Contract Agreements To Limit Damages Do Not Always Protect Businesses

Business contracts typically include a clause that limits damages to the actual monetary amount that is lost due to a breach of the contract. While the specific language may differ, these limitation clauses usually state that, in the event of a breach of the contract, the breaching party is not liable for punitive damages, multiple damages, lost profits, losses associated with business interruption, or other damages indirectly caused by the breach. As a general rule, these damages limitation provisions are enforceable, so businesses should be sure to understand their ramifications before signing a contract. Business leaders also should be aware, however, that sometimes a court will not enforce these limitation provisions, which could expose a business to the full range of potential damages, including punitive damages and legal fees.

A recent Massachusetts Appeals Court case, captioned The Exhibit Source, Inc. v. Wells Avenue Business Center, LLC, provides a clear example of the circumstances under which a damages limitation clause does not apply. This case involved a commercial lease dispute between The Exhibit Source, Inc. (“Exhibit Source”), a commercial tenant, and Wells Avenue Business Center, LLC (“Wells Avenue”), a commercial landlord. These parties had signed a commercial lease agreement, which contained a clause that read, “In no event will Landlord be liable for punitive damages, lost profits, business interruption, speculative consequential or other such damages.”

When Exhibit Source and Well Avenue entered into the commercial lease agreement, Exhibit Source furnished Wells Avenue with a security deposit in the amount of $15,982. The commercial lease agreement contractually required that this security deposit must be returned to Exhibit Source within 30 days after the agreement terminated, although Wells Avenue could retain whatever amount was necessary to cover any damages caused by Exhibit Source.

The lease terminated on August 31, 2013, and the parties jointly walked through the vacated lease premises on September 4, 2013. At the time of the September 4 walk-through, neither party observed any damage to the property. Exhibit Source began requesting return of the full security deposit in October 2013, and Wells Avenue repeatedly stated the full deposit amount would be returned, but payment was never made.

In April 2014, Wells Avenue returned $1,202 to Exhibit Source, but kept the remaining balance of $14,780 to cover alleged damages to the property. Exhibit Source subsequently sued Wells Avenue in May 2014, and claimed that Wells Avenue’s refusal to return the full security deposit was a breach of contract by Wells Avenue. Significantly, Exhibit Source also claimed that Wells Avenue had violated Massachusetts General Laws Chapter 93A by engaging in unfair and deceptive trade practices. This additional count was significant because Chapter 93A violations allow the wronged party to recover trebled damages and attorneys fees.

Following a trial, the judge ruled that Wells Avenue violated Chapter 93A by falsely telling Exhibit Source, over the course of several months, that it was going to return the full security deposit, but then withholding most of the security deposit on false pretenses with the expectation that Exhibit Source would just drop the matter. The trial judge then awarded Exhibit Source a judgment of $44,340 (which is triple the amount of the unreturned security deposit of $14,780), and ordered Wells Avenue to pay Exhibit Source’s attorney fees.

Wells Avenue appealed, on the grounds that the lease’s limitation of damages, as quoted above, clearly states that neither party is entitled to receive “punitive damages … [or] consequential or other damages” as the result of any breach of contract. The Appeals Court rejected Wells Avenue’s argument, on the grounds that Wells Avenue’s wrongful effort to improperly keep Exhibit Source’s security deposit went beyond a simple breach of contract. Therefore, even though the lease agreement contained a contractual clause that limited damages to actual losses and expressly provided that punitive damages (such as trebled Chapter 93A awards) were not recoverable, the Appeals Court ruled that this contractual clause did not apply because Wells Avenue’s conduct went beyond the scope of the contract and, instead, constituted unfair and deceptive business practices.

As noted above, business contracts typically include a damages limitation clause, which is designed to protect the parties from the risk of punitive damages in the event of a breach of contract.These clauses are generally enforceable but, as illustrated in Exhibit Source v. Wells Avenue, businesses that are accused of violating Chapter 93A should not simply rely on such a damages limitation clause; instead, they should carefully consider the full scope of their potential exposure if the damages limitation clause is ruled to be inapplicable.

Massachusetts Supreme Judicial Court Invalidates Choice-of-Law Provision in Non-Competition Agreement

Businesses and employees in Massachusetts routinely enter into non-competition, non-solicitation, and confidentiality agreements. These agreements are designed to protect the business from the wrongful disclosure and unauthorized use of the business’ confidential information, in the event an employee changes job and begins working for a competitor. These agreements almost always include a choice-of-law and forum-selection provision, which states that, in the event the business sues the former employee to enforce the non-competition, non-solicitation, and confidentiality agreement, the employee agrees that Massachusetts law will apply and that the suit will be heard in a Massachusetts court. Significantly, the Supreme Judicial Court, in a case captioned Oxford Global Resources, LLC v. Hernandez, recently ruled that the choice-of-law and forum-selection provision does not apply, and that the Massachusetts company must file suit in California to enforce its non-competition, non-solicitation, and confidentiality agreement against a former employee.

The plaintiff in that case, Oxford Global Resources, LLC (“Oxford”), is a technology recruiting and staffing company that is headquartered in Beverly, Massachusetts. In 2013, Oxford hired the defendant, Jeremy Hernandez, to work in an office that Oxford maintains in California. At the time he was hired, Mr. Hernandez signed a non-competition, non-solicitation, and confidentiality agreement. This agreement included a provision that “this Agreement will be governed by the laws of Massachusetts, without giving effect to the conflict of laws provisions thereof”, and the agreement further provided that any lawsuit involving the agreement must be filed in Massachusetts. Indeed, the agreement specifically stated that Mr. Hernandez “hereby waives any claims against or objections to” the requirement that any suit must be filed in Massachusetts.

In 2016, Mr. Hernandez quit working for Oxford, and began working for one of Oxford’s competitors located in California. Oxford then filed suit against Mr. Hernandez, alleging that Mr. Hernandez violated the terms of the non-competition, non-solicitation, and confidentiality agreement. Oxford filed this suit in Massachusetts, in accordance with the agreement’s aforementioned choice-of-law and forum-selection provision.

Mr. Hernandez filed a motion to dismiss Oxford’s suit on the grounds that Massachusetts was a forum non conveniens, and that California was a more appropriate venue for this litigation. (Within this context, “forum non conveniens” is a legal doctrine that allows a court to refuse to take jurisdiction over a matter, where there is a more appropriate forum available to the parties.) Oxford opposed this motion to dismiss, on the grounds that Mr. Hernandez explicitly waived any objection to litigation in Massachusetts when he agreed to the choice-of-law and forum-selection provision discussed above.

The Supreme Judicial Court ruled in favor of Mr. Hernandez, and ordered that Oxford’s lawsuit in Massachusetts must be dismissed because Massachusetts was a forum non conveniens. In reaching this decision, the Supreme Judicial Court first determined that the lawsuit should be governed by California law (despite the parties’ agreement to apply Massachusetts law), because “California has a much stronger interest than Massachusetts in deciding whether Hernandez breached his contract or committed a tort in trying to convince some of Oxford’s customers or consultants in California to use a competitor instead” and, by contrast, “Massachusetts has very little interest in the outcome of this lawsuit.” Because California has a much stronger interest than Massachusetts in the outcome of this dispute, the Supreme Judicial Court ruled that the parties’ choice-of-law agreement must be voided on public policy grounds.

The Supreme Judicial Court also voided the parties’ forum-selection agreement, and ordered that Oxford’s suit must be dismissed in Massachusetts and, if Oxford so chooses, re-filed in a California court. The Court reached this decision on the grounds that “a California court is at least as capable as a Massachusetts court to hear this matter and fairly decide it”, especially since “everything relevant to this case happened in California”, “all relevant witnesses are located in California and cannot be compelled to testify in Massachusetts”, “it will be easier and more efficient for both Hernandez and Oxford to try this case in California”, and “Hernandez will be unable adequately to defend himself unless the case is litigated in California”.

In sum, the Supreme Judicial Court, citing public policy considerations, overruled the parties’ own choice-of-law and forum-selection agreements and ruled that “in the interest of substantial justice this action should be dismissed on the ground of forum non conveniens so that the case can be resolved in a California court.”

The Oxford case is a significant decision for Massachusetts businesses that conduct business in other states, because the Supreme Judicial Court has clearly limited the ability of businesses and employees to rely upon their own choice-of-law and forum-selection agreements. Accordingly, while every case is dependent on its own set of unique factual circumstances, businesses in Massachusetts should confer with legal counsel in order to assess their rights and obligations in light of the Oxford decision.