Questions about damages and remedies are not simple to answer and, often, the answers are less than fully satisfying. The overriding framework is that business people don’t really focus on these “leave it to the lawyers” issues until a problem rears its head. Unlike many lease and other agreement issues that are worked out between cooperating parties, when one starts to look at a document or at the law to see “what are my rights, what can I do, how can I be made whole,” the relationship has already broken down. That’s when each side starts counting commas and looking for all of the “notwithstandings.”
Today, we’re going to look at an actual case, one decided at the end of October by a California appellate court. It can be seen by clicking HERE.
It involves the concept of “consequential damages, “exclusive remedies,” and “rent and other charges.” And, as will come as no surprise to regular readers, it teaches us something about using the right words. Oh, yes, it also describes a very familiar process, that process being where lawyers are hired to try to find a way to argue that the words in a lease or other agreement support a conclusion contrary what any objective observer would see as the plain intention of the parties. In the course of that process, the dispute we’ll be describing became the subject of four, count them, four separate appellate proceedings.
The story behind this lease dispute is a short one. Under the terms of a 25- year lease, a drugstore was to build-out its leased space, do some common area work, and “open for business for at least one full day, fully staffed, fixturized and stocked with inventory and merchandise” by a given date. It did none of those things. So, the landlord, after selling the shopping center but retaining its claim against the drugstore tenant, sued for damages and for specific performance. We won’t bore you with why it wasn’t entitled to a court order that the drugstore do the called-for construction, but we will bore you with our Ruminating about why the (now ex-) landlord didn’t get the monetary damages it was hoping to receive.
Setting forth the exact lease language at the center of this case would make today’s blog posting even longer than Ruminations would tolerate. So, instead, we’ll quote the court’s summary as follows:
The remedies limitation provision [that the defaulting tenant] relied on said that, in the event of a breach by [the tenant, the landlord] could “sue for rent and other charges due from time to time under the terms of this Lease,” and also said that “[t]he foregoing remedies of [the landlord] shall be exclusive and are in lieu of any other remedies to which [the landlord] may now or hereafter be entitled to at law. . . .”1 [The landlord] challenged this interpretation, relying primarily on dictionary definitions of the “charges due from time to time” language in the remedies provision.
Take careful note that the court does not use the term, “consequential damages or “loss of profits” when summarizing the nature of the dispute. That’s an important point, one that raises the issue of “parallelism” when writing any agreement. To explain that, we need to show you another particular provision in the lease, again by using the court’s summary:
Article 18(d) of the lease dealt with [the tenant’s] remedies and entitled [the tenant] to sue [its landlord] for damages arising from any uncured defaults, “but not consequential or punitive damages or loss of profits.” This provision also restricted [the tenant] to recovery of its damages from the net rents and other revenue produced by the shopping center, with no right to recover from [the landlord’s] personal assets.
Basically, the (ex-)landlord (which, going forward will be referred-to without the prefix) wanted to collect damages based on the lower rent from other tenants at the shopping center and the lower sales price it suffered because the drug store never built its store or opened for business. We’ve written “consequential damages” several times already, so it’s time to explain that term of art.
Here is our short explanation, but first a warning. Our warning is that with all the litigation over the issue and with all of the various misunderstandings about the term, you can’t rely on any more than the concept we now express. Consequential damages are those that arise indirectly from a contract breach, damages that were not anticipated to flow from the breach. This old rhyme explains how suing for the cost of an entire kingdom would be a claim for consequential damages if your blacksmith left out a nail:
For want of a nail the shoe was lost.
For want of a shoe the horse was lost.
For want of a horse the rider was lost.
For want of a rider the message was lost.
For want of a message the battle was lost.
For want of a battle the kingdom was lost.
Now, for the drafting lesson.
The lease had two limitation of damages provisions – one to protect the tenant, and one to protect the landlord. The one benefitting the landlord said what the landlord would not be responsible for: consequential or punitive damages or damages for loss of profits. The one benefitting the tenant said what the tenant would be responsible for: rent and other charges. At the end of the day, each party enjoyed the same protection, but not until the courts ruled that way.
How much easier and clearer it would have been had the lease employed “parallel” language. To the extent that the business deal was to limit each party’s exposure to claims for damages directly arising from a breach, the lease should have used the same approach for each. Ruminations would suggest something simple such as, “Notwithstanding anything else in this lease or under law, neither Landlord nor Tenant will be liable to the other for consequential or punitive damages.”
Now, we know that some readers want to know why the lower and appellate courts both rejected the landlord’s argument that when the lease said the tenant would be liable for rent and other charges, the lease was using the word “charges” in the dictionary sense. It turned to Black’s Law Dictionary, a favored resource for courts, and found that the term “charge” meant “price, cost, or expense.” It then looked up the term “expense” in a serious dictionary to show that it meant “loss … incurred” and it found that “expense” was defined as a financial burden. With those definitions in hand from respected dictionaries, it argued that the loss it incurred and the financial burden it experienced because the drug store neither built-out or opened were “charges.” It also argued, at a minimum, that if the tenant disagreed with this way to interpret the lease, the lease’s damage provision was “ambiguous” and a trial was mandated to resolve the interpretation issue.
Now for the good part. Ruminations just loves these quotes from within the appellate court’s decision:
A skillful attorney can conjure ambiguities from nearly any document, but such hypothetical difficulties often disappear when the surrounding circumstances are considered.
[Don’t] overstate the importance of dictionary definitions as an interpretative tool.
[Don’t] make a fortress out of the dictionary.
The use of a dictionary to solve a legal problem “can be the subject of easy ridicule.” … The truth behind this potential for ridicule is that dictionary definitions cannot be applied simplistically. For example, the multiple meanings of a word as found in a dictionary cannot be inserted into the text of an insurance policy without regard to the document construed as a whole, the exact context of the language, other basic rules of contract interpretations, and the reasonable expectations of the insured.
The appellate court acknowledged that the landlord’s exclusive remedy was to collect “rent and other charges due from time to time under the terms of this Lease” from the tenant. It looked at the various places in the lease where the term “rent and other charges” was used. Based on its analysis, it held that “rent and other charges under the lease” meant only recurring, specified charges. That meant that the landlord could not collect lost profits or consequential damages resulting from a breach of the lease because such damages were not “charges” dues from time to time under the lease.
How much simpler would it have been for the tenant (who apparently wrote the lease in the first place) to have written: “No consequential damages”? That probably would have saved four trips to the appellate court.
[And, thanks for the many, many supportive messages and comments we got regarding Ruminations having made its 300th blog posting last week. We are humbled by your friendship. Colleagues, let’s keep the discussions alive!]