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.