U.S. District Court in Maryland Holds Contractor Barred from Recovering Consequential and Incidental Damages for Breach of Contract from Manufacturer of Steel Formwork Where Exclusive Remedy of Repair and Replacement Did Not Fail of Its Essential Purpose, But Denies Summary Judgment as to Some Negligence and Indemnity Claims

Potomac Constructors, LLC v. EFCO Corp.
2008 U.S. Dist. LEXIS 1602 (D. Md, Jan. 9, 2008)

Plaintiff general contractor and Defendant manufacturer entered into a purchase order agreement under which Defendant would engineer and supply steel formwork used to cast concrete segments to be incorporated in the support structure for a bridge. The agreement contained a clause, which specifically limited the Defendant’s liability to the repair or replacement of any defective work, explicitly disallowing incidental, direct or consequential damages.

The Plaintiff sued the Defendant for damages for breach of contract, costs caused by the Defendant’s negligent design, and indemnification costs from third parties’claims. The Defendant moved for Partial Summary Judgment to exclude damages which precluded by the Agreement.

The Court first addressed the issue of damages for breach of contract. Under the Maryland Commercial Code, parties are free to limit damages in the event of breach provided they are not unconscionable. Here, the parties specifically agreed that the Defendant’s potential liability was limited to the damages enumerated in the contract. Further, the Plaintiff was barred from recovering incidental and consequential damages, because these damages were explicitly excluded in the Agreement.

Next, the Court determined whether the exclusive remedy clause was enforceable. Under the Maryland Commercial Code, an exclusive remedy for breach of contract is unenforceable only if “circumstances cause the remedy to fail of its essential purpose.” This ensures that at least a minimum adequate remedy is available to a non-breaching party. Here, where the exclusive remedy under the Agreement was the repair and replacement of defective work and the goods were of complicated design, the Defendant had to use its best efforts to keep the goods in repair and working condition. The Court held that the exclusive remedy did not fail of its essential purpose because the Plaintiff did not establish bad faith or inability to repair, and the Defendant, in fact, repaired the formwork. It also noted that even if repair were not possible, if the goods were experimental in character or of complicated design, good faith efforts on the part of the seller to keep the goods in repair and working condition would satisfy the obligation. Accordingly, the Court granted Defendant’s Summary Judgment Motion with respect to the contractual damages.

The Court next determined Defendant’s claim for negligence could proceed under the economic loss doctrine. The economic loss doctrine generally bars a plaintiff from recovering in tort for purely economic losses. Under an exception to this rule, a plaintiff may nonetheless recover for the cost of the “negligently created defects that produce a substantial and unreasonable risk of death.” A plaintiff should not have to wait until substantial injury occurs before repairing defective work. The Court held that the plaintiffs claims for damages based on delayed delivery were barred by the doctrine, because it did not create a substantial likelihood of injury or death. However, the Court held that the Plaintiff could recover for the damages associated with the cost of repairing defective formwork, because an issue of fact existed regarding whether Defendant was negligent in designing the formwork and whether the defective formwork created a substantial risk of injury or death. (However, the court noted that these damages would overlap with the costs of repair and replacement allowable on a breach of contract theory.) Accordingly, the Court granted in part and denied in part Defendant’s Summary Judgment Motion with respect to the costs associated with Defendant’s negligence.

Finally, the Court held that the Defendant was by contract obligated to indemnify Plaintiff for injuries to third parties stemming from Defendant’s negligence, and denied Defendant’s Summary Judgment Motion to that extent. However, the Court held that the indemnity provision could not be used to circumvent the contractual limitation of damages so as to permit plaintiff to recover damages for contractual obligations owed to other parties arising out of the Defendant’s delays.

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