84 LUMBER COMPANY, L.P. v. GREGORY MORTIMER BUILDERS et al
Filing
214
MEMORANDUM OPINION ON CONTRACTUAL DAMAGE LIMATIONS. Signed by Magistrate Judge Lisa Pupo Lenihan on 10/11/16. (jer)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA
84 LUMBER COMPANY, L.P.
Plaintiff/Counter-Defendant
v.
GREGORY MORTIMER BUILDERS,
et al.
Defendants/Counter-Plaintiffs
)
)
)
)
)
)
)
)
)
Civil Action No. 11-548
Magistrate Judge Lisa Pupo
Lenihan
MEMORANDUM OPINION ON CONTRACTUAL DAMAGE LIMITATIONS
I.
SUMMATION
The Court acknowledges the contributions of counsel on their bench trial briefing of the
issues identified during the July 28, 2016 Status Conference. See July 29, 2016 Order, ECF
No. 200. By the Court’s April 20, 2016 Pretrial Order, ECF No. 171, a Bench Trial is
scheduled for October 31, 2016. For the instruction of the parties to aid in preparation for the
trial, the Court issues the following Opinion.
For the reasons set forth more fully below, the Court predicts and concludes that, under
Maryland law reflecting accord with the general law merchant, the parties’ contractual
language precluding “any consequential, indirect, exemplary or punitive damages of any
type” is an independent provision. And thus under Maryland law, absent unconscionability,
a contractual prohibition against consequential damages remains in effect even where the
1
parties’ “repair or replacement” provision may fail of its essential purpose. See Patapsco
Designs, Inc. v. Dominion Wireless, Inc., 276 F.Supp.2d 472 (D. Md. 2003) (predicting that
under Maryland law, as reflected in adoption of UCC, limitation on damages did not fail
even if repair and replacement provision failed of essential purpose; rather, damage
limitation was freely contracted independent allocation of risk between business parties and
remained subject to unconscionability standard). Cf. Waters v. Massey-Ferguson, Inc., 775
F.2d 587 (4th Cir. 1985) (predicting that under South Carolina law and particular
circumstances of contract on case-by-case basis, consequential damage limitation did not
extend to long-term damages where reasonable repair and replacement was not made by
manufacturer and provision failed of essential purpose). Because the contractual damage
limitation provisions at issue were not unconscionable under Maryland law, and because they
are not forfeited under any of Defendants’ alternative rationales, the limitation provisions
remain enforceable as to those contract claims encompassed by the parties’ clear language,
i.e., they limit damages related to/flowing from “defects in workmanship or materials.” See
discussion, infra (addressing claims of fraudulent inducement, ratification, and damages
proximately caused by specific misrepresentation(s)).
The Court further concludes that, under Maryland law, recovery for lost profits is
unambiguously precluded by the parties’ contractual limitation of damage provisions.
II.
RELEVANT FACTUAL AND PROCEDURAL HISTORY
The extensively documented factual and legal history in this case arising from disputes
between the parties with regard to (a) construction material purchases and (b) sub-contracted
construction of housing in Defendants’ multi-duplex residential developments – Timberlake
Village (hereafter “Timberlake”) and Cedar Creek – located near Deep Creek Lake, in Garrett
2
County, Maryland was explicated by this Court in its Summary Judgment Opinion, ECF No.
166. In relevant part: the parties executed contract documents including an 84 Lumber
Commercial Credit Application form dated May 9, 1997 (the “1997 CCA”), signed by Gregory
Mortimer (“Mortimer”). See, e.g., ECF No. 12, Ex. 1. In October, 2007, the parties entered into
a settlement agreement that included compensation for improper CCA billing activity relating to
a residential project (the “2007 Settlement”). See, e.g., Memorandum of Law in Support of
Defendants’ Opposition to Plaintiff’s Motion for Partial Summary Judgment (Defendants’ Memo
of Law in Opposition to PSJ”) at 4, ECF No. 156. In addition, Mortimer and 84 Lumber were
the signatories to 84 Lumber “Subcontractor Agreement/Scope of Work” forms (the
“Subcontractor Agreements”) for the installation of purchased materials at five (5) development
projects - three (3) at Timberlake (buildings 8, 11 and 12) and (2) at Cedar Creek (buildings 1
and 2). See, e.g., ECF No. 12, Ex. 1.1 More particularly, Timberlake contract #8 was signed in
April, 2008; Timberlake contract #12 was signed in late August, 2008; and Timberlake contract
#11 and the two Cedar Creek contracts were signed by Mortimer at the end of October, 2008 and
by 84 Lumber in December, 2008. See Defendants’ Combined Statement of Material Facts at 67, ECF No. 153.
Each of these essentially identical Subcontractor Agreements provided that the work would
be properly performed “per print and manufacturer specifications”, with “competent
supervision”, and would “meet or exceed local building codes” and “pass all required
1
See Summary Judgment Opinion at 11, ECF No. 166 (noting that the Second Amended
Counterclaim, ECF No. 44, brings claims asserted on the basis of five (5) Subcontractor
Agreements and those five (5) subject duplex construction projects). See also Plaintiff’s
Memorandum of Law Concerning Damages Available Under Contract Claims (“Plaintiff’s
Memo of Law”) at 1, ECF No. 202.
3
inspections”. See, e.g., ECF No. 15, Ex. A. Paragraph 14 provided that the terms and conditions
of “84 Lumber Company’s Contractor-Commercial Credit Agreement”, “a copy of which
[Mortimer] hereby acknowledges receiving” were “incorporated herein by reference”. Id.
Subcontractor Agreement paragraph 15 contained, among other things, 84 Lumber’s
“guarantee” that the work would conform to specifications, comply with laws, and be free from
defects in workmanship and materials. Paragraph 15 limited 84 Lumber’s “liability hereunder”
to the “extent of 84’s negligence” and its obligations to “repair or replacement of any defective
or nonconforming [w]ork.” Mortimer agreed that 84 Lumber was “in no event” liable “for any
consequential, indirect, exemplary or punitive damages of any type in connection with any claim
under this paragraph.” And the paragraph closed with a form language disclaimer of any further
express or implied warranty, including warranty of merchantability or fitness for a particular
purpose. Id.
Defendants assert that Plaintiff materially breached each Subcontract Agreement by, e.g.,
failing to install materials according to manufacturer’s instructions and failing to conform to
local building code; that Defendants received Correction Notices from the County Office of
Buildings and Permits; and that Plaintiff made misrepresentations as to its work performance and
failed/refused to make and made further misrepresentations regarding the requisite repairs to its
work. Defendants also assert that their harm from Plaintiff’s actionable conduct includes not
only diminution in value of the subject properties, but other development properties as well, and
more generally, e.g., their business reputations and related income, and financing positions and
costs. See, e.g., Second Amended Counterclaim, ECF No. 44.
For a full discussion of the prior procedural history, see ECF No. 166. The relevant claims
documents are:
4
The Complaint against Gregory Mortimer Builders (“GMB”), as Defendant, and Mortimer,
as guarantor, removed to this Court on April 28, 2011 (ECF No. 1) and asserting counts for (1)
breach of contract against Gregory Mortimer Builders (under the CCA) owing to GMB’s
purchase, receipt and nonpayment “on [GMB’s] account”, of approximately $579,000 in
goods/supplies delivered, together with ongoing fees/penalties and attorney’s fees; (2) breach of
contract against Mortimer as personal guarantor “of [GMB]’s obligations” under the CCA; and
(3) separate counts against each Defendant for unjust enrichment in the alternative. See ECF No.
1, Ex. A. The count for unjust enrichment against Mortimer was dismissed by this Court. See
ECF No. 166. Plaintiff’s entitlement to attorney’s fees was assessed in the Summary Judgment
Opinion. See id. at 4 n. 4, and 6, ECF No. 166.
The Defendants’ Second Amended Counterclaim (ECF No. 44) setting forth claims:
(a) by each of the Defendants for (i) unspecified negligent misrepresentations (implicitly and
by incorporation those misrepresentations made to Mortimer and underlying Count I), and (ii)
fraud/intentional misrepresentation/concealment expressly with regard to Summer, 2009
representations to Mortimer regarding faulty construction issues and Plaintiff’s intent to
correct/purported correction of them (Counts II and III, respectively);2 and
See Defendants’ Combined Statement of Material Facts at 20, ECF No. 153 (stating that in
Spring and Summer 2009, Mortimer received “numerous reports of leaks at units at both
Timberlake and Cedar Creek” and notified 84 Lumber, and that in August and September 2009
he consulted experts, made written demands for repair and 84 Lumber “repeatedly represented
that [it] would correct all construction defects”); id. at 21 (recounting that in August through
mid- September 2009 84 Lumber retained other construction contractors to investigate and repair
the defects and falsely represented they were corrected); id. at 22 (continuing chronology with
assertion that “[d]espite the numerous leaks and other defects apparent at that time” Mortimer
paid Plaintiff in full for the subcontracts on Buildings 8 and 12, but withheld subcontract
payments on other buildings.). See also Defendants’ Memorandum of Law in Opposition to
Partial Summary Judgement (“Defendant’s Memo of Law in Opposition to PSJ”) at 6, ECF No.
2
5
(b) by Mortimer for breach of contract as to each of five (5) separately subcontracted
Timberlake (8, 11, 12) and Cedar Creek (1, 2) units (Counts IV-VIII); breach of contract more
clearly delineated as to the Commercial Credit Agreement (Count IX), specifically by false
and/or excessive charges and concealment;3 and fraud in the inducement (Count I) by both (i)
misrepresenting that improper CCA charges made in 2007 by a subsequently-fired Maryland
manager would not recur4 and that a Fall 2008 internal audit was conducted and showed no
improper CCA charges,5 and (ii) misrepresenting that subcontracted work would be performed
156 (asserting that Plaintiff’s “August and September 2009” multiple representations that it
corrected and would correct all construction defects were false).
3
This brief Count alleges that 84 Lumber charged for unprovided materials, overcharged and/or
substituted lesser materials, and that it invoiced and delivered in manners intended to conceal
these practices. See Second Amended Counterclaim, ECF No. 44.
4
See Defendants’ Combined Statement of Material Facts at 4-5, ECF No. 153 (“Following the
execution of the settlement agreement, [84 Lumber employees] verbally represented to Mortimer
that there were no other improper charges to [the CCA] account and that there would be no
further improper or excessive charges to [it].”); Defendant’s Memo of Law in Opposition to PSJ
at 4, ECF No. 156 (“[These] representations . . . . were . . . false in that immediately following
the settlement agreement and the representations, 84 continued to improperly charge Mortimer’s
account on the [prior residential] project.”) (emphasis added). See also Defendants’ Combined
Statement of Material Facts at 12, ECF No. 153 (“During August 2008, before Mortimer
executed the Subcontractor Agreements for Timberlake Building 11 and Cedar Creek Buildings
1 & 2, 84 Lumber employees informed Mortimer that 84 Lumber . . . was manipulating
inventory and intentionally overcharging, double-billing and failing to properly credit his
account.”).
5
See Defendants’ Combined Statement of Material Facts at 12-13, ECF No. 153 (recounting that
on notice from 84 Lumber employees, “Mortimer then informed 84 Lumber representatives
[and] questioned certain invoices . . . . In early September 2008, [Mortimer met with 84 Lumber
representatives who informed him] the Store Manager . . . . had been fired for theft, . . . 84
Lumber had investigated Mortimer’s account . . . [and the] audit did not show any wrongful
billing or manipulation of his account”); id. (“On October 1, 2008, Mortimer [received
correspondence from Plaintiff stating that an audit of the Maryland store] “did not reveal any
manipulation of either the quota system or inventory [or] any misuse of the invoicing system”).
6
by 84 Lumber’s national “install program” construction experts/specialists.6 The following
counts were dismissed by this Court: (a) Count II, negligent misrepresentation as brought by
Defendant M&M Development, LLC a non-party to the 1997 CCA and Count III,
fraudulent/intentional misrepresentation related to Plaintiff’s defective/negligent construction
and/or failure to repair/replace under the Subcontractor Agreements, as brought by the nonindividual Defendants. See ECF No. 166.
III.
ANALYSIS
A. Independence of Limitation Excluding Consequential Damages
As noted supra, untitled paragraph 15 of the Subcontract Agreements contains 84
Lumber’s guarantee against “defects in workmanship and materials” and limits 84 Lumber’s
Cf. id. at 14 (Mortimer relied upon 84 Lumber’s false and misleading assurances that no
improper billing or manipulation of his account had occurred [and] would not have executed the
Subcontractor Agreements for Timberlake Building 11 and Cedar Creek Buildings 1 & 2 without
these representations.”). The Court observes the execution dates of these contracts, as well as
that for Timberlake Building 12, i.e.,: the first Subcontractor Agreement was executed in April,
2008 (Timberlake #8); the second (Timberlake #12) in late August, 2008; and the additional
three (3) in late October, 2008.
See Defendants’ Combined Statement of Material Facts at 5-6, ECF No. 153 (“In 2007 and
2008, 84 Lumber represented to Mortimer that it had experienced and skilled construction
experts and specialists that were capable of constructing homes of the type Mortimer intended to
build at Timberlake and Cedar Creek . . . . 84 Lumber represented to Mortimer that these
construction workers were part of 84 Lumber’s “in-house” install program . . . .”); Defendant’s
Memo of Law in Opposition to PSJ at 4, ECF No. 156 (“84 Lumber’s representations regarding
the skill and quality of the workers it intended to use at [Defendants’] projects were . . . false in
that the workers used immediately on Mortimer’s projects following the representations were . . .
local friends and family of 84 Lumber local store employees.”).
6
Cf. Defendants’ Combined Statement of Material Facts at 6, ECF No. 153 (“In reliance
on 84 Lumber’s representations regarding the skill and quality of its ‘install program’
construction crews, and in reliance on 84 Lumber’s representations that there were no further
improper or excessive charges to Mortimer’s account, Mortimer agreed to expand 84 Lumber’s
role from supplier to primary subcontractor.”).
7
obligations thereunder “at [its] sole election, to the repair or replacement of any defective or
nonconforming Work.” Additional provisions of paragraph 15 include those specifying that
“in no event” would 84 Lumber be liable for “any consequential, indirect, exemplary or
punitive damages of any type in connection with any claim under this paragraph.”
Defendants assert that 84 Lumber’s delays, failures, misrepresentations and/or effective
refusals to repair or replace defective workmanship rendered the contractual limitation to
elective repair or replacement unenforceable because such provision “failed of its essential
purpose.” As Defendants discuss, failure of essential purpose of a repair and replacement
provision “is relatively straightforward.” Defendants’ Memo of Law at 7, ECF No. 201. See
also Plaintiff’s Memo of Law at 5-6, ECF No. 202 (stating -as do Defendants - that in
Maryland, repair and replacement remedy fails of essential purpose if seller has refused to
make repairs as required or cannot repair) (citing Potomac Constructors, LLC v. EFCO
Corp., 530 F.Supp.2d 731 (D. Md. 2008)); Riegel Power Corp. v. Voith Hydro, 888 F.2d
1043, 1046 (4th Cir. 1989). Cf. Dowty Communications, Inc. v. Novatell Computer Sys.
Corp., 817 F.Supp. 581, 585 (D. Md. 1992) (describing two ways of evaluating failure: (1)
comparing actual breach to potential breaches envisioned at time of contract, or more
commonly (2) evaluating compliance with limited remedial responsibilities).
Although there is evidence of the questionable sufficiency and protracted duration of
Plaintiff’s efforts to repair well-alleged and evidenced subcontract construction defects, the
Court retains reservations regarding whether the circumstances of the case sub judice meet
this standard given the evidence of record as to Defendants’ conduct as well as Plaintiff’s.
See, e.g., supra at 5, n. 2; Plaintiff’s Memo of Law at 6, ECF No. 202 (discussing evidence
8
and admissions regarding Defendants’ exclusion of 84 Lumber from project sites). 7 Cf.
Patapsco, 276 F.Supp.2d at 474-5 (concluding evidentiary record of three months’ delay and
continued defects following repair was insufficiently developed to determine failure of
essential purpose).8 However, here, as in Patapsco, the Court need not make a determination
on this question because it predicts, as did the District Court in Patapsco, that even if 84
Lumber’s conduct and the course of events construed in the light most favorable to
Defendants were sufficient to render the parties’ repair and replacement provision
unenforceable for failure of its essential purpose, the parties’ other contractual damage
limitations provisions are, under Maryland law, independent. See id. at 476 (assuming failure
of essential purpose arguendo).
This case does not arise under the Uniform Commercial Code (“UCC”), but is, as
Defendants note, a mixed goods and services case with a primary services component.9
Nonetheless, the UCC is itself a reflection and codification of the “law merchant”, i.e., the
See also Plaintiff’s Memo of Law at 7, ECF No. 202, quoting Riegel Power Corp. v. Voith
Hydro, 888 F.2d 1043, 1046 (4th Cir. 1989) (noting that repair and replacement clause in
contract for specialized/customized goods may impose requirement of seller’s “best efforts”).
The Court rejects Plaintiff’s assertion that Defendants’ sale of some units “provides sufficient
indicia” that the buildings were in “working condition”, evidences Plaintiff’s “best efforts”, and
is therefore dispositive of the failure of essential purpose question in Plaintiff’s favor. Id.
7
Plaintiff’s assertion that the repair and replacement provision has not failed of its essential
purpose because “[a] contractor could make repairs to the alleged defects today and Defendants
could sell the properties . . .”, Plaintiff’s Memo of Law at 8, ECF No. 202, is questioned by this
Court for reasons discussed in the prior Status Conference, including the amount of time passed
in litigation. Cf. Patapsco, supra (noting delay of three months and question of failure of
essential purpose).
8
See also Plaintiff’s Memo of Law at 5, n. 1, ECF No. 202 (“The UCC applies to transactions in
goods as well as transactions in services and goods if the predominant purpose of the contract is
for the sale of goods with services incidentally involved.”).
9
9
rules, customs and usages generally recognized and applicable to commercial/mercantile
transactions.10 And the broader presumption underlying and referenced in the analysis of
relevant cases decided under the UCC (i.e., a State’s adoption thereof) is that the failure of
essential purpose of a repair or replacement provision does not invalidate a proscription
against consequential damages because “sophisticated business entities” may want to allocate
unknown or undeterminable risks and “should be free to allocate [them] as desired, provided
the waiver is not unconscionable.” Patapsco, 276 F.Supp.2d at 477 (predicting that under
Maryland law set forth in its adoption of the UCC, limitation on damages did not fail if repair
and replacement provision failed of essential purpose, and granting motion to dismiss
counterclaim for consequential damages); id. (noting that Comment to relevant subsection of
Maryland’s UCC (allowing contractual exclusion of consequential damages) “recognizes the
validity of clauses limiting or excluding consequential damages but makes it clear that they
may not operate in an unconscionable manner” and that “such terms are merely an allocation
of unknown or undeterminable risks”). See also Eastman Chemical Co. v. Niro, Inc., 80
F.Supp.2d 712, 721 (N.D. Tex. 2000) (quoted in Patapsco) (“It would largely undermine the
liberty of business entities to allocate . . . commercial risks as they see fit to make the
validity of a freely negotiated consequential loss waiver . . . dependent on the success of a
quite distinct contractual provision . . . .”).11
See Defendants’ Memo of Law at 6, ECF No. 201 (explaining that UCC cases are relevant
where “the factors courts consider” in a legal determination “are the same under Maryland (and
other states) common law and the UCC”).
10
11
Cf. Potomac Electric Power Company v. Westinghouse Electric Corp., 385 F.Supp. 572, 575
(D.D.C.1974), reversed and remanded on other grounds, 527 F.2d 853 (D.C.Cir.1975)
(concluding that clauses restricting remedies to repair and replacement and limiting liability were
10
This case also does not arise under the Maryland Uniform Computer Information
Transactions Act (“MUCITA”), which “specifically reverses the UCC presumption” in favor
of the parties’ consequential damage limitations. Compare Baney Corp. v. Agilysys NV,
LLC, 773 F.Supp. 2d 593, 606 (D. Md. 2011) (differentiating UCC and following
MUCITA’s express statutory language in finding that failure of exclusive remedy makes
limitation of consequential or incidental damages unenforceable unless agreement expressly
provides that the limitation is independent of the remedy). Neither the inapposite Baney
decision nor any other authority cited by Defendants presents any reason the law merchant,
i.e., standard accumulated commercial practices law, should be disregarded in this mixed
services case. Defendants have made no showing of a different expectation between these
sophisticated commercial parties.12
Defendants more aptly cite a well-written case decided by the Fourth Circuit in 1985 and
concluding that contractual language excluding consequential damages in the sale of a tractor
was inapplicable to longer-term consequential damages for a duration of several years beyond reasonable repair and replacement. Waters v. Massey-Ferguson, Inc., 775 F.2d 587,
591 (4th Cir. 1985) (examining contract “through the specific light of its written context, its
creative context, and its commercial context”). The Court observes, however, that the
decision expressly limited its holding both to a prediction of South Carolina law and to the
valid and enforceable “[w]ithin the framework of [the] commercial transaction” and “also
consistent with Sections [of the UCC]”).
Cf. Defendants’ Combined Statement of Material Facts at 2, ECF No. 153 (indicating that
between 1996 and 2008, Defendants generated over $60 Million in residential and commercial
construction project revenue, Mortimer directly managed over 500 employees, and Defendants
maintained successful financial relationships with multiple banking institutions with $30 million
in borrowings fully repaid).
12
11
particular contract before it, “advanc[ing] no general opinions about the enforceability of
another warranty . . . .” Waters, 775 F.2d at 593. Waters was duly distinguished in the
District of Maryland’s Patapsco decision, see Patapsco, 276 F.Supp.2d at 477, n. 4, and those
distinctions apply here as well. In Waters, the parties’ contract evidenced their confident
presumption that any flaw in the tractor sold could and would be repaired. Id. (discussing
premise that “warranty foresaw only repair” and the case-specific reasonableness of that
premise). Unlike Waters, where the warrantor, Massey-Ferguson, designed the product and
had extensive experience in and dedicated facilities for routine tractor repair/restoration, here
the warrantor, 84 Lumber, was adapting its services to the design/specifications of the
controlling general contractor, Mortimer. See id.; see also Plaintiff’s Memo of Law at 7 (“84
Lumber completed subcontract work at Defendants’ direction and based on on Defendants’
unique requests and specifications.”); id. at 11-12, ECF No. 202 (distinguishing Waters). Cf.
Patapsco, 276 F.Supp.2d at 478 (noting “modern trend of jurisprudence” reflected in majority
of jurisdictions’ determinations “that a waiver of consequential damages can be valid
notwithstanding the fact that a limitation of remedy has failed of its essential purpose”)
(citing Riegel Power, 88 F.2d 1043); Plaintiff’s Memo of Law at 9-10, ECF No. 202 (string
citing cases).
The Court further notes, in concluding this portion of its analysis, that an independent
reading of these provisions follows most reasonably from the parties’ chosen terms.
Paragraph 15 first limits 84 Lumber’s obligation to repair or replacement, i.e., this provision
itself precludes entitlement to any other forms of relief/damages for work or material defect
claims. And paragraph 15 next provides that “in no event” will 84 Lumber be subject to “any
consequential, . . . damages of any type in connection with any claim under this paragraph.”
12
Thus, under the parties’ own language the second provision comes into play upon some
failure of the operation of the foremost “repair or replacement” term. See Dowty, 817 F.
Supp. at 585 (“The contractual language . . . creates a two-tiered limitation on [seller]’s
potential liability. On the first level, [it] is limited to the cost of repairing or replacing
nonconforming [merchandise] . . . . If that limitation were deemed to be not effective, the
second level operates to preclude [buyer] from recovering incidental, consequential [and
other] damages . . . .”); Cf. Patapsco, 276 F.Supp.2d at 474-5 (quoting second provision
excluding consequential damages “regardless of whether such liability arises in contract, tort
or otherwise” as “serv[ing] as a more general cap on the amount and type of damages [buyer]
could recover for any reason”).13
B. Survival of Prohibition Against Consequential Damages Under
Unconscionability Standard and Defendants’ Other Asserted Grounds for
Forfeiture
The next step in the analysis, then, is to measure survival of the parties’ contractual
limitation against consequential damages under the applicable standard. Under Maryland law, an
“unconscionable agreement” is defined as one that no sane-witted, undeluded person would
make on the one hand, and no honest and fair person would accept on the other. See Patapsco,
276 F.Supp.2d at 478-9 (quoting Schrier v. Beltway Alarm Co., 533 A.2d 1316 (Md. App. 1987)
(quoting Earl of Chesterfield v. Janssen, 28 Eng. Rpr. 82 (1750))); id. at 479 (concluding that
exclusion of consequential damages was not unconscionable where it did not involve unfair
The Court concurs with Plaintiff’s objections to Defendants’ assertion that the proximity of the
damage provisions in paragraph 15 “confirm[s] that the only reasonable reading of the bargain
made in this paragraph is that the damages limitations are imposed in exchange for the
guaranty.” See Defendants’ Memo of Law at 4, ECF No. 201; Plaintiff’s Memo of Law at 2-3,
ECF No. 202 (observing that Defendants proffer no evidence of an isolated exchange of
consideration as to these contract provisions).
13
13
surprise or oppression). See also Leet v. Totah, 620 A.2d 1372 (Md. 1993).14
The Court first notes that Defendants’ assertion of unconscionability is being made by a
commercially sophisticated party with extensive experience as a general contractor, who was
subcontracting residential development construction. See, e.g., Dowty, 817 F. Supp. at 589
(noting, in opening analysis of unconscionability, that “the transaction between [the parties] was
commercial in nature, involving sophisticated business entities” and thus “the terms of the
[contract] are presumptively valid”) (citing Flow Industries, Inc. v. Fields Const. Co., 683 F.
Supp. 527, 531 (D. Md. 1988)). Defendants define unconscionability as “extreme unfairness”
evidenced by “(1) one party’s lack of meaningful choice, and (2) contractual terms that
unreasonably favor the other party”; and they appear to acknowledge the merit of their assertion
of unconscionability by the two substantive sentences they devote to it. See Defendants’ Memo
of Law at 11-12, ECF No. 201 (quoting Walther v. Sovereign Bank, 872 A.2d 735, 743 (2005)).
The Court in Leet (a real estate – non-UCC – case) first noted the defendant’s “principal
reliance” on Maryland Nat’l Capital Park & Planning Comm’n v. Washington Nat’l Arena, 386
A.2d 1216, 1231 (Md. 1978) (“Unless clearly prohibited by statute, contractual limitations on
judicial remedies will be enforced, absent a positive showing of fraud, misrepresentation,
overreaching or other unconscionable conduct . . . .”). 620 A.2d at 660. It went on, however, to
uphold the contractual limitation, by the following analysis:
14
Assuming, arguendo, that the doctrine of unconscionability may even be applied
to a damage limitation clause in a contract between [two sophisticated
businessmen], the subject contract is not unconscionable. Guidance as to
Maryland public policy relating to unconscionable contracts, or clauses in
contracts, can be found in § 2–302(1) of the Uniform Commercial Code, relating
to the sale of goods. Md.Code (1975, 1992 Repl.Vol.), § 2–302(1) of the
Commercial Law Article (CL). The official comment to that section points out
that “[t]he principle [of unconscionability] is one of the prevention of oppression
and unfair surprise . . . .” Against the background of this transaction, the
Remedies Limitation Clause reflects neither . . . .
Id. (emphasis added)
14
To be equally succinct: The consequential damage limitation is not procedurally
unconscionable; the contract in question is not a consumer contract, is not addressed to an
unsophisticated party in need of assistive bolding or font size or other indication of provisional
importance, and is not unclear as to the scope of its limitation. Nor is the limitation substantively
unconscionable; the general contractor has made no proffer that he had no absence of choice of
other subcontractors to hire or limitation on his freedom to contract, and the contract condition of
which Defendants complain as objectively “unreasonable” in fact reflects a very common
allocation of risk (the amount of which is often in the control of the purchaser, so it is not
surprising that the provider of services would want to limit its liability to an amount within its
contemplation) in a manner that eliminates potentially complex damage calculations.
In addition to asserting unconscionability, Defendants also assert (again, fairly briefly)
that 84 Lumber has forfeited the limitations against consequential damages by acting in bad faith
and/or by work defects so pervasive that they constitute a total and fundamental breach of the
contract. Defendants’ Memo of Law at 10-11, ECF No. 201. Defendants’ assertions of estoppel
based on 84 Lumber’s “bad faith with respect to its guaranty that it would repair or replace any
defective work” is simply a recharacterization or relabeling of the failure of essential purpose
argument addressed by the Court, supra. The argument that sufficiently egregious
performance/implementation of a repair or replacement remedy can preclude the
seller/warrantor’s reliance on other contractual damage limitations is just another way of
asserting that the clauses are dependent, which the Court has concluded they are not. Similarly,
Defendants’ assertions of estoppel based on an asserted “fundamental breach” - i.e.,
workmanship flaws so pervasive and subcontract performance breaches of such a fundamental
character as to vitiate contractual damage limitations - is likewise a repackaging of failure of
15
essential purpose. Defendants’ assertions go directly to issues of construction defects and
delays/failures in repair and replacement which, as the Court holds supra, do not provide
independent grounds for striking the parties’ contractual preclusion of consequential damages.
Cf. Dowty, 817 F. Supp. at 589 (concluding that remedy did not fail of essential purpose; “for the
sake of completeness” then “not[ing] again that the distinction between types of contractual
limitations on remedies must be maintained” such that “repair, replace or refund” remedy was
separate from “restriction on consequential damages”; and further noting – after completing
analysis of absence of “unconscionability” under Maryland law – that “[a]nother approach some
courts have taken in approaching the effectiveness of a contractual limitation consequential
damages is to focus on the magnitude of the breach”); id. at 589-90 & n. 7 (discussing “total and
fundamental breach” analysis of two Ninth Circuit cases and distinguishing between that in
which performance was not as promised and that in which buyer “received [literally] nothing”;
concluding that partial performance “prevent[ed]” the breach “from being ‘total and
fundamental’”)). 15
The only colorable argument raised by Defendants is that of fraud in the inducement. See
Defendants’ Memo of Law at 10-11, ECF No. 201 (asserting that Plaintiff cannot rely on
contractual damages limitation if established to have (a) “fraudulently induced Mortimer into
entering” the Subcontract Agreements or (b) “acted fraudulently” by misrepresenting that it
“would correct” and “had in fact corrected all construction defects”); id. (citing Dowty, 817
F.Supp. at 590 (citing Am. Elec. Power Co. v. Westinghouse Elec. Corp., 418 F.Supp. 435, 460
15
The Court observes that it is undisputed that Defendants received some benefit of partial
performance under the Subcontract Agreements. Compare S.M. Wilson & Co. v. Smith
International, Inc., 587 F.2d 1363, 1375 (9th Cir. 1978) with RRX Industries, Inc. v. Lab-Con,
Inc., 772 F.2d 543 (9th Cir. 1985).
16
(S.D.N.Y. 1976) for proposition that limitation of consequential damages cannot be effective if
claims of fraudulent inducement are sustained at trial)).16
Both parties have, however, neglected the line of Maryland cases which make clear that a
party discovering fraud during the course of contract performance is required to elect rescission
or ratification at the time; and a party failing to timely elect rescission retains its right to damages
for deceit but is precluded from subsequently asserting fraudulent-inducement rescission. See,
e.g., Sonnenberg v. Security Management Corp., 599 A.2d 820 (Md. App. 1992) (holding that
real estate purchasers who became aware of fraud in material facts between executing purchase
contracts and closing on property, were in communication with seller, and elected to close, were
not precluded from claim for deceit but could “recover damages for the fraud in lieu of
rescission”); id. at 823 (noting that Maryland is in accord with majority rule that “where the
defrauded party has in part . . . performed the contract at the time of discovering the fraud, he
may go on with performance and also recover or have the appropriate allowance of damages”).17
As the Court of Appeals of Maryland has further explained:
Persons who discover that they have been induced into a contract by fraud must
decide, or the law will decide for them, whether unilaterally to rescind the
The Court rejects Defendants’ assertion of Plaintiff’s forfeiture of the limitations on
consequential damages by fraud in the performance based on its repair or replacement conduct.
This argument amounts, like others rejected supra, to a recharacterization of the assertion that
sufficiently egregious conduct under that contractual provision vitiates the other. See discussion,
supra. The Court notes, therefore, its prediction that the Court of Appeals of Maryland would
not adopt fraud in the performance as a ground for negating a consequential damages exclusion.
In contrast, to the extent that fraud in the inducement vitiates a contract, it would a fortiori vitiate
its damage limitation provisions.
16
17
See also View Point Medical Systems, LCC v. Athena Health, Inc., 9 F.Supp.3d 588, 612 (D.
Md. 2014) (“’In fraudulent inducement cases, a defrauded party may elect between two
remedies, which are exclusive.’ Paul Mark Sandler & James K. Archibald, Pleading Causes of
Action in Maryland § 3.92, at 346 (5th ed.2013)”); id. (quoting Sonnenberg, infra, as to
requirement of decision).
17
contract or to ratify the contract and seek damages, either affirmatively or by
recoupment. [citations omitted] Failure promptly to rescind does not preclude
other remedies for fraud in the inducement. The defrauded party, in effect, must
elect between inconsistent and mutually exclusive rights. The party is ‘put to the
choice of repudiating or ratifying . . . . If he adopted the first alternative he
repudiated the conveyance and sought its rescission and a restoration of his
situation before the contract; but if he chose the second, he ratified . . . but could
obtain damages to redress the injury inflicted by the false and fraudulent
representation.’
Id. at 824 (emphasis added) (quoting Telma v. Gingell, 146 A. 221, 222 (1929)).
Thus, while timely rescission of the fraudulently-induced contract is not the only relief,
and the injured party may prosecute an action for the tort of deceit, the damages to which he is
entitled are those “redress[ing] the injury inflicted by the false representation”, i.e., those flowing
from the relevant fraudulent misrepresentation itself rather than from entry into the contract. Id.
at 815 (quoting Sommers v. Dukes, 118 A.2d 660 (1955), later proceeding, 135 A.2d 419 (1957))
(concluding, where defendant misrepresented application of payments to fire insurance policy,
that plaintiffs “should be put in the same position as if [payments had been made and] the
insurance had been in effect”).
Indeed, the Court of Appeals of Maryland noted and elaborated on its holding in
Sonnenberg, the following year:
[I]n Sonnenberg v. Security Management Corp., 325 Md. 117, 599 A.2d 820
(1992), . . . we held that settling on a contract . . . after acquiring full knowledge
of the facts does not, as a matter of law, vitiate the purchaser's reliance on the
seller's misrepresentation which induced the formation of the contract. We
pointed out that consummation of the contract was, in effect, an election of
remedy; the purchaser forgoes his or her right to rescind the contract in favor of
damages for deceit. We noted, moreover, that, notwithstanding that its
importance became apparent only after the fact, the relationship between the
misrepresentation and the claimed loss is a question of fact.
In this case, the petitioners learned of the false statements which they claim
induced them to contract for the purchase of their house after the contract was
18
executed, but before settlement. They alleged, however, that that
misrepresentation, and those that depended upon it, induced them to change their
position, with the result that they suffered losses. Thus, they contend that there
was a causal relationship between the misrepresentations and their claimed loss,
i.e. the falsity of the statement did not become apparent until after they had sold
their former residence, rented temporary housing accommodations, enrolled their
children in new schools, and commenced transporting them to those schools.
Whether there is such a causal relationship, the petitioners maintain, clearly
constitutes a genuine dispute of material fact.
Gross v. Sussex, Inc., 630 A.2d 1156, 1168 (Md. App. 1993) (citations omitted) (emphasis
added).18
In other words, to the extent that Defendants may be able to proffer prima facie evidence of
fraud in the inducement as to any of the Subcontract Agreements, where they are deemed under
Maryland law to have ratified each of the contracts by failing to repudiate them upon
discovery/reasonable knowledge of the alleged fraud, they are limited to the damages
18
See also Lustein Chev. v. Cadeaux, 308 A.2d 757, 751 (Md. App. 1973) (holding, where
seller of automobile misrepresented vehicle’s involvement in prior accident, that plaintiff could
not recover for fraud or negligent misrepresentation because she had failed to prove that the prior
accident proximately caused her damages; “but for” allegation that she would not have
purchased vehicle was insufficient); Lavine v. Amer. Airlines, Inc., 2011 WL 6003609, **5-6
(Md. App., Dec. 1, 2011) (“As a general rule, ‘one may recover only those damages that are
affirmatively proved with reasonable certainty to have resulted as the natural, proximate and
direct effect of the injury.’” Empire Realty Co. v. Fleisher, 269 Md. 278, 284, 305 A.2d 144
(1973) (internal citations omitted). In the case of a misrepresentation, ‘the plaintiff must show
not only that he would not have performed the act from which the injury resulted but for the
misrepresentation, but also that the fact misrepresented was the proximate cause of the injury.’
Lustine Chevrolet v. Cadeaux, 19 Md.App. 30, 35, 308 A.2d 747 (1973). To establish the causal
link, the plaintiff must show that there is a reasonable probability or reasonable certainty that the
act complained of caused the injury suffered. Mere possibility is not enough. Reasonable
probability can be shown by either direct evidence or inferences drawn from surrounding
circumstances. Id. at 36, 308 A.2d 747.”). Cf. id. (implicitly rejecting that fraud claim would
vitiate contract damage limitation provisions).
19
proximately flowing from the purported fraudulent misrepresentations themselves (and not those
from failure/delay in performance of contractual undertakings).19
The law that puts a party to election of rescission or ratification reflects the policy that when
a party to a contract has learned he has been misled he cannot sit back and hold the potential
claim, treating it as an insurance that the contract may still prove beneficial or, if not, the loss
may be transferred to the other party.20 Under the Subcontract Agreements at issue, the parties
agreed that 84 Lumber would provide materials and construction services to a warranted
standard. They also agreed upon an allocation of risk such that, even if 84 Lumber’s
construction services fell short of that standard, any indirect losses sustained by Defendants in
consequence would fall on Defendants. In other words, 84 Lumber would not be a guarantor of
loss beyond the direct cost of meeting the warranted standard, and other losses incurred by delay
or failure of contract performance remained with Defendants – a risk allocation that was
presumably reflected in the contract price. In this circumstance, having discovered any
misrepresentation comprising fraudulent inducement, Defendants could not allow the
continuation of contract execution and hold in their pocket the position that 84 Lumber had now
effectively become a guarantor. To the contrary, a party cannot change a material term of the
19
Were there any question as to whether Defendants are deemed to have ratified any of the
Subcontract Agreements by failure to elect rescission when they knew or should have known of
a claim for fraudulent inducement, it is beyond peradventure that they have ratified said contracts
by asserting breach of contract claims in this action. Defendants have made no ad damnum
request for rescission and have clearly asserted that they are proceeding under the contracts. See
Defendants’ Second Amended Counterclaim, ECF No. 44.
McAleer v. Horsey, 1872 WL 4422, *6 (Md. App. Mar. 19, 1872) (“The appellee is estopped
by every principle of good faith from ripping up alleged frauds which he had known of long ago,
. . . . . If the appellee knowingly affirmed the contract and took the chances of success he cannot
now recover.”) (setting forth positions of counsel) (citing 30 Law Journal, (N. S.,) 4; 1 Ad. &
Ellis, 40, 41.).
20
20
contractual risk allocation sub silentio.
Defendants have raised allegations of fraudulent inducement on the basis of Plaintiff’s (i)
misrepresenting at the time of the 2007 Settlement that no other improper/excessive CCA
charges had been or would be made in 2007 when 84 Lumber immediately continued improper
charges on the prior residential project, as Mortimer was advised by 84 Lumber employees
during August, 200821 and misrepresenting in early September, 2008 that an August-early
September 2008 internal audit was conducted and showed no improper CCA charges;22 and (ii)
misrepresenting in 2007-2008 that subcontracted work would be performed by 84 Lumber’s
national “install program” construction experts/specialists when 84 Lumber immediately used
workers who were local friends and family of store employees.23
The Court notes, in closing its discussion of the scope of potential liability for the tort of
fraudulent inducement as to one or more of the Subcontract Agreements on which a claim has
been made, that damages resulting from construction defects do not flow from billing/audit
misrepresentations. And it reminds the parties of its prior observations related to allegations as
to work performance by an “install program” – that the statements alleged are ones of promise,24
21
See supra at 6 n. 4 (summarizing account in Defendants’ Combined Statement of Material
Facts at 4-5, ECF No. 153; Defendant’s Memo of Law in Opposition to PSJ at 4, ECF No. 156;
Defendants’ Combined Statement of Material Facts at 12, ECF No. 153).
22
See supra at 6 n. 5 (summarizing Defendants’ Combined Statement of Material Facts at 12-13,
ECF No. 153).
See supra at 6-7 n. 6 (summarizing Defendants’ Combined Statement of Material Facts at 5-6,
ECF No. 153; Defendant’s Memo of Law in Opposition to PSJ at 4, ECF No. 156).
23
See Summary Judgment Memo at 5, n. 6, ECF No. 166 (“The Court observes that statements
which constitute promises of future performance differ from those which constitute
representations of existing fact. See discussion, infra, e.g. fn.13; Section IV.C.”).
24
21
and are of promise not reflected in Subcontract Agreements which otherwise expressly provide
for workforce standards, i.e., indicating that the sophisticated business parties knew how to
include such contract terms.25 Finally, the Court directs the parties’ attention to the execution
date of the first Subcontract Agreement in April, 2008, Defendants’ assertion that construction
performance by friends/family of local store employees was “immediate”; the record indicia of
Defendants’ familiarity/relationships with numerous local store employees and duration/extent of
its residential/commercial construction projects and related business dealings with said local
store; and the late August 2008 through late October 2008 execution dates of the other four (4)
Subcontract Agreements. The Court therefore notes, without deciding herein, a substantial
question as to colorability of any claim that Defendants entered the Subcontracts in reasonable
reliance on a workforce representation.
For the reasons set forth above, the contractual consequential damage limitation provisions at
issue stand as to those claims encompassed by their language, i.e., those related to “defects in
workmanship or materials” and the damages flowing therefrom. The Subcontract Agreement
damage limitation is, however, inapplicable (a) to any damages from asserted breach of the 1997
CCA (Count IX)26 or (b) under Defendants’ established fraudulent-inducement misrepresentation
claims, if any, damages proximately flowing from said misrepresentation(s). See supra
(delineating claims). And, as noted below, the Subcontract Agreement consequential damage
limitations do not exclude direct damages under the contract for defects or delays in
See id. at 10-11, n. 16 (“The Court observes that the only provision specifying particular
qualifications of the subcontractor laborers appears with regarding to decking, which requires
that all work ‘be performed by trained and experienced personnel. . . . . The Court also notes the
facts of record regarding the duration and scope of Mortimer’s experience in residential
construction.”).
25
26
See supra at 6, n. 3.
22
performance.
C. Lost Profits as Within Contractual Limitation of Damages
Defendants assert that “even if the damages limitation provision stands, lost profits are
available because they are not expressly excluded and the language is ambiguous . . . .”
Defendants’ Memo of Law at 2, ECF No. 201. In support of this position, Defendants make
three arguments:
First, Defendants contend that “to reach this conclusion the Court need only to review the
contortions that 84 Lumber is now going through to argue that the consequential damages
language applies to all claims”. Id. at 13. However, the fact that a party may urge an overbroad
interpretation does not render contractual language ambiguous. Ambiguity is an objective
standard based on a reasonable interpretation, rather than upon the parties’ litigation positions.
See Plaintiff’s Memo of Law at 17-18, ECF No. 202.
Second, Defendants contend that “[u]nder Maryland law, lost profits is an uncertain term,
because they can be both “general damages” and “special [or consequential] damages”. Id.
(citing CR-RSC Tower I, LLC v. RSC Tower I, LLC, 429 Md. 387, 408, 56 A.3d 170, 182
(2012)). However, the Maryland Court of Appeals proceeded to resolve the claimed uncertainty
in the very passage cited:
There is some uncertainty over which category applies to lost profits claims. . . .
[T]his is because the word “profit” can refer either to business profits or the
increase in value of an item. In the former instance, when lost profits are claimed
for lost income from business operations that would have been made but for the
breach, the claim is for “consequential” or “special” damages. In the latter
instance when the lost profits claim is based on the value of the item promised,
the claim is for “general damages,” as the damages are “the difference between
the contract price and the fair market value at the time of breach.”
23
Id. (citations omitted). See also Plaintiff’s Memo of Law at 19, ECF No. 202. Under the Tower
analysis, to the extent Defendants seek damages for profits their real estate business might have
made but for 84 Lumber’s defective and delayed services, that constitutes a claim for
consequential damages, and is barred by the damages limitation provision. On the other hand, to
the extent Defendants seek to recover the value of the thing promised, that is equivalent to a
claim to for the value of repair or replacement under the warranty, which is not barred by the
damages limitation provision. Whether Defendants choose to refer to the latter claim as a claim
for “lost profits” is of no moment.
Third, Defendants contend that the asserted ambiguity of the term “consequential damages”
is confirmed by the fact that “in nearly every case discussing whether a consequential limitation
applies, the clause at issue specifically excluded lost profits, expressly defined lost profits as
consequential damages, or both.” Defendants’ Memo of Law at 14, ECF No. 201 (emphasis
added). Commonly-used contract terms are not rendered ambiguous merely because some (or
many) draftsmen choose to illustrate their scope with examples. Defendants’ position might
entail the problematic result that a limitation on consequential damages that fails to list every
illustrative example would be ambiguous as to any application not listed. The courts have not
generally found such limitations to be ambiguous. Moreover, it appears to the Court that
numerous instances of commercial parties expressly listing lost profits as an example of
consequential damages - rather than tending to create ambiguity - indicates that lost profits are
commonly understood to constitute consequential damages, whether so listed or not.27
See, e.g., Waters, 775 F.2d at 592 (“In no event shall the owner be entitled to recover for
incidental, special or consequential damages such as . . . loss of profits or revenue . . . .”)
27
24
_________________________
Lisa Pupo Lenihan
United States Magistrate Judge
Cc:
Counsel of record
Dated: October 11, 2016
25
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