How Will COVID-19 Impact Recovery of Damages in Civil Litigation?

Andrew Pearce, Lee A. Collins

What can you recover when the other party breaches your contract?

  • In the wake of the COVID-19 pandemic, many parties will likely face the question of how to deal with another party’s breach of their contract. Much of the current authorship has focused on COVID-19 as a basis for excusing a breaching party from its performance under a contract. Also important is the focus of this viewpoint; namely, (1) what an injured party may be entitled to recover in the event of a breach that is not excused, (2) what, if anything, an injured party is obligated to do to minimize the damages they stand to suffer, and (3) how COVID-19 impacts those damages and the non-breaching parties’ obligation to mitigate.

Liquidated Damages

  • Liquidated damages are a contractually-agreed method between the parties of a dollar amount or a method of calculating a dollar amount, to compensate the non-breaching party in the event the other party breaches the contract.
  • However, a party seeking to enforce a liquidated damages provision must show that at the time the agreement was executed, (1) the harm caused by the anticipated breach was incapable or difficult of estimation, and (2) the amount of liquidated damages was a reasonable forecast of just compensation.
  • If there is an “unbridgeable discrepancy” between the actual damages and the liquidated damages, the liquidated damages were not an accurate forecast of just compensation and the provisions will be invalidated as a penalty.
  • It does not appear that COVID-19 will impact the question of whether a contractual liquidated damages’ provision is enforceable or invalidated as a penalty, particularly if the contract was negotiated and signed before the COVID-19 pandemic caused a nationwide economic shut-down.

Limitations on Consequential Damages

  • Generally speaking, a party stands to suffer two types of damages when a contract is breached: direct and consequential. Direct damages are those that result naturally and necessarily from a breaching party’s wrongful conduct and the breaching party would have necessarily foreseen these damages in case of breach.
  • By contrast, consequential damages result naturally but not necessarily from a breaching party’s wrongful conduct, but such damages must still be foreseeable and directly traceable to the breach of contract.
  • For example, if a mechanic fails to put oil in a person’s car during an oil change, the cost to replace a resulting engine failure would be direct damages. However, that same person’s inability to make money as an Uber driver would be consequential damages.
  • Classifying direct versus consequential damages can be difficult, at times, and must be evaluated on a case by case basis.
  • The distinction is important, however, because many agreements between parties contain limitations on a party’s ability to recover consequential damages. Further, a party seeking to recover consequential damages must specifically plead for them in a lawsuit.
  • COVID-19’s impact on consequential damages will be decided in the courts, as courtrooms and litigants become more comfortable with investing time, effort and energy in lawsuits. We anticipate, for example, that breaching parties will point to COVID-19 as an independent cause of the non-breaching parties’ alleged consequential damages.

Duty to Mitigate

  • The general rule in Texas is that an injured party must exercise reasonable care to minimize damages and the failure to avoid or mitigate damages may serve as a bar to an injured party’s ability to recover them.
  • The standard is that of ordinary care, and what an ordinary prudent person would have done under the same or similar circumstances, and while an injured party has a duty to minimize its damages, this duty arises only if the damages can be avoided or mitigated with only slight expense and reasonable effort.
  • As such, an injured party need not take all possible actions that might possibly reduce the amount of their damages and the burden of proving a failure to mitigate damages is upon the party who caused the loss.
  • With respect to mitigation of damages by the non-breaching party, we anticipate that the non-breaching parties will point to the COVID-19 pandemic as an unforeseeable event that prevented that party from entering into a transaction that could have minimized its damages.

Attorney’s Fees

  • Chapter 37 of the Texas Civil Practices & Remedies Code deals with declaratory judgments, and the stated purpose is to settle and to afford relief from uncertainty and insecurity with respect to rights, status, and other legal relations. Importantly, a court may award costs and reasonable and necessary attorney’s fees as are equitable and just under this chapter to either party – a plaintiff or defendant.
  • Chapter 38 of the Texas Civil Practices & Remedies Code authorizes a prevailing claimant to recover attorney’s fees “in addition to the amount of a valid claim and costs.” Civ. Prac. & Rem. Code § 38.001(a) and §38.002. However, courts have thus concluded that a party who prevails in defending against an enumerated claim cannot recover attorney’s fees under this chapter. Additionally, courts have held that attorney’s fees cannot be recovered from business entities not organized as corporations, such as limited liability partnerships or LLCs.
  • Many contracts contain a prevailing party provision, which sets out the terms by which the parties to a contract may be entitled to recover fees in the event of a dispute. The parties’ contract may also include important provisions regarding the agreed location of any dispute, the choice of law to govern any dispute, and the process for dispute resolution (such as mandatory mediation or arbitration).