James D. Crosby – Business Trials & Arbitrations –

In Agam V. Gavra, 2015 WL 1843009, the Sixth District Court of Appeals recognized a “losing contract” limitation on reliance damages in California breach of contract cases, and laid out the respective burdens of the parties in such cases. For its discussion of reliance damages alone, this case will be useful to any California attorney litigating contract cases. And, its recognition of a “losing contract” limitation on reliance damages provides an opening to breaching parties to limit exposure for their own breaches.

The case involved a partnership agreement for the purchase and development of land in Los Altos Hills. The deal apparently spoiled with the collapse of the housing market and the Great Recession, leading to litigation. The losing side on breach claims appealed, contending, in part, the trial court misallocated the burden of proof on breach of contract reliance damages.

In its opinion, the Sixth District first noted the traditional definition of reliance damages in California:

One proper “measure of damages for breach of contract is the amount expended [by the nonbreaching party] on the faith of the contract.” (Mendoyoma, Inc. v. County of Mendocino (1970) 8 Cal.App.3d 873, 879 (Mendoyoma ); 1 Witkin, Summary of Cal. Law (10th ed. 2005) Contracts, § 883, p. 970 [“[One] measure of contract damages is the amount of the plaintiff’s expenditures, together with the reasonable value of his or her own services, in preparation and performance in reliance on the contract.”].) As our Supreme Court explained in Buxbom v. Smith (1944) 23 Cal.2d 535, 541, “ ‘[w]here, without fault on his part, one party to a contract who is willing to perform it is prevented from doing so by the other party, the primary measure of damages’ “ includes “ ‘his reasonable outlay or expenditure toward performance.’ “ That the nonbreaching party’s damages include his or her “outlay incurred in making preparations for the contract” has been the law in California for over a century. (Cederberg v. Robison (1893) 100 Cal. 93, 99 (Cederberg ); see also United States v. Behan (1884) 110 U.S. 338, 345–346 (Behan ) [nonbreaching party’s damages include “actual outlay and expenditure”].)

The court described the well-recognized burdens on the parties in the context of reliance damages. The burden is initially on the non-breaching plaintiff to establish the amount which he was induced to expend in reliance on the breached contract. The burden then shifts to the breaching defendant to show the plaintiff’s expenses were unnecessary, such that his recovery of reliance damages should be reduced. Standard breach of contract stuff!

But, the Court then discussed a second limitation on reliance damages – the “losing contract” limitation – which allows the defendant to reduce or eliminate plaintiff’s reliance damages with proof the plaintiff would have suffered a loss even if the defendant had fully performed. The court noted no California court appears to have addressed the “losing contract” limitation upon awards of reliance damages. Citing a variety of out-of-state cases, the court discussed the “losing contract” limitation as follows:

Courts also have recognized a second limitation on reliance damages awards (aside from proof of unnecessary expenditures)—proof that the plaintiff would have suffered a loss even if the defendant had fully performed. “[I]n such a case the plaintiff should not be permitted to escape the consequences of a bad bargain by falling back on his reliance interest.” (Dialist Co. v. Pulford (Md.Ct.Spec.App.1979) 399 A.2d 1374, 1380.) Put differently, the plaintiff should not be put “ ‘in a better position than he would have occupied had the contract been fully performed.’ “ (Bausch & Lomb Inc. v. Bressler (2nd Cir.1992) 977 F.2d 720, 729 (Bausch & Lomb ).) Thus, much like courts allow the breaching party to prove the nonbreaching party’s expenditures were unnecessary, courts allow the breaching party “to reduce [the nonbreaching party’s recovery] by as much as he can show that the [nonbreaching party] would have lost, if the contract had been performed.” (L. Albert & Son v. Armstrong Rubber Co. (2nd Cir.1949) 178 F.2d 182, 189 (L.Albert ); (Holt v. United Sec. Life Ins. & Trust Co. (1909) 76 N.J.L. 585, 597 (Holt ) [“if he who, by repudiation, has prevented performance, asserts that the other party would not even have regained his outlay, the wrong-doer ought at least to be put upon his proof”]; Westfed Holdings, Inc. v. United States (Fed.Cl.2002) 52 Fed.Cl. 135, 155 (Westfed Holdings ) rev’d in part on other grounds, 407 F.3d 1352 (Fed.Cir.2005) [plaintiff “must show that the expenses submitted as reliance damages were incurred in reliance on the contract … while defendant may prove, in diminution of the amount of losses proved by plaintiff, any losses that plaintiff would have incurred in the event of full performance of the contract”]; Bausch & Lomb, supra, at p. 729 [“a reliance recovery will be offset by the amount of ‘any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been fully performed.’ “].)

The court’s holding laid out the respective burdens of the parties in the context of reliance damages to include the “losing contract” limitation.

Accordingly, we hold that, in the context of reliance damages, the plaintiff bears the burden to establish the amount he or she expended in reliance on the contract. The burden then shifts to the defendant to show (1) the amount of plaintiff’s expenses that were unnecessary and/or (2) how much the plaintiff would have lost had the defendant fully performed (i.e., absent the breach). The plaintiff’s recovery must be reduced by those amounts.

Agam v. Gavra is significant because it opens up a new avenue for defendants, in breach of contract cases where reliance damages are sought, to argue, if the facts so warrant, that plaintiff should not be able to recover some or all his claimed reliance damages because he would have done worse if the contract had been fully performed. As the court stated, under such circumstances, the plaintiff “should not be permitted to escape the consequences of a bad bargain by falling back on his reliance interest.” So, at trial, plaintiff proves he spent $1M in reliance on the now-breached contract and wants judgment in that amount for breach. To negate those claimed reliance damages, defendant can then attempt to prove that if he had not breached, plaintiff would have lost more than $1M on the contract and plaintiff should not be put in a better position upon breach than he would have been in the absence of breach. In effect, defendant puts on a “this is what would have happened to plaintiff if I hadn’t breached – I did him a favor” case! Interesting.

Agam v. Gavra – a must read for any California attorney litigating contract cases.

The “Referral Rules” – Guidelines for Professionally Handling Referrals.

James D. Crosby, Attorney/Partner - Henderson, Caverly, Pum & Charney, LLP

Referrals are the lifeblood of law practices – they are the “coin of the realm” for most attorneys. There are attorneys with large loyal clients providing cases year after year. But, for most attorneys, it’s not 20 cases from one client, its 20 cases from 20 different referral sources. Yet, despite the significance of referrals as a source of business, attorneys often mishandle referrals and torch referral sources. So, as a public service to the “referral-source-torchers” out there, I offer The Referral Rules! (Click this link – The Referral Rules ). This article originally appeared in the January/February 2015 edition of San Diego Lawyer from the San Diego County Bar Association.

In a case of first impression, the First District Court of Appeal in Gonsalvez v. Li (Case No A140284), 2015 Daily Journal D.A.R. 472, has held that denials or qualified denials of requests for admissions (RFAs) are not admissible evidence “in an ordinary case, i.e., a case where a party’s litigation conduct is not directly at issue”.

In this auto accident case brought by an injured passenger against the driver, plaintiff propounded RFAs requesting defendant to admit, among other things, that he was driving too fast for the conditions at the time of the accident and that his pressure on the gas pedal was a substantial factor in the accident. Defendant responded with standard denials for lack of information and belief. At trial, plaintiff’s counsel asked defendant on the stand to confirm his RFA responses and that they were made under oath. He then proceeded to question defendant, over objections, about his qualified denials of the RFAs. At the conclusion of the testimony, the court, again over objection, admitted the RFAs and responses.

In closing, plaintiff’s counsel urged the jury to look at the RFAs and the responses, and then cleverly argued they showed that defendant, through “a bunch of double talk” (i.e., the lawyer-drafted qualified denials for lack of information and belief), was failing to take responsibility for his actions. The closing argument passage quoted in the opinion is very clever and was likely quite compelling to the jury.

“I encourage you to look at … the Requests for Admissions that we sent to Ran Li asking him to admit some very basic facts about this crash. His responses are there as well. Let’s just look at a few of them…. [¶] … [¶] This is a simple question, ladies and gentlemen. ‘How much did you push on the accelerator.’ [His response] is a bunch of double speak[,] … a bunch of ‘I’m sorry I’m not taking responsibility and not only am I doing it, I’m doing it in a way that makes no sense.’ [¶] … [¶] … [I]t’s been more than four and a half years since this crash, and he will not in any way take any responsibility for it…. And that’s why we need to impanel a jury like you.”

Very good stuff! The jury apparently thought so, too. The jury found that defendant Li was negligent, that plaintiff Gonsalves was not comparatively negligent, and awarded plaintiff more than $1.2 million in damages for significant back injuries.

Defendant appealed, arguing the trial court erred in permitting plaintiff’s counsel to examine defendant on his negative responses to RFAs and admitting those responses into evidence. The First District Court of Appeal agreed, vacated the judgment and remanded the case to the trial court for new trial.

In the opinion, the court first undertook some statutory interpretation, noting defendant’s arguments that the applicable discovery statutes expressly allow any part of a deposition or interrogatory to be introduced at trial, whereas they only provide that admissions in response to RFAs are binding on the party at trial (Code Civ. Proc., §§ 2025.620 re depositions, 2030.410 re interrogatories and 2033.410 re RFAs). The court further noted the statutory scheme provides for monetary sanctions (i.e., reasonable expenses including attorney fees) when a party unreasonably fails to admit a matter in response to RFAs, but does not expressly permit a denial, objection or failure to respond to RFAs to be used against the party at trial. (Code Civ. Proc., § 2033.420, subd. (a)).

The court then drew a parallel to Rifkind v. Superior Court (1994) 22 Cal.App.4th 1255, a well-known opinion which condemned the use of “legal contention questions” at deposition (i.e. asking a deponent to state all facts or identify all documents which support an affirmative defense). Rifkind held that “legal contention questions” unfairly require the deponent to make a “law-to-fact application that is beyond the competence of most lay persons” and “to sort out the factual material in the case according to specific legal contentions and to do this by memory and on the spot.” Likewise, in Gonsalves, the court noted that defendant “Li was asked to explain “by memory and on the spot” and without the ability to consult with his attorney why he took the legal position that he could not admit or deny certain RFA’s without further inquiry. And he was asked to do this not in a deposition, as in Rifkind, but in front of the jury.”

The court then noted, citing cases from Massachusetts, Florida, Missouri and Texas, that the weight of authority from other jurisdictions supports the position that denials or qualified denials of requests for admissions are not admissible evidence.

Finally, the court rejected the argument the RFA denials were admissible to impeach defendant’s credibility by showing his attitude toward the action in which he testifies under Evidence Code § 780(j). The court found no support for plaintiff’s attempt to make a party’s litigation conduct a legitimate subject for inquiry under Evidence Code section 780(j).

The court held that “denials of RFA’s are not admissible evidence in an ordinary case, i.e., a case where a party’s litigation conduct is not directly in issue” and, thus, “the trial court permitted examination of Li that was unfair and prejudicial to him, and erred in admitting those responses in evidence”.

There are takeaways from this case for both sides:

1. For the Propounding Party – Propound your RFAs early in discovery so there will be sufficient time to bring motions to compel admissions and to, through orders and sanctions, narrow issues for trial. If only RFA admissions have evidentiary value at trial, leave time in your discovery plan to get the admissions you need to narrow trial issues and streamline your trial. Unchallenged RFA denials have no worth at trial. Also, draft your RFAs as clearly as possible so you can get the compelling orders you want or need.

2. For the Responding Party – Under Gonsalves, the trial risk of serving denials or qualified denials is gone. Denials and qualified denials to RFAs cannot be used to impeach a witness, or to question witness veracity, or as fodder for closing argument as so cleverly done by plaintiff’s counsel in the case. And this is appropriate. Given the likely significance of an admission, counsel should be free, without risk of adverse consequences or unfair arguments at trial, to carefully and meticulously scrutinize the wording of RFAs to insure that what will be admitted is crystal-clear and not subject to misconstruction, misinterpretation or misunderstanding by the parties, the court or the jury.

But, while the trial risk of RFA denials and qualified denials is gone under Gonsalvez, the monetary risk is not. Under Code Civ. Proc., §2033.420, if a party fails to admit the genuineness of any document or the truth of any matter when requested to do so, and if the party requesting that admission thereafter proves the genuineness of that document or the truth of that matter, the court, upon motion and subject to certain conditions, may require the party to whom the request was directed to pay the reasonable expenses incurred in making that proof, including reasonable attorney’s fees. Thus, you will not lose a jury and a trial as a result of your RFA denials. But, you or your client may end up writing a big check after it is all done if your denials were unreasonable under §2033.420(b)(1)-(4).


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