San Diego Business Contracts: Using 30-Day Termination Provision to Limit Potential Damages

One of the most important reasons to use written contracts for your San Diego business is the ability to use the contract to help eliminate risks in the event of breach. Generally speaking, the measure of damages for breach of contract here in the Golden State is “benefit of the bargain.” This is codified in Section 3300 of the California Civil Code which reads:

“For the breach of an obligation arising from contract, the measure of damages … is the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom.”

As an example, if your San Diego business was expected to make a profit of $5,000 a month from a contract for the delivery of service for machine repairs, then $5,000 per month is the benefit of your bargain if the contract is fully performed each month. If the term of the contract is 120 months, in general, the benefit of the bargain would be $5,000 per month times 120 months (or $600,000). However, with a well-crafted written contract, the buyer can reduce the risk of having to pay that full amount with the addition of a no-cause 30-day termination provision. An experienced San Diego corporate attorney can provide help to accomplish this risk reduction.

Under long-established California law, if an ongoing contract has a no-cause termination provision, then the measure of damages for a breach of contract is the number of days set for the notice. If the notice required is 15 days, then damages are limited to 15 days of damages. The seminal case is Martin v. U-Haul Company of Fresno, 251 Cal.Rptr. 17 (Cal. App. 5th Dist. 1988). In that case, the contract allowed either party to terminate the contract at issue without cause on 30 days written notice. The plaintiff was an independent U-Haul dealer for about 10 years when, in 1981, the defendant U-Haul Company of Fresno terminated the dealership contract without cause with 30 days’ notice. The plaintiff sued claiming breach of contract because of the wrongful termination. At trial, the jury agreed with the plaintiff and awarded the plaintiff $29,000 for breach of contract based on lost profits for about four years into the future. However, U-Haul argued that the damages awarded were excessive because it had the right to terminate the contract without cause on 30 days’ notice. As such, U-Haul asked that the damages be reduced to 30 days lost profit. or about $725. Citing the Civil Code quoted above and California case law, the trial court agreed and reduced the damage verdict to $725. On appeal, the Court of Appeals affirmed. These legal principles were recently confirmed in the case of Strategic Concepts, LLC v. Beverly Hills Unified School Dist., 23 Cal. App. 5th 163 (Cal. App. 2nd Dist. 2018).

Contact San Diego Corporate Law

For more information, call Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard focuses his practice on business law, transactional, and corporate matters, and he proudly provides legal services to business owners in San Diego and the surrounding communities. Mr. Leonard can be reached at (858) 483-9200 or via email. Like us on Facebook.

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