Texas Supreme Court on Damages on Top of Specific Performance
Before reading this case, I had assumed that one could get damages on top of specific performance, whenever the award of such damages was necessary to make the injured party whole. But in Texas, and likely in some other jurisdictions, the damages that one gets in addition to equitable relief have to themselves be equitable. I am not sure what that means, and this case does not relieve my confusion, as the court seems to define equitable damages the same way I would define damages available at law.
In 2015, White Knight Development, LLC (White Knight) bought a parcel of land from the Simmons family for $400,000. The property had been divided subject to restrictions, including set-back requirements, which were subject to revision at the election of the residents. White Knight was concerned that the restrictions would interfere with its plans for the development of the property, so it negotiated a buy-back provision:
Seller agrees that if any of the Restriction concerns . . . are reinstated at any time prior to January 1, 2018, Buyer has the option (but not the obligation) to demand that Seller repurchase the Property. If Buyer exercises this option, Seller shall be required to repurchase the Property for the purchase price stated in the Sale Contract, minus any unpaid balance owed by Buyer . . .
The residents did indeed extend the restrictions, and White Knight exercised its option, but the Simmonses refused to buy back the property. White Knight sued for breach of contract, fraudulent inducement and other claims. It sought both specific performace of the buy-back provision and damages. The Simmonses cited alternative facts: they had no obligation to pay because the restrictions never occurred, and they counterclaimed for a declaration that the restrictions were invalid.
At trial, White Knight provided evidence of the disastrous consequences that the Simmonses’ refusal to repurchase had on its business, including loan defaults, fees, foreclosures, and business interruption. The trial court sided with White Knight, ordering the Simmonses to pay $400,000 as specific performance and adding over $300,000 additional actual and consequential damages. It makes sense to characterize the initial $400,000 as specific performance, because White Knight had to transfer title back to the Simmonses. Both parties were subject to positive injunctions; hence specific performance.
Both parties appealed, with White Knight pressing its fraudulent inducement claim and the Simmonses seeking to reverse the trial court’s ruling that they were estopped from denying the efficacy of the restrictions and challenging both portions of the judgment against them.
The appellate court upheld the legal rulings of the trial court, except for the award of damages on top of specific performance. Although it recognized that damages on top of specific performance can be awarded if necessary to put the non-breaching party in the position they would have been in had the promise been performed, the appellate court was of the view that the additional damages had to be equitable in nature, and the trial court had not invoked equity in connection with the damages.
In White Knight Development, LLC v. Simmons, the Supreme Court of Texas reversed the court of appeals and remanded to the trial court to adjust its calculation of additional damages. The Supreme Court also invoked this notion that additional damages had to be equitable in nature while also saying that they return the non-breaching party to the position it would have been in had the promise been performed. That’s what law does. I’m not sure why a court would characterize those damages as equitable. As authority, the Court cites to Corbin, but Corbin does not mention equity:
A decree for specific performance seldom brings about performance within the time that the contract requires. In this respect, such a decree is nearly always a decree for less than exact and complete performance. For the partial breach involved in the delay or in other existing non-performance, money damages will be awarded along with the decree for specific performance.
The Court explains:
[T[he expenses recoverable are not coextensive with damages available at law for breach of contract. Rather, the equitable monetary award is more limited in nature. . . . In this case, White Knight may recover only those expenses that are directly traceable to the delay, foreseeable, commercially reasonable, and incurred in connection with its care and custody of the Simmons property.
I don’t follow. How is that different from the requirement that consequential damages be foreseeable and the duty to mitigate damages? I don’t see why the recovery that the court describes as “equitable” would be any different or “more limited” than the recovery available at law. The Court uses the word “directly,” which might lead one to think that consequential damages are unavailable in equity. However, the Court also uses the word “foreseeable,” and as direct damages are always foreseeable, that word must apply to consequential damages. Moreover, if you deprive the aggrieved party of their foreseeable, consequential damages, you are not putting that party in the position it would have been but for the breach, which is equity’s stated goal.
The Court then takes a, to me, confusing and unnecessary detour into the law of damages under the UCC. The Court thinks that the UCC, in its definition of “incidental damages,” provides useful analogies to the harms that White Knight suffered. Under UCC § 2-710, “a seller’s incidental damages include commercially reasonable expenses incurred in the care and custody of goods after the buyer’s breach.” I don’t think the analogy works. I think some of the harms that White Knight suffered are better understood as consequential rather than incidental.
If I am right about that, using the UCC is problematic in this context because the UCC does not contemplate that sellers might have consequential damages. Some courts (including the Sixth Circuit, the Eleventh Circuit, and most relevantly, the Fifth Circuit applying Texas law) have refused to allow their recovery. I prefer to take Karl Llewellyn (below) seriously but not literally and would allow for the recovery of consequential damages consistent with the general rules for remedies laid out in § 1-305(a). That provision allows for the recovery of consequential damages as provided by the UCC “or other rule of law.” It should not matter that the UCC says nothing about seller’s recovery of consequential damages. It nowhere prohibits them. The common law can fill in the gaps and provide a mechanism for the recovery of consequential damages. But this whole excursus is unnecessary because this was never a UCC case to begin with, so it makes no difference whether the monetary damages on top of specific performance are incidental or consequential.
No matter, in substance, the Supreme Court seems to have gotten things right, insisting that White Knight recover only those actual or consequential damages attributable to the Simmonses’ breach. The Supreme Court correctly notes that White Knight cannot recover property tax and interest that accrued before the Simmonses’ obligation to repurchase the property accrued. In addition, non-breaching parties can only recover foreseeable types of damages, even if the actual amount of damages is not foreseeable. They cannot recover types of damages that are more attenuated and not foreseeable.
And so, the Supreme Court concludes:
Each category of expenses awarded must be (1) directly traceable to the defendant’s delay in performance, (2) foreseeable at the time of contracting, and (3) commercially reasonable.
All of this is true under the standard law of contracts damages.