the substituted remedy is
exclusive
◦ UCC 2-719(1)(b)
2. The substituted remedies clause does not fail of its essential
purpose
◦ UCC 2-719(2)
Substituted remedies clause fails in Kearney & Trecker:
◦
Because K&T didn’t repair/replace and refused to refund $
Buyer’s Remedies When Substituted Remedies Clauses
“Fail of Their Essential Purpose”
Does the “failure of essential purpose” standard really protect nonbreaching parties?
What if both parties to a contract agree to a clause that states: “Buyer
agrees to assume the sole risk of loss due to failure of the machine except
that Seller will try to repair in good faith.”?
◦ Isn’t that clause fail proof? Is there any way plaintiff can get
around such a problem?
What remedies are available to P if the substituted remedies clause is
found to be unenforceable?
Limitations on Consequential Damages
There was also a limitation on consequential damages in K&T as well.
UCC 2-719(3) allows contracting parties to limit consequential damages.
Clauses limiting consequential damages will be upheld as long as they
are not “unconscionable”
◦ Unconscionable = whether under circumstances existing at the time
K formed in light of the general commercial background and
commercial needs of a particular case, the clause is so one-sided as
to be oppressive.
◦ Unconscionability is a difficult standard to meet so clauses like this are not
often struck down.
◦ Every case depends on the circumstances and evidence pertaining to the
general commercial practices, needs of a particular case and the operation
of the clause against P. You really need to pay attention to the
circumstances at the time of contract in such cases.
What happens when contract contains both clauses and
substituted remedies clause fails? (actual issue in Kearney
& Tracker)
There are two major approaches by the courts:
◦ Majority approach (maybe only just barely) – If the substituted remedies
clause fails, the clause limiting consequential damages still stands
(unless it fails on its own as unconscionable).
◦ Why this approach?
◦ Minority approach – Both clauses (substituted remedies & clause
limiting consequential damages) fail and are unenforceable – B can go
after all available remedies under the UCC.
◦ Why this approach?
Liquidated Damages
Defined: clauses where parties agree that breaching party
will pay a sum certain in damages if one party breaches
Purposes:
◦ To allow risk allocation in situations where damages are often difficult
to measure.
◦ Avoid lengthy litigation regarding damages.
◦ To compensate plaintiff (roughly) for losses.
Due to the fixed nature of liquidated damage awards, questions arise as
to whether liquidated damages clauses operate as a penalty.
◦ Courts will NOT enforce them if the clauses are operate as a penalty.
Liquidated Damages & Penalty Analysis
Most common standard applied by courts (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.” (judged at time of contract)
What does this standard mean?
◦ Applied as a sliding scale – The harder it is to estimate actual damages at
time of contract, the less carefully one must prove liquidated damages &
anticipated damages actually approximate one another. The easier it is to
estimate actual damages at time of contract, the more closely courts will
scrutinize the approximation between liquidated and anticipated damages
Missouri courts apply a standard nearly identical to TWA standard
◦ “Are damages a reasonable forecast of just compensation in event of
breach and are actual damages difficult to accurately estimate at time of
contract”
More on standards re liquidated damages
Restatement (Second) Contracts §356 & UCC 2-718 –
worded slightly differently from TWA/Missouri common
law standards
◦ Both allow liquidated damages if LD provision
reasonably approximates anticipated damages OR
actual damages

It is common for courts to interpret Restatement &
UCC in light of the prevailing common law approach.
So even though the test’s look sort of different they
are often applied as the TWA court applied its
standard
Why was Sec. 17 of the contract in In re TWA a penalty?
TWA standard: 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.”
What did the L.D. clause provide?
What were Interface’s anticipated damages?
Applying the Rules of Liquidated Damages
A, who had 15 years experience in the jewelry business working with others, decided
to open his own company. He acquired some land in a commercial business area and
contracted with B’s Engineering Co. to construct a building for his store. A wanted
the building completed by 9/1 in order to take advantage of the historically strong
jewelry sales that occur in the last quarter of the calendar year. Accordingly, the
parties agreed that B would pay $200/day for every day past 9/1 that the building
was not completed. This amount represented a rough estimate of A’s daily lost
profits while the store wasn’t open.
◦ B was two weeks late finishing the construction of the building. A wants
to enforce the clause. Can A– i.e., is it a valid clause?
◦ Assume the liquidated damages clause called for the amount (initially
$200) to double each day that the work was not finished. B was two
weeks late finishing the construction of the building. A wants to enforce
the clause. Can A?
A few twists on the rules – cont’d:
Assume the clause called for $200/day liquidated damages (a reasonable estimate of
potential losses at the time of contract). B finished the building two weeks late. But A
took and filled sale orders over the Internet; he worked during those weeks anyway.
Thus, there is strong evidence that A’s actual damages were $0. A wants to enforce
the clause. Can he under the most common approach to assessing such clauses?
Depends. Some courts would enforce the clause if it was a reasonable estimate of
damages when the contract was entered and actual damages were hard to estimate.
BUT:
“Second look courts”: Some jurisdictions require P’s actual and anticipated
damages to be roughly proportionate – when actual damages are much lower
than anticipated/liquidated they won’t enforce the clause
“Actual loss” requirement: Some courts require actual economic harm before a
party can invoke a liquidated damages clause.
◦
Here A has no harm. Even $100 in total damages would allow him to
invoke the clause.
No. Illinois Gas – a twist on Liquidated Damages
•What are P’s actual versus liquidated damages?
•Under UCC 2-718, how would P avoid enforcement of this undercompensatory liquidated damages clause?
•So how does P argue that the liquidated damages clause should not be
enforced?
•How does the court respond to P’s argument?
•Is the court’s bright line distinction between clauses covered by 2-718
and 2-719 sensible?
Situations like N.I. Gas often turn on whether the LD
clause is exclusive - How do courts handle?
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