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Limitation of liability bars punitive damage and other Tennessee contract issues

June 21, 2022
Limitation of liability bars punitive damage and other Tennessee contract issues
          Concisely, subcontractor sued contractor for non-payment alleging breach of contract and violation of statute – Tennessee Prompt Payment Act.  While the contract was for renovation of an army base in Missouri the contract was signed in Tennessee and had Tennessee as choice of law. 
          Tennessee has a few interesting statutes pertaining to contracts for construction projects in Tennessee which the Court didn’t apply because the job wasn’t in Tennessee, but these will be of interest to you, especially if you’re in Tennessee or your state has similar law.  Interest on late payment is statutory as are punitive damages; retention is 5% and must be held in a segregated account. 
          The Court addressed the effect of the limitation of liability clause on a motion to dismiss the cause of action for punitive damages.  You will find this interesting:
          “Count Six: The Contract Bars Recovery of Punitive Damages.
Count Six seeks punitive damages for the conversion of FE&C's equipment [Doc. 52 ¶¶ 65-73]. FE&C alleges that Relyant had no right to possess FE&C's equipment under the subcontract [Id. ¶ 67]. FE&C further asserts that it is entitled to punitive damages because Relyant took the property with “an evil motive or reckless indifference to the rights of FE&C” [Id. ¶ 73]. Defendants counter that Section 22 of the contract bars punitive damages for conversion [Doc. 59 at 7-9]. Section 22 specifically limits Relyant's liability by prohibiting any recovery “IN CONTRACT, TORT, OR OTHERWISE, FOR ANY LOSS OF PROFITS OR BUSINESS, OR ANY SPECIAL, INCIDENTAL, INDIRECT, EXEMPLARY, PUNITIVE, OR CONSEQUENTIAL DAMAGES, ARISING FROM OR AS A RESULT OF” the contract [Doc. 52-1 ¶ 22 (emphasis in original)].
FE&C's conversion claim arises “from or as a result of” the subcontract and is subject to the contract's limitations on liability “in contract, tort, or otherwise” [See id. (deemphasized)]. Section 11.1 of the subcontract authorized Relyant to “take possession of all materials, supplies, equipment, and facilities purchased or paid for by [FE&C], for its own” upon termination of the contract for cause [Doc. 59-1 ¶ 11.1]. Thus, Relyant's right to the equipment (or lack thereof) turns on the terms of the subcontract and arises as a result of the subcontract. FE&C's Amended Complaint acknowledges that the conversion claim arises from the subcontract when asserting that  “Relyant's termination of the Subcontract was improper and, therefore, Relyant had no right to the possession of FE&C's equipment to complete the Project” [See Doc. 52 ¶ 67]. The fact that FE&C asserts a claim for the tort of conversion instead of a breach of Section 11.1 of the subcontract does not render the limitation on liability inapplicable. See Cheney v. IPD Analytics, LLC, 583 F.Supp.2d 108, 122 (D.D.C. 2008) (“[T]he mere fact that a plaintiff has pled his claim as a tort or a violation of federal statute does not determine whether the claim ‘arises' from the contract.”); see also Gen. Env't Sci. Corp. v. Horsfall, 25 F.3d 10481994 WL 228256, *8 (6th Cir. 1994) (table) (applying a forum selection clause even though the claim was not “a direct action for breach of contract” because the claim arose from the contract); Tritt v. Category 5 Records, LLC, 570 F.Supp.2d 977, 980-81 (M.D. Tenn. 2008) (applying a forum selection clause to a tort claim that arose under the contract). Moreover, Section 22 explicitly applies to any liability sounding in “TORT” as well [Doc. 52-1 ¶ 22 (emphasis in original)]. Because Relyant's right to the equipment, if any, arises from the subcontract, the contractual limitation on liability applies.
Contrary to FE&C's argument, the punitive damages waiver is not an unenforceable exculpatory clause in violation of Tennessee law [See Doc. 64 at 6-8]. Exculpatory clauses are generally enforceable; but, Tennessee prohibits parties from contracting away liability for intentional conduct, recklessness, or gross negligence. See Copeland v. Healthsouth/Methodist Rehab. Hosp., LP, 565 S.W.3d 260, 270 (Tenn. 2018). A party may, however, waive its right to punitive damages, which punish a wrongdoer beyond general liability. See Com. Painting Co. v. Weitz Co., No. W2019-2089-COA-R3-CV, 2022 WL 737468, at *28 (Tenn. Ct. App. Mar. 11, 2022) (finding that a contractual waiver barred punitive damages); see also Commc'ns Unlimited Cont. Serv., Inc. v. Comdata, Inc., No. 17-cv-1158, 2020 WL 606592, at *7 (M.D. Tenn. Feb. 7, 2020) (upholding a waiver of punitive damages); Shipwash v. United Airlines, Inc., 28 F.Supp.3d 740, 755 (E.D. Tenn. 2014)  (upholding a waiver of punitive damages because it did “not purport to deprive plaintiff of damages under the contract; rather it merely limits what damages plaintiff is entitled to and the manner in which those damages can be enforced.”). Section 22 does not allow Relyant to avoid liability for its actions. Punitive damages “are not intended to compensate a wronged party; they serve as punishment for bad conduct.” Com. Painting Co., 2022 WL 737468 at *27. Section 22, which FE&C agreed to, only precludes it from obtaining punitive, noncompensatory damages from Relyant [See Doc. 52-1 ¶ 22].
Further, a contractual provision waiving punitive damages can apply to a claim for conversion. FE&C cites to Bejing Fito Med. Co. v. Wright Med. Tech., Inc., No. 15-cv-2258, 2017 WL 5170126, at *1 (W.D. Tenn. Feb. 21, 2017), for the proposition that limitations of liability for intentional wrongdoing are null and void, but that case upheld a limitation on punitive damages because the clause “allow[ed] liability for actual and direct damages, and therefore [was] not substantively unconscionable, ” id. at *8. Similarly, Tennessee has upheld a waiver of punitive damages even against allegations of fraud. See Com. Painting Co., 2022 WL 737468, at *28. Punitive damage waivers, by their nature, protect against intentional conduct because punitive damages serve to punish egregious conduct. As specifically relevant here, punitive damages for conversion may only be awarded when the conversion is “accompanied by malice, insult, reckless and willful disregard of the plaintiff's rights, or other proof showing the aggravated nature of the act.” White v. Empire Express, Inc., 395 S.W.3d 696, 720-21 (Tenn. Ct. App. 2012) (internal citations omitted). Therefore, if Section 22 did not apply to intentional or reckless conduct, as FE&C asserts, then all waivers of punitive damages would be void. Allowing parties to intentionally waive punitive damages for conversion advances Tennessee's policy that punitive damages are “typically not available in a breach of contract case” and “are to be awarded only in  the most egregious of cases.” See Com. Painting Co., 2022 WL 737468, at *24 (internal citations omitted). Therefore, even assuming Relyant intentionally breached the contract without cause by converting FE&C's equipment, FE&C waived punitive damages. Consequently, FE&C has failed to state a claim for punitive damages in Count Six.”
          The full citation for the case is Fed. Eng'rs & Constructors v. Relyant Glob., 3:19-CV-73-KAC-JEM (E.D. Tenn. May 27, 2022)

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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301