Rexnord Corporation v. DeWolff Boberg & Associates, Inc.

In the
United States Court of Appeals
For the Seventh Circuit
No. 01-3095
Rexnord Corporation,
Plaintiff-Appellee,
v.
DeWolff Boberg & Associates, Inc.,
Defendant-Appellant.
Appeal from the United States District Court for the
Southern District of Indiana, Indianapolis Division.
No. 98 C 317--Larry J. McKinney, Chief Judge.
Argued February 22, 2002--Decided April 16, 2002
Before Posner, Kanne, and Rovner, Circuit
Judges.
Posner, Circuit Judge. Rexnord, a
manufacturer of roller chain, hired
DeWolff Boberg & Associates (DBA), a man
agement-consulting firm, to help improve
its productivity. The parties had a
falling out and Rexnord brought this
diversity suit for breach of contract,
obtaining a jury verdict of some $1.6
million, exactly one-half of what it had
sought. To that amount the judge added an
award of attorneys’ fees of almost
$600,000 pursuant to a term of the
contract. Indiana law is agreed to govern
all the substantive issues in the
litigation.
The consulting agreement was drafted by
DBA and provides that DBA "shall provide,
on a timely basis, and to the best of its
ability, the professional services as
generally outlined in the Proposal from
the Analysis Report." Going to the
Proposal section of DBA’s precontractual
analysis of Rexnord’s needs (the
"Analysis Report"), one discovers a whole
series of "We wills": "We will design and
install management systems to give your
supervisors and managers the information
they need to effectively control all of
the functions within their departments."
"We will train your supervisors and
managers ’on the floor,’ so they

-- 1 of 9 --

trulyunderstand how to apply and use the
systems and management concepts in their
operations." "We will conduct a series of
opening meetings during the first two
weeks, to set the stage for the process
that is starting." "We will develop a
performance improvement evaluation method
to measure the attainment of our savings
commitment on a weekly basis." "We will
design the supervisory training program
based on the weaknesses we observed." "We
will design the management operating
system upgrades with the supervisors to
provide all of the currently missing
elements while fine tuning marginal
elements [including] . . . staffing
requirements determination." And so on.
The consulting agreement also states
that
we [DBA] estimate the annual savings
available to you through implementation
of our program will be Four Million
Dollars ($4,000,000). These savings will
come about from increased labor
productivity, increased throughput, and
reduced rework and scrap . . . . Please
note that we are not attempting to put a
financial value on the many collateral
benefits that will come about as a result
of this program, such as improved
customer service, improved employee
morale and ongoing improvements made by
your people using this process,
and adds that DBA’s fee is $1.32 million,
payable weekly over the course of the
project; but if DBA is not "able to
achieve our guaranteed annual savings
rate [the $4 million] by the planned
completion date of our program [the
program was to run for 33 weeks], we
would either continue working on your
premises at our expense, or we would
reimburse a portion of our fees, to
provide you with the original estimated
return on investment."
The 33 weeks ended in August of 1997,
but (we are now summarizing the evidence
developed at trial, construed as
favorably to Rexnord as the record
permits) the promised $4 million savings
had not yet been achieved and DBA chose
to continue working. Why had the savings
not materialized? Well, DBA had
recommended that Rexnord reduce the
number of its workers in certain
departments, and Rexnord had complied.
But the recommendation had proved to be a

-- 2 of 9 --

bad one, so DBA had changed course and
recommended that workers be moved into
those departments from other departments.
When this failed too, DBA had changed
course once again and urged Rexnord to
hire a number of new employees, which
Rexnord did. These about-faces in
personnel policy caused the morale
ofRexnord’s employees to plummet, and in
August more than half the employees could
be seen wearing T-shirts emblazoned
"DON’T MISMANAGE OUR JOBS AWAY," with the
letters D, B, and A emphasized. Turnover
among both supervisors and workers had
soared, causing impaired productivity and
additional severance and recruitment
expenses. The company lost business and
market share, customers were permanently
lost, profits fell, rework and scrap
increased, overtime increased, delivery
reliability deteriorated. All these were
consequences of the disruptive effects of
DBA’s inept recommendations regarding
staffing; and the poor quality and
defective implementation of the
recommendations could be traced in turn
to breaches by DBA of specific promises
in the Proposal, such as the promise to
install a management operating system
that would determine optimal staffing
requirements and the promise to train
supervisors and employees in the new
systems. (DBA objected to a number of
Rexnord’s damages exhibits on the ground
that Rexnord had failed to prove a causal
relation between breach and damages; but
this just is not so.)
DBA gave up the project in October,
still having achieved nowhere near the $4
million in promised savings; but it
refused to refund any part of its fee, on
the ground that the failure of the
project had been due to lack of
cooperation by Rexnord. DBA complains
that the judge failed to instruct the
jury adequately on this defense (that the
promisee made it impossible for the
promisor to carry out its promise); but
he did, if less amply than would have
been desirable, by stating that Rexnord
could not prevail without proving that it
had "performed its duties under the
contract."
Contract law distinguishes between
direct and consequential damages, the
difference lying in the degree to which
the damages are a foreseeable (that is, a
highly probable) consequence of a breach.

-- 3 of 9 --

See EVRA Corp. v. Swiss Bank Corp., 673
F.2d 951, 958 (7th Cir. 1982); Suburban
Propane v. Proctor Gas, Inc., 953 F.2d
780, 785 (2d Cir. 1992); Vitol Trading
S.A. v. SGS Control Services, Inc., 874
F.2d 76, 79 (2d Cir. 1989); R.K.
Chevrolet, Inc. v. Hayden, 480 S.E.2d
477, 481 (Va. 1997); cf. AES Technology
Systems, Inc. v. Coherent Radiation, 583
F.2d 933, 940-41 (7th Cir. 1978). DBA’s
refusal to refund any part of its fee
when the project failed to generate the
promised savings had the utterly foresee
able, indeed certain, consequence that
Rexnord paid more for DBA’s services than
it had agreed to do. That is an example
of direct damages. In contrast, the
effect on Rexnord of the breach of
various undertakings by DBA was more
difficult for DBA to foresee because it
depended to a large extent on matters
internal to Rexnord.
Contract law takes two approaches to
consequential damages in cases in which
the contract itself fails to make
provision concerning them (this is such a
case). One, which the great Holmes
favored (see Globe Refining Co. v. Landa
Cotton Oil Co., 190 U.S. 540, 543-45
(1903)) but has fallen into disuse, e.g.,
Western Industries, Inc. v. Newcor Canada
Ltd., 739 F.2d 1198, 1203 (7th Cir.
1984); Native Alaskan Reclamation & Pest
Control, Inc. v. United Bank Alaska, 685
P.2d 1211, 1219 (Alaska 1984), though not
everywhere, see Stifft’s Jewelers v.
Oliver, 678 S.W.2d 372, 373 (Ark. 1984),
is that consequential damages can be
awarded only if the promisor has assumed
the risk of the consequences in question-
- has, in other words, agreed, whether
expressly or as a matter of "what the
parties probably would have said if they
had spoken about the matter," to bear
them. Globe Refining Co. v. Landa Cotton
Oil Co., supra, 190 U.S. at 543; see also
Hector Martinez & Co. v. Southern Pacific
Transportation Co., 606 F.2d 106, 109 n.
6 (5th Cir. 1979). DBA’s explicit promise
of $4 million in savings was a promise of
just that character. The second approach
requires merely that consequential
damages be foreseeable, Western
Industries, Inc. v. Newcor Canada Ltd.,
supra, 739 F.2d at 1203, and it is the
approach that the parties have correctly
assumed governs here. Rogier v. American
Testing & Engineering Corp., 734 N.E.2d
606, 614 (Ind. App. 2000); Indiana Ins.

-- 4 of 9 --

Co. v. Plummer Power Mower & Tool Rental,
Inc., 590 N.E.2d 1085, 1092 (Ind. App.
1992); Schroeder v. Barth, Inc., 969 F.2d
421, 425 (7th Cir. 1992) (Indiana law).
Were the consequential damages
foreseeable here? The famous case of
Hadley v. Baxendale, 9 Ex. 341, 156 Eng.
Rep. 145 (1854), held that a mill could
not recover lost profits as a result of a
carrier’s delay (in breach of the
contract of carriage) in delivering a
part essential to the mill’s operation;
and there is a superficial resemblance,
supportive of DBA’s position, to this
case. But the cases are different in two
important respects. First, unlike the
carrier in Hadley, DBA knew a great deal
about the promisee’s business and should
have been able to estimate the likelihood
and magnitude of the losses that it would
impose on a client if it failed to honor
its undertaking. Second, the result in
Hadley may have depended on the mill’s
failure to have protected itself against
the consequences of a delay by the
carrier by having a spare part on hand.
Rodi Yachts, Inc. v. National Marine,
Inc., 984 F.2d 880, 884 (7th Cir. 1993);
Rardin v. T & D Machinery Handling, Inc.,
890 F.2d 24, 27 (7th Cir. 1989); EVRA
Corp. v. Swiss Bank Corp., supra, 673
F.2d at 957; Coastal Power Int’l, Ltd. v.
Transcontinental Capital Corp., 10 F.
Supp. 2d 345, 368 n. 166 (S.D.N.Y. 1998),
aff’d, 182 F.3d 163, 165 (2d Cir. 1999);
see also Wells Fargo Bank, N.A. v. United
States, 33 Fed. Cl. 233, 242 (Cl. Ct.
1995), aff’d in part, rev’d in part, 88
F.3d 1012 (Fed. Cir. 1996). In other
words, there was a sense in which the
mill was the author of its own loss. In
still other words, the carrier was not on
notice that the mill was taking an
unusual risk and had it been told that it
would be an insurer against that risk it
would have demanded a higher price for
its service. DBA argues that Rexnord was
likewise the author of its own loss, but
the evidence permitted the jury to reject
the argument.
What is slightly offputting about the
consequential damages sought and awarded
in this case is that they seem rather
more like tort damages than like contract
damages. Suppose that in the course of
performing the contract, which required
DBA personnel to spend a lot of time in
Rexnord’s factory, an employee of DBA had

-- 5 of 9 --

through carelessness dropped his cell
phone into the assembly line, causing
damage. Unless the contract expressly or
implicitly required the exercise of due
care by DBA personnel when at Rexnord’s
plant, Rexnord’s remedy would lie in tort
rather than in contract even though the
injury had arisen in the course of the
performance of a contract. Raquet v.
Thompson, 693 N.E.2d 969, 971 (Ind. App.
1998); Crum v. AVCO Financial Services of
Indianapolis, Inc., 552 N.E.2d 823, 827
(Ind. App. 1990) ("the negligent
performance of a contract may give rise
to liability in tort"); Essex v. Ryan,
446 N.E.2d 368, 370-71 (Ind. App. 1983)
("it is axiomatic that one who contracts
to perform services may commit both a
breach of contract and the tort of
negligence when he negligently fails to
perform in a workmanlike manner"). This
case looks like that because one way to
describe it is as a case in which DBA’s
people came into Rexnord’s plant and
messed things up albeit without causing
physical damage to property. But the
difference is that the mess-up resulted
from a failure to comply with express
terms of the contract; and when a
standard of care is specified in the
contract it supersedes the tort standard
(for why shouldn’t the parties be able to
cut their own deal, so far as their
rights and liabilities to each other are
concerned?) and the promisee’s remedy is
limited to a suit for breach of contract.
Wells v. Stone City Bank, 691 N.E.2d
1246, 1249 (Ind. App. 1998).
So far, so good. But unfortunately the
appeal, and indeed the entire litigation,
have been muddied by the misplaced
preoccupation of both parties with the
"collateral benefits" provision of the
consulting agreement, in which, the
reader will recall, DBA stated that it
was "not attempting to put a financial
value on the many collateral benefits
that will come about as a result of this
program, such as improved customer
service, improved employee morale and
ongoing improvements made by your people
using this process." DBA argues that this
provision did not create a legally
enforceable duty but that the damages the
jury awarded are based in part on the
erroneous belief that it did. Rexnord
insisted at trial and continues to insist
that the provision indeed imposed a
legally enforceable duty that DBA

-- 6 of 9 --

violated.
The provision is a red herring. Rexnord
to the contrary notwithstanding, the
provision does not contain a binding
promise, does not justify any award of
damages, and indeed has nothing to do
with this case. The very term
"collateral," the placement of the
provision after the express promise of $4
million in savings, and DBA’s disclaimer
of being able to put a price tag on the
benefits, scotch any inference that a
binding promise was intended. (Language
purists, which we however are not, would
wish to point out in addition that third-
person commitment is expressed by
"shall," not "will," the reverse being
true for first-person commitment. "We
will undertake" and "he shall undertake"
express commitment--and notice that the
promises in the Proposal are in the form
"we will." "We shall undertake" and "he
will undertake" are statements merely of
intention or prediction.)
Then too, DBA would be unlikely to make
a binding promise to achieve a result so
dependent on the conduct of the promisee
as "ongoing improvements made by your
people using this process." Such a
promise would place DBA at Rexnord’s
mercy, cf. Charter Oak Fire Ins. Co. v.
Color Converting Industries Co., 45 F.3d
1170, 1174 (7th Cir. 1995); Wallace v.
Employers Mutual Casualty Co., 443 So. 2d
843, 849 (Miss. 1983), with only the
limited protection provided by the
doctrine of mitigation of damages.
Outboard Marine Corp. v. Babcock
Industries, Inc., 106 F.3d 182, 185 (7th
Cir. 1997).
The clincher is the sheer impossibility
of quantifying the damages that Rexnord
incurred from DBA’s failure to achieve
"improved customer service, improved
employee morale and ongoing
improvements." Suppose customer service
did not improve, but did not worsen
either. How would a judge or jury
determine how much customer service
should have improved--and how much DBA
had promised it would improve--if DBA had
performed all its promises, and what
value Rexnord would have derived from
such an incremental improvement? The
second step would merely be difficult,
but the first would be impossible because
the provision does not specify the amount

-- 7 of 9 --

of improvement that DBA is obligated to
bring about.
The difference between a prediction and
a promise is that only the latter is a
commitment. Medtech Corp. v. Indiana Ins.
Co., 555 N.E.2d 844, 847 (Ind. App.
1990); Security Bank & Trust Co. v.
Bogard, 494 N.E.2d 965, 969 (Ind. App.
1986); Rakestraw v. United Airlines,
Inc., 981 F.2d 1524, 1536 (7th Cir.
1992); Major Mat Co. v. Monsanto Co., 969
F.2d 579, 583 (7th Cir. 1992). A promisor
can of course commit to something that is
beyond his control and therefore
uncertain of attainment. Field Container
Corp. v. ICC, 712 F.2d 250, 257 (7th Cir.
1983); Oliver Wendell Holmes, Jr., The
Common Law 300 (1881). In such a case the
commitment operates as a form of
unofficial insurance, Cargill, Inc. v.
Hardin, 452 F.2d 1154, 1158 (8th Cir.
1971), and insurance (spreading risk) is
one of the economic functions that
contracts perform. E.g., Outboard Marine
Corp. v. Babcock Industries, Inc., supra,
106 F.3d at 185; Fidelity & Deposit Co.
v. City of Sheboygan Falls, 713 F.2d
1261, 1269 (7th Cir. 1983); Jordan v.
Group Health Ass’n, 107 F.2d 239, 247-48
(D.C. Cir. 1939); State ex rel.
Londerholm v. Anderson, 408 P.2d 864, 875
(Kan. 1965); see also Spartech Corp. v.
Opper, 890 F.2d 949, 955 (7th Cir. 1989).
But there is no flavor of commitment in
the "collateral benefits" paragraph of
the consulting agreement. It is merely a
prediction that Rexnord will derive
unbargained-for as well as bargained-for
benefits if it signs the contract. This
is further shown by the fact that Rexnord
limited its proof of damages, so far as
bears on the provision, to evidence of
DBA’s having caused Rexnord’s customer
service and employee morale to worsen, as
a result of DBA’s violating its other
undertakings in the contract. That is,
Rexnord didn’t attempt the impossible--
quantifying the collateral benefits that
DBA failed to achieve in its performance
of the contract.
True, the instruction relating to the
collateral benefits was so broadly worded
as to allow the jury to award damages for
DBA’s failure to confer those benefits.
But DBA does not object to the
instruction in this court, and so the
point is waived. We add that it is
unlikely, though of course not

-- 8 of 9 --

impossible, that the jury awarded damages
for which there was no basis in evidence.
Juries sometimes do crazy things, but
there is no presumption that they do. DBA
did object to some of the damages
exhibits because they failed (it argued)
to establish any causal relation between
breach and damages, but it neglected to
argue that the failure resulted from the
fact that the only "breach" pertinent to
those damages was the "breach" of a so-
called "promise," the "promise" of
collateral benefits, that was not legally
enforceable.
Other issues are raised but do not
warrant discussion. The judgment in favor
of Rexnord is
Affirmed.

-- 9 of 9 --