Be Slow to Waive Consequential Damages

CHICAGOLAWBULLETIN.COM MONDAY, JULY 27, 2015

Volume 161, No. 145 Be slow to waive consequential damages ust about every purchase be measured by the cost necessary would have occupied had there and sale agreement to put the purchaser in the BY EUGENE J.M. L EONE been no breach – but not a penny affecting real property position it would have been had Eugene J. M. Leone is the managing more. contains a provision titled the breach not occurred. partner of the Chicago office of Unfortunately for the parties, “Waiver of Consequential Practitioners often describe direct Pircher, Nichols & Meeks. He focuses the next stop in this journey is the JDamages.” The caption and the damages as those that are the on commercial real estate matters, courthouse. The difference location of these provisions, often natural, probable and reasonable including joint ventures, acquisitions, between direct and consequential buried in the agreement’s miscella - consequence of a breach. dispositions, leasing, financings and damages will become a fact neous section, make them traps • Incidental damages are workouts. Leone can be reached at intensive analysis, twisted and for the unwary purchaser. generally the out-of-pocket costs a [email protected] and 312-915-3113. contorted to conform with each The provisions come in different purchaser sustains to correct a party’s view of the law defining shapes and sizes, but the key breach of a covenant, representa - property’s wastewater, the seller direct and consequential damages. terminology is substantially the tion or warranty. They are closely did represent that the property If the law does not provide a same from one provision to the akin to direct damages. was not the subject of any notices simple or understandable distinc - next. “Each party hereby forever • Consequential damages are of violation of applicable laws. tion between direct damages and waives and releases, and the losses that a purchaser However, the municipality had consequential damages, the covenants not to seek or retain, sustains as a result of a breach issued a notice that the leach field parties are left to time-consuming any claims for consequential, inci - that would not normally and failed to comply with the city’s and expensive legal proceedings. dental, indirect, special or punitive necessarily result from the breach ordinance and mandated repairs. The lesson is simple enough: A damages as against the other in the absence of some special or The seller had previously purchaser waives the right to party.” That is a broad waiver. unusual circumstance. performed certain required recover consequential damages at Punitive damages arise outside A bright-line test for the differ - repairs and therefore deemed the his or her peril. But, in light of the a contract and are therefore likely ence between direct damages and violation to have been cured. prevailing custom of waiving to be unavailable on account of a consequential damages does not However, by failing to obtain an consequential damages in real contractual breach. The U.S. exist. Courts have generally inspection and sign-off, the seller property purchase and sale agree - Supreme Court said in City of described direct damages as those failed to cure the violation. The ments, how can a purchaser Newport v. Fact Concerts Inc. , 453 that naturally and generally result purchaser closed and subse - achieve a good result? U.S. 247 (1981), “punitive damages from the breach, and consequen - quently learned of the property’s Instead of using the term conse - by definition are not intended to tial damages as those that are the violation of law and the seller’s quential damages, consider compensate the injured party, but consequence of special or unusual breach. waiving “remote” or “speculative” rather to punish the tortfeasor circumstances. The challenge is in Under the purchase agreement, damages. Avoid including “inci - whose wrongful action was inten - determining what exactly qualifies the purchaser waived its right to dental damages” in a consequential tional or malicious, and to deter as special or unusual circum - recover consequential damages in damages waiver since, as stated him and others from similar stances. Consider the following — the event of the seller’s breach. above, incidental damages are extreme conduct.” a real life example. What are the purchaser’s often a form of direct damages. Since punitive damages are not, The purchaser of a luxurious damages? The cost of the analysis Also avoid the term “lost profits.” for the most part, available on spa hotel acquires an operating, and repairs ($150,000) are Lost profits in a nascent business account of a contractual breach, fully functional property, but certainly direct damages. But venture are quite a bit different and since claims outside a shortly after closing finds that the what about the lost revenue and from lost profits at an operating contract are remote, a purchaser leach field is incapable of net operating income? Are these hotel. Be as specific as possible in can readily accept a waiver of providing adequate drainage for consequential damages or direct defining the damages that are punitive damages. the property’s wastewater. The damages? being waived, and further, provide Consequential damages are an municipality with jurisdiction over Certainly every purchaser an example of the type of damages altogether different matter. the property orders the purchaser confronting this set of facts would that are not being waived. However, before we explore the to curtail its operations while the take the position that the lost Finally, perhaps the best way for impact of a consequential condition is studied, the repairs revenue is the natural, probable a purchaser to address consequen - damages waiver, we should review are designed, the work is and reasonable consequence of the tial damage waivers may be to do the three principal types of permitted and the corrective work seller’s breach. These are direct away with them altogether. damages that a real property is performed. damages, and the purchaser is Somewhat surprisingly, a seller purchaser could suffer and their The estimated downtime is entitled to recover them. The may be receptive to the request. close relationship to one another. approximately six months. The municipality’s action in shutting In light of the overall cap on • Direct damages, which are cost of the analysis and repairs is down a portion of the property is a damages that a seller often also referred to as general projected to be about $150,000, reasonable and foreseeable conse - demands from a purchaser, it is damages, are losses that are the but the lost revenue is approxi - quence of the failure of the not unreasonable for a purchaser necessary and usual result of the mately $800,000, and the lost net property to comply with appli - to say “we cannot recover very kind of breach committed without operating income falls somewhere cable law. much in absolute terms, but we considering any special circum - between these two figures — Not so fast, asserts the seller. should not be in a position where stances. depending upon who is performing The cost of repairs corrects the we have a good claim, and we While direct damages are often the calculation. breach. Who knows how much cannot recover our damages.” If measured as the difference Although the seller did not revenue could have been earned we have a good claim, we deserve between the value of the asset as represent and warrant the by the property? The seller offers to be made whole — at least to the purchased and its fair market adequacy of the leach field or its to pay the cost of putting the limit of the seller’s post-closing value, direct damages could also sufficiency for handling the purchaser in exactly the position it liability.