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Keywords

contractbreach of contractdamagesverdictcontractual obligation
contractdamagesappeal

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Rexnord Corp. v. DeWolff Boberg & Associates, Inc., 286 F.3d 1001

Facts

Rexnord hired DBA to improve productivity, paying $1.3 million for their services with a promise of $4 million in savings. However, after 33 weeks, the promised savings were not realized, and DBA's recommendations led to poor morale and increased turnover among employees. Despite DBA's claims of Rexnord's lack of cooperation, the court found that DBA's failure to fulfill its contractual obligations was the primary cause of the damages incurred by Rexnord.

The consulting agreement was drafted by DBA and provides that DBA 'shall provide, on a timely basis, and to the best of its ability, the professional services as generally outlined in the Proposal from the Analysis Report.'

Issue

Did DBA breach its contract with Rexnord, and were the consequential damages claimed by Rexnord foreseeable and compensable under the contract?

The Court of Appeals, Posner, Circuit Judge, held that: (1) consequential damages, including lost business and market share, from firm's failure to perform undertakings spelled out in contract were foreseeable and thus compensable, but (2) 'collateral benefits' contract provision discussing expected improvements in employee morale and customer service could not support consequential damages award.

Rule

Consequential damages are compensable if they are foreseeable and arise directly from the breach of contract, while collateral benefits that do not constitute binding promises cannot support a damages award.

Contract law distinguishes between direct and consequential damages, the difference lying in the degree to which the damages are a foreseeable (that is, a highly probable) consequence of a breach.

Analysis

The court determined that DBA's failure to achieve the promised savings was a foreseeable consequence of its breach of contract. The jury found that the damages incurred by Rexnord, including lost business and market share, were a direct result of DBA's inadequate performance. However, the court ruled that the collateral benefits provision in the contract did not create enforceable obligations, thus disallowing any damages based on that provision.

DBA's refusal to refund any part of its fee when the project failed to generate the promised savings had the utterly foreseeable, indeed certain, consequence that Rexnord paid more for DBA's services than it had agreed to do.

Conclusion

The court affirmed the jury's verdict in favor of Rexnord, awarding $1.6 million in damages, while clarifying that the collateral benefits provision did not support the damages awarded.

Affirmed.

Who won?

Rexnord prevailed in the case, as the court found that DBA's failure to fulfill its contractual obligations directly caused the damages incurred by Rexnord.

The judgment in favor of Rexnord is Affirmed.

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