Without a remedy, your lease or other contract is suitable only for framing. And, to save you a trip to the mall, the range of standard size frames does not include 8-1/2 by 11 inches. In two prior Ruminations’ postings – HERE and HERE – we’ve reviewed the kinds of remedies, in the form of damages, that are the backbone of “enforcement.” Today, we’ll complete the three- part series. In a couple of weeks, we’ll try to wrap this topic up with an applied example discussing damages following a tenant’s eviction. But, for today, we feel compelled to complete the “foundation.”
Sometimes, money damages just won’t “cut the mustard.” To get what you’ve bargained for, you need to get the other party to actually do something it should do or to stop doing something it shouldn’t be doing or threatening to do. That calls for an “equitable order.” The ultimate goal is to have a court hear all sides of the dispute, cogitate, and decide if the requested relief is warranted. If it agrees with the complaining party, it will issue a “Permanent Injunction” that orders people or entities to do something or to refrain from doing something. But, that takes time. So, there is a possible two-stage lead-up to getting or trying to get a Permanent Injunction.
The two possible preliminary court orders are considered “extraordinary” remedies because, if issued, it would happen prior to a full blown hearing of the issues. Nonetheless, the law recognizes that if the status quo isn’t preserved, a Permanent Injunction may come too late to protect an aggrieved party. So, there is something called, not so surprisingly, a “Preliminary Injunction.” It can be issued if you convince a court that: (a) you’ll probably prevail on the merits; (b) you would be irreparably harmed if you didn’t get immediate relief; (c) the other side won’t be anywhere nearly as badly harmed; (d) the public interest won’t be offended; and (e) the court won’t have to be a babysitter. If an award of money damages would be appropriate compensation, you won’t pass the “irreparable harm” test. Also, you might have to post a bond or provide other security if you turn out to be wrong and the other side is financially hurt by the Preliminary Injunction.
To get a Preliminary Injunction, you’ve got to give the other side notice of your request and there will be a hearing. In limited circumstances, going through that process may take too long to protect the complaining party. So, there is a more rarely granted form of relief, the “Temporary Restraining Order” or “TRO.” It is a stop gap measure and might be effective for only a few days (up to ten, with a possible ten day extension, in our Federal court system). It might be granted before the other side is notified, but that would be rare in a lease or similar contract case. Perhaps, it would be granted if it were 10 a.m. and the landlord has threatened to use self-help and shutter a store by 2 p.m. Basically, its purpose is to buy time to allow a hearing on a request for a Preliminary Injunction.
Injunctions are enforced by the courts against people or entities who violate them. The process is to find the violator in contempt of court and to impose fines and even to imprison the violator. These are considered to be “coercive” orders. Just because they are later dissolved doesn’t mean the violator is off the hook if it violated the order before it was dissolved.
Another short word about restitution, a topic we introduced in an earlier posting. Sometimes, one person does something as if it had a contract, but there really wasn’t an enforceable agreement in the first place. It could be that one party made a reasonable promise to the other and the recipient of that promise reasonably did something significant based on that promise. In such a case, a court might create a “quasi-contract,” as if there were a “real” contract, and then make a monetary award to the one who acted on the promise. Similarly, imagine there was an emergency threatening the entire building in which a tenant had a lease and the landlord couldn’t be reached. If the tenant expended money to “save” the building and doing so was reasonable, a court would say the landlord’s agreement to repay the tenant was implied by the facts. The tenant wouldn’t need to have a right in its lease to undertake the emergency repair in order to be compensated. In the mind of the court, no landlord would have denied its consent and the tenant, under the same “quasi-contract” doctrine, would be entitled to compensation for the value of what it did.
Earlier, Ruminations promised to describe a “Declaratory Judgment,” so here is where we deliver on that promise. In the context of agreements, such as leases, such a judgment is available where the parties have an actual dispute over the meaning of a provision. The thought is that if a court “declares” the provision’s meaning, the parties will be able to resolve any resulting rights and duties.
Interestingly, an award of “nominal damages” is similar to a Declaratory Judgment in some respects. If an aggrieved party is “right,” but its actual damages are inconsequential, it will get Nominal damages, perhaps a dollar. That award serves to “declare” to the other party that its own understanding of the agreement was wrong. In some jurisdictions, an award of Nominal damages alone will allow the “winning” party to get attorneys fees (if the contract provides for them).
A common term used in leases and other agreements is “Liquidated Damages.” Sometimes the parties decide to spell out a certain amount of money to be paid by one to the other if there is a breach of the agreement. If the parties do this in the right way, that amount constitutes “Liquidated Damages.” If they do it the wrong way, courts call that amount an “unenforceable penalty.” It might still be “liquidated damages,” but if unenforceable, it isn’t worth a lot to either party. If unenforceable, the claiming party will need to prove its actual damages. You get the idea.
What distinguishes an enforceable Liquidated damage from an unenforceable penalty? Here are the rules, but be aware that if a judge doesn’t feel “right” about the amount, the agreed-upon amount of Liquidated damages will be characterized as unenforceable even if you think you’ve followed the rules. A Liquidated Damages provision goes into the agreement itself. Its enforceability is premised on there actually being damages that could not reasonably be calculated when the breach occurs. This is a prime focus in deciding their enforceability – how difficult would it be to calculate the damages that would result from the breach. In such a case, the parties can make a reasonable estimate as to what those damages might be and that would be an acceptable number, if and only if the court agrees that it was a reasonable estimate. If the “guilty party” just decides to “write the check,” there is no dispute to go to court. If it doesn’t and the other criteria are met, the action is just over the reasonableness of the amount. Theoretically, the reasonableness is only to be tested as of when the agreement was written – what would have been reasonable given what the parties thought might happen in the way of damages. In practice, and for good reason, looking at what actually happened will inform the court as to what was reasonable “way back when.” This is called using hindsight. So, if there is a big, big gap between the amount of stated Liquidated Damages and what the damages really looked like after the problem materialized, a court will find the agreed upon amount to be an “unenforceable penalty.”
Give me an example, you say? Late fees are tested under the Liquidated damage analysis. A one-time 5% late fee would probably be an acceptable Liquidated Damage, but 5% a week or a 25% late fee in a lease would probably not pass muster. Where are these useful, you ask? Liquidated damages make sense when the loss will be to profits, because who can really figure what was “lost” with the precision the law requires in the way of proof?
If your agreement has an (enforceable) Liquidated Damages provision, you can’t choose to sue for alternate damages by proving a larger amount. But, if a court doesn’t accept your agreement as one for valid Liquidated Damages, you don’t lose your right to damages; in such a case, you just need to prove your actual damages. Pretty simple, huh?
We’re coming to the end. Just hang on.
What do people do if they find a mistake in their contract? They amend it to conform it to their actual understanding. But, what if there is a mutual mistake and it is material, but one party doesn’t want to “fix” the contract? For that situation, there is the remedy of “Reformation.” Here, a court will even take evidence of discussions preceding the contract’s execution. It will “correct” the contract to make it say what the complaining party actually proves to have been the agreement. It doesn’t matter if the contract says that prior agreements can’t change the contract (merger and integration clauses) because those don’t prevent the use of prior discussions to “explain” what the parties actually intended or to correct the writing that came out of that understanding.
Similarly, if the parties to a contract agree to terminate it, they can. But, what if one party alleges that there was a serious mistake, possibly mutual or possibly unilateral, but so big as to make it clear that the mistaken party would never, ever have agreed to sign it, often a mistake that the other party could have pointed out during negotiations, but didn’t? What if there was fraud involved? Or, a serious misrepresentation or real duress? What if the contract is unconscionable (whatever that really means)? How does the “put upon” party get the contract terminated if the other won’t agree. For that, there is the remedy of Legal Rescission. This is an extraordinary remedy. So, don’t expect to simply trot to a court and tell your sad tale of woes. Almost always, it is all or nothing. While partial rescission is possible, that’s only available where a contract is divisible. It is hard to envision a divisible real estate contract other than for unrelated locations without any real connection between the parcels.
Ruminations has done too many pieces lately that could fairly be characterized as “pure law.” So, we’re going to try to stay away from those topics for a while. Not all readers are “into” the law, even though all readers are bound by, and affected by, “the law.” In a couple of weeks, we’re going to talk nuts and bolts about a very common damages situation, that being what a defaulting tenant might owe to its landlord after its lease has been terminated by reason of the default. We’ll also revisit “attorneys’ fees” later in the year. So, in two weeks, for the most part, we’ll be putting away our law books and taking out our math books and calculators. Be prepared.