Kent County Circuit Court — The BUSKLAW Newsletter

November is the month of Thanksgiving. And Thanksgiving for most folks means time with family and friends (better yet, family who are friends), an appropriate but modestly-priced wine, and a turkey. Turkeys should live their brief sojourn on this earth in relative peace before winding up on our table. But that was not to be for the poor fowls in the recent Kent County (MI) Circuit Court case of White Acres, LLC et al v. Shur Green Farms, LLC et al.

The case involves a plethora of parties (hence the "et al"), all of whom were in the distribution chain of a biofuel called Lascadoil. Unlike its parent product, Lasalocid, Lascadoil is not an appropriate turkey-feed additive. (Does anything with "oil" in its name sound fit for human or animal consumption?) So when a bunch of turkeys died after eating feed tainted with Lascadoil, the lawsuits started flying; each party was sued by its downstream buyer who in turn sued its upstream seller. And numerous insurance companies entered the fray.

Before discussing the case itself, we need to talk about the differences between tort and contract claims. In the law, a tort is a civil wrong having the elements of duty, breach of duty, causation, and damages. Wrongful death is a common tort. For example, we go pheasant hunting, and I wave my loaded shotgun in your face. It discharges. You are killed entirely. Your estate sues me, alleging that I had a duty to handle my firearm safely. I breached that duty by discharging my loaded gun in your face which caused your death. And you (and your survivors) personally sustained damages because of my conduct; you're no longer around to give your family love and financial support.

But torts are - and should be - unrelated to contracts, and the damages are different. Contract damages depend on a contract stating the parties' respective duties, a party breaches one or more of these duties, and the other party suffers damages as a result. But the damages are economic, i.e., you didn't get what you bargained for (money or something valuable).

Even so, plaintiffs' trial lawyers are optimistic souls. They will argue anything if there's even a one percent chance that a court will agree. In the case at hand, they not only alleged breach of contract, but they also threw in several tort claims alleging negligence, intentional fraud, and "innocent misrepresentation." The defendants targeted with these negligence allegations asked Judge Christopher Yates to dismiss them under the economic loss doctrine, and he agreed.

Judge Yates correctly found that the negligence claims couldn't stand because the economic loss doctrine bars tort recovery and limits remedies to those available under the Michigan Uniform Commercial Code where a claim for damages arises out of the commercial sale of goods and the losses are purely economic. There is an exception for damages caused by fraud in the inducement (i.e., a defendant's fraud induced a plaintiff to sign a contract for the purchase of Lascadoil as a feed additive), but no one alleged that tort. The Court let stand breach of contract claims, including breach of implied warranty, so the case will now continue on that basis.

Calculating probable damages in contract disputes can be tricky. You need an experienced team consisting of a competent lawyer (who isn't litigating the matter), an accountant, and risk manager to perform an accurate analysis. But alleging tort damages in a breach of contract case will likely get those allegations thrown out of court - and may earn you the judge's disrespect in the process.

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This Photo by Unknown Author is licensed under CC By-SA

In last month's newsletter, we determined that Michigan law doesn't recognize the concept that "unreasonable" or adhesion contracts are unenforceable. But there is a caveat: a liquidated damages contractual provision must be reasonable to be enforceable.

A liquidated damages provision is a term of art in the legal world. It applies when, according to Professor Bryan Garner, the parties to a contract agree in advance on the measure of damages to be assessed if a party defaults. Liquidated damages provisions are common in employee non-competition agreements, and it was that clause in one such agreement that Kent County Circuit Court Judge Christopher Yates examined in the case of Alpha Automotive v Cunningham Chrysler of Edinboro.

The facts of the case are simple. Cunningham is a car dealer who contracted with Alpha to conduct promotional events to sell Cunningham's cars. The agreement contained mutual non-solicitation provisions that barred each side from poaching the other's employees. After the promotional events ended, Alpha accused Cunningham of taking two of its employees in breach of the contract. After Judge Yates found that Cunningham had indeed breached the contract by hiring Alpha's employees, Alpha asked the Court to enforce the following liquidated damages provision for each employee that Cunningham "stole" from Alpha:

[Cunningham will pay Alpha] an agency or recruitment fee of $100,000, such amount representing the reasonable value of said individual's specialized training and by potential earnings to Alpha.

Judge Yates cogently summarized Michigan law on the enforceability of liquidated damages provisions:

The amount of the liquidated damages must be reasonable in relation to the possible injury suffered and not unconscionable or excessive. If the liquidated damages number is excessive, the provision is a penalty and thus unenforceable.
A liquidated damages provision is particularly appropriate where actual damages are uncertain and difficult to ascertain.

In concluding that Alpha was entitled to $200,000 in liquidated damages from Cunningham, Judge Yates examined Alpha's profit and loss statements proving that Alpha earned around $113K from its work for Cunningham in 2014, but that income evaporated after Cunningham hired the two Alpha employees and then decided to perform promotional events itself in 2015.

And just to close the loop, Judge Yates found that although the Rory decision (see my September post) rejected the concept that "unreasonable" or adhesion contracts are unenforceable, the same analysis doesn't apply to liquidated damages provisions based on an unpublished (thus having no precedential value) Michigan Court of Appeals case decided after Rory. But the premise that an unpublished appellate court decision holding that Rory doesn't apply to liquidated damages provisions is weak. How can judges get away with this? There are two answers. First, they can and do because the law - like everything else in life - is ~~messy~~ imprecise! Second, the doctrine affirmed in Rory that a contract is "made to be kept" despite being "unreasonable" is just as enshrined in U.S. contract law as the concept that a liquidated damages clause must be reasonable in amount to be enforceable.

Do your contracts contain liquidated damages provisions? Have you hired expert legal counsel to make sure that they are valid?

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