Opinion
Civil No. 00-474-AS
March 19, 2002
O P I N I O N
Presently before the court is Menlo Logistics, Inc's. ("Defendant"), motion in limine. Defendant seeks an order "excluding any testimony, evidence, argument or comment concerning certain categories of its alleged damages based on the limitation of damages provision contained in the Warehouse Services Agreement between the parties, which the court has previously ruled is enforceable against plaintiff's surviving claims of fraud and breach of contract."
BACKGROUND
Platt Electric Supply, Inc. ("Plaintiff"), is a wholesale distributor of electrical parts and supplies.
On April 14, 1999, the parties entered into a Warehouse Services Agreement (the "Agreement") in which Defendant assumed full responsibility for Plaintiff's warehouse, including modernizing its systems, and managing and operating the warehouse with Defendant's personnel. Prior to the effective date of the Agreement, which was June 14, 1999, Defendant participated in the operation of the warehouse. In March 1999, Defendant placed a number of its warehouse managers in the warehouse and in May 1999, Defendant replaced all of Platt's warehouse employees with its own employees.
After taking over the warehouse, it became apparent to Defendant that it could not perform the services set forth in the Agreement for the budget set forth in the Agreement. On October 22, 1999, Defendant informed Plaintiff that it considered the Agreement to be null and void and that it would soon begin to lay off warehouse employees. On November 15, 1999, the parties mutually agreed to terminate the Agreement without a waiver of either parties' rights. Plaintiff took sole possession and control of the Warehouse on November 18, 1999.
The Agreement contains a limitation of liability provision which provides:
Furthermore, neither party will in any case be liable for any indirect, special, incidental, consequential, punitive and/or other extraordinary damages of any kind resulting form of in any way related to this Agreement, whether based on contract, tort or any other legal theory.
This court has held that this clause is enforceable. Based on the limitation language, the court ruled that Plaintiff was unable to recover it's punitive damages. With regard to the consequential damages, the court noted that the evidence before the court was sparse and expressed concern over characterizing the damages sought by Plaintiff as direct or consequential in the absence of additional evidence.
This court then held that:
In the absence of some legitimate evidence underlying Defendant's damage summaries, the court is unable to determine, at this time, which damages requested by Plaintiff are direct damages and which are incidental or consequential damages. Accordingly, while the court has found that the limitation of liability language is enforceable, with the exception of the punitive damage claim, the jury must determine the proper characterization for Plaintiff's damage claims.
Defendant is now asking the court, for a second time, to characterize a number of Plaintiff's alleged damages as consequential and to bar Plaintiff from asserting such consequential damages at trial.
DISCUSSION
The first issue for the court to consider is whether the characterization of damages as direct or consequential is a question of law for the court or a question of fact for the jury. As noted above, this court previously stated that, because of an absence of evidence on the underlying basis for Plaintiff's damage claims, the issue must be left for the jury. That does not mean, however, that when the court has sufficient evidence prior to trial to properly characterize a specific claim for damages as consequential rather than direct, the court must still defer the issue to the jury.
Defendant argues that the court has the responsibility for determining whether a plaintiff's claims for damage are properly characterized as direct or consequential. In support of this argument, Defendant relies on three Oregon cases. A careful review of the cases cited establish that in two of these cases, the court addressed the issue of the characterization of the damages after the presentation of the evidence at trial. In the remaining case, Duyck v. Northwest Chemical Corporation, 94 Or. App. 111 (1989), the trial court addressed the issue in a summary judgment motion and determined that plaintiff's claim for damages under its sole claim for breach of warranty, were consequential damages. It appears that the court relied, at least in part, on the defendant's characterization of plaintiff's claim as one for lost profits because the court never specifically discussed the proper characterization of the plaintiffs claim. The court described the plaintiff's damages as compensation for a reduced blueberry crop yield and stated that claims for lost profits are generally considered consequential damages under the Uniform Commercial Code ("UCC").
Calbag Metals, Co., v. Guy F. Atkinson Company, 95 Or. App. 514 (1989) and McGinnis v. Wentworth Chevrolet Co., 295 Or. 494 (1983)
The court then quoted the UCC definition of consequential damages and held that:
Defendant warranted that lannate was reasonable fit to use on blueberries if it was applied while bees were not actively visiting the area. Damage resulting from a breach of that warranty would be consequential and fall within Dupont's exclusion [of consequential damages.]"
Id. at 117.
The court in Duyck made no comment on whether it was the court's responsibility to characterize damages as direct or consequential. The issues in Duyck were clear and supported by uncontradicted evidence. The plaintiff brought one claim for breach of warranty and was seeking damages for a reduced blueberry crop. In that situation, it was appropriate for the court to characterize the plaintiff's damages as consequential.
The scenario currently before the court could not be more different. First, an issue exists about whether the UCC even applies in this case. The UCC applies primarily to contracts for the sale of goods. Here, we have a contract which combines the sale of goods and services. Also, in addition to the breach of contract claim, we have a fraudulent misrepresentation claim, which arguably introduces the possibility of another definition for direct and consequential damages. Finally, Plaintiff has alleged no less than 16 different types of damages, some of which have already been addressed and eliminated by the court.
The court stands by its prior decision that, in most instances, the proper characterization of a particular claim of damages as either direct or consequential is an issue of fact which the jury must decide. However, the court concedes that in certain circumstances, where the evidence is clear and undisputed and the law is clear cut, the court may rule, as a matter of law, that particular damages are either direct or circumstantial.
The next issue, which was already mentioned, is the application of the UCC to this case. Defendant argues that the UCC clearly applies and defines the parameters of direct and consequential damages. Plaintiff argues that the underlying contract was primarily one for services and, as such, is not governed by the UCC. Neither party has offered any guidance on the proper measure of damages for Plaintiff's fraud claim.
The Oregon courts have consistently applied the UCC to cases involving contracts for the sale of goods. In Illingsworth v. Bushong, 297 Or. 675 (1984), the court reasoned that the UCC should be viewed as a starting point for analyzing contracts in general, while acknowledging that there may be reasons for varying from the UCC provisions based on the individual circumstances of each case.
In determining whether a contract is one for the sale of goods or one for services, the court must look to the "essence of the agreement." RRX Industries, Inc. v. Lab-Con, Inc., 772 F.2d 543, 546 (9th Cir. 1985). "Where a sale predominates, incidental services provided do not alter the basic transaction." Id.
The services to be performed by Defendant clearly predominate in the Agreement. The Agreement was titled "Warehouse Services Agreement" and the first two pages of the Agreement describe the particular services to be performed by Defendant. The pricing language of the Agreement is limited to the amount Plaintiff will pay Defendant for services rendered. The Agreement provides that Defendant is to be considered an independent contractor and provides for an initial term of five years with automatic renewal for successive periods of two years thereafter in the absence of written notice of cancellation by either party. The first mention of goods to be purchased under the Agreement are on the second page of Schedule A where Plaintiff's start up and capital costs are addressed. Schedule A provides that Plaintiff will purchase computer equipment for $421,500 and other capital equipment for $409,846. This is clearly secondary to the services to be performed under the Agreement which would cost Plaintiff between $250,000 and $350,000 per month for an initial term of five years.
The court finds that the Agreement was primarily a contract for services and, therefore, not governed by the UCC. However, in light of the teaching of Illingsworth, the court should still look to the UCC for guidance in the determination of whether damages are direct or consequential for the purposes of Plaintiff's breach of contract claim. Additionally, the UCC addresses remedies for fraud and provides that such remedies include those available for a nonfraudulent breach of contract.
Accordingly, the court finds that the UCC provisions addressing remedies applies to all of Plaintiff's claims.
Under Oregon's UCC, a buyer's measure of damages for nondelivery, repudiation, or, in this case, mutual termination:
is the difference between the market price at the time when the buyer learned of the breach and the contract price together with any incidental and consequential damages provided in O.R.S. 72.7150, but less expenses saved in consequence of the seller's breach.
O.R.S. 72.7130(1). Consequential damages resulting from the seller's breach of contract include: Any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be presented by cover or otherwise.
In the case currently before the court, Plaintiff really hasn't presented any evidence of the market price for the services to be performed under the Agreement. Up until now, the parties had seemed to agree that direct damages, or those the parties are entitled to recover under the Agreement, were those "flowing naturally from the breach, which are presumed to have been foreseeable" which differs from direct damages available under the UCC. In the absence of evidence of what Plaintiff would claim as direct damages under the UCC, the court may have some difficulty in determining what damages are truly consequential rather than direct. However, the court will address each type of damage claim objected to by Defendant and attempt to provide as much guidance to the parties as possible under the circumstances.
Defendant characterizes Plaintiff's claims for "lost sales due to inaccurate shipments" and "lost opportunity costs" as lost profits. Lost profits are consequential damages under the UCC. Calbag Metals Co., v. Guy F. Atkinson Company, 95 Or. App. 514, 602 (1989). This characterization is generally based on the fact that lost profits are caused by customers choosing not to do business with the plaintiff as a result of defendant's breach. The loss is directly related to the actions of third parties, even though those actions were a consequence of the breach of the contract.
Plaintiff's representative testified at his deposition that the lost sales figure was based on customers that Plaintiff lost as a result of poor service. This is clearly a claim for lost profits, or consequential damages, that is barred by the limitation of liability language.
The lost opportunity costs are described as the "loss of expected savings that would result from the modernization of Platt's warehouse operations" for the initial 12-month period of the Agreement.
This is really not a claim for lost profits and is not based on decisions made by third parties. It is the amount that Plaintiff would have saved in the first twelve months of the Agreement had the contract been complied with. This amount would not be covered by direct damages, which would merely provide Plaintiff with the difference in the market value of what was promised under the Agreement with the price of the services based on the Agreement. The likelihood of savings was clearly within the mind of both parties at the time the Agreement was entered into. Plaintiff's sole reason for modernizing their warehouse systems was to save money. The court finds that Plaintiff's lost opportunity costs are consequential costs that are not recoverable under the Agreement.
The next category of damages mentioned by Defendant are "Costs incurred in facilitating Defendant's performance." These include costs incurred in correcting and expediting inaccurate deliveries and resolving discrepancies, top management expenses incurred due to Defendant's performance under the Agreement, costs incurred in technology integration and implementation.
Arguably, Plaintiff incurred these costs in an effort to assist Defendant to perform in accordance with the terms of the Agreement and would not have incurred these costs had Defendant performed as required under the Agreement. Based on this characterization, these services should have been performed by Defendant without cost to Plaintiff and would be included in the market value of the Agreement if performed in accordance with the terms of the Agreement. The court finds that these damages are direct damages and are recoverable by Plaintiff.
The court would expect that these damage claims would be incorporated by Plaintiff into their direct damage calculation based on the fair market value of the services and goods promised in the Agreement less the amount to be paid to Defendant under the terms of the Agreement.
The final category, costs of recovering the operation of the warehouse, consists of management expenses, general transition costs and costs to regain inventory control. As noted above, the Agreement was for an initial five-year period with either party having the right to cancel every two years thereafter. Plaintiff would have had to incur these transitions costs whenever the Agreement was cancelled, whether under the terms of the Agreement or not. These costs are not the direct result of Defendant's breach of the Agreement and, therefore, are not recoverable under the terms of the Agreement.
CONCLUSION
Defendant's motion (# 103) in limine is GRANTED in part and DENIED in part. Defendant's motion is GRANTED with regard to Plaintiff's damage claims for lost sales (Category 8); lost opportunity costs (Category 9); and costs of recovering the operation of the warehouse (Categories 5, 6 and 10); and is DENIED with regard to Plaintiff's damage claims for costs incurred in assisting or correcting Defendant's performance under the Agreement (Categories 12, 13 and 15).