Limitations on Contract Damages
Chapter 19: Limitations on Contract Damages
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The basic rules of expectancy damages for breach of contract are subject to three principal limitations: foreseeability, certainty, and avoidability. Under the foreseeability limitation, damages are disallowed unless they were foreseen or reasonably foreseeable to the parties at the time of contracting. This rule of foreseeability thus draws on the objective theory of contract to define and then respect the risk allocations that the parties reasonably and objectively made when they entered into the contract. If, for example, you know that my profit of \$1,000 depends on your delivery of a certain part to my Chicago customers in 24 hours and you undertake to provide overnight delivery without limiting or disclaiming liability for delay, you have probably assumed the risk and can be held to pay me my lost \$1,000 in profits should you breach and fail to deliver the part in a timely manner. If, on the other hand, you are not aware of the time-sensitive nature of the delivery, it is difficult to fairly charge you for those damages.
The second limitation is certainty. It is considered unfair to award damages that are speculative, insofar as one is entitled to the benefit one would have received for one's bargain---not the benefit one might have received. Certainty, however, is a relative term that does not require absolute certainty, just reasonable certainty. Further, uncertainty is generally part of the defense's burden and, if unable to carry this burden, the plaintiff's initial proof of the expectancy interest will carry the day.
Finally, there is the limit of avoidability. Put another way, there is a duty on the part of the non-breaching party to behave reasonably and minimize damages. This is just good policy, as providing an incentive to minimize loss is more efficient than maximizing it, no matter who must bear the burden of compensation.
The cases in this chapter explore the parameters of these limiting doctrines on expectancy damages.
p. 534 A.FORESEEABILITY
Hadley v. Baxendale
Court of Exchequer 9 Ex. 341 (1854)
[1]At the trial before Crompton, J., at the last Gloucester Assizes, it appeared that the plaintiffs carried on an extensive business as millers at Gloucester; and that, on the 11th of May, their mill was stopped by a breakage of the crank shaft by which the mill was worked. The steam-engine was manufactured by Messrs. Joyce & Co., the engineers, at Greenwich, and it became necessary to send the shaft as a pattern for a new one to Greenwich. The fracture was discovered on the 12th, and on the 13th, the plaintiffs sent one of their servants to the office of the defendants, who are the well known carriers trading under the name of Pickford & Co., for the purpose of having the shaft carried to Greenwich. The plaintiff's servant told the clerk that the mill was stopped, and that the shaft must be sent immediately; and in answer to the inquiry when the shaft would be taken, the answer was, that if it was sent up by twelve o'clock any day, it would be delivered at Greenwich on the following day. On the following day the shaft was taken by the defendants, before noon, for the purpose of being conveyed to Greenwich, and the sum of 2£. 4s. was paid for its carriage for the whole distance; at the same time the defendant's clerk was told that a special entry, if required, should be made to hasten its delivery. The delivery of the shaft at Greenwich was delayed by some neglect; and the consequence was, that the plaintiffs did not receive the new shaft for several days after they would otherwise have done, and the working of their mill was thereby delayed and they thereby lost the profits they would otherwise have received.
[2][The defendants] object that these damages were too remote, and that the defendants were not liable with respect to them. The learned Judge left the case generally to the jury, who found a verdict with 25£ damages beyond the amount paid into Court.
[3]Whateley, in last Michaelmas Term, obtained a rule nisi for a new trial, on the ground of misdirection.
[4]Keating and Dowdeswell (Feb. 1) showed cause.---The plaintiffs are entitled to the amount awarded by the jury as damages. These damages are not too remote, for they are not only the natural and necessary consequence of the defendants' default, but they are the only loss which the plaintiffs have actually sustained. The principle upon which damages are assessed is founded upon that of rendering compensation to the injured p. 535 party . . . [PARKE, B.1---The sensible rule appears to be that which has been laid down in France, and which is declared in their code [and] translated in Sedgwick: "The damages due to the creditor consist in general of the loss that he has sustained, and the profit which he has been prevented from acquiring . . . The debtor is only liable for the damages foreseen, or which might have been foreseen, at the time of the execution of the contract, when it is not owing to his fraud that the agreement has been violated. Even in the case of nonperformance of the contract, resulting from the fraud of the debtor, the damages only comprise so much of the loss sustained by the creditor, and so much of the profit which he has been prevented from acquiring, as directly and immediately results from the non-performance of the contract."] If that rule is to be adopted, there was ample evidence in the present case of the defendants' knowledge of such a state of things as would necessarily result in the damage of the plaintiffs suffered through the defendant's default. . . .
[5]Alderson, B. We think that there ought to be a new trial in this case; but in so doing, we deem it to be expedient and necessary to state explicitly the rule which the Judge, at the next trial, ought, in our opinion, to direct the jury to be governed by when they estimate the damages. It is, indeed, of the last importance that we should do this; for if the jury are left without any definite rule to guide them, it will, in such cases as these, manifestly lead to the greatest injustice . . .
[6]Now we think the proper rule in such a case as the present is this:---Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, p. 536 the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract. It is said, that other cases such as breaches of contract in the nonpayment of money, or in the not making a good title to land, are to be treated as exceptions from this, and as governed by a conventional rule. But as, in such cases, both parties must be supposed to be cognizant of that well-known rule, these cases may, we think be more properly classed under the rule above enunciated as to cases under known special circumstances, because there both parties may reasonably be presumed to contemplate the estimation of the amount of damages according to the conventional rule.
[7]Now, in the present case, if we are to apply the principles above laid down, we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill. But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. Or, again, suppose, that, at the time of the delivery to the carrier, the machinery of the mill had been in other respects defective, then, also, the same results would follow. Here it is true that the shaft was actually sent back to serve as a model for a new one, and that the want of a new one was the only cause of the stoppage of the mill, and that the loss of profits really arose from the delay in delivering the broken one to serve as a model. But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. For such loss would neither have flowed naturally from the breach of this contract in the great multitude of such cases occurring under ordinary circumstances, nor were the special circumstances, which, perhaps, would have made it a reasonable and natural consequence of such breach of contract, communicated to or known by the defendants. The Judge ought, therefore, to have told the jury that, upon the facts then before them, they ought not to take the loss of profits p. 537 into consideration at all in estimating the damages. There must therefore be a new trial in this case.
Rule absolute.
Notes and Questions
The foreseeability limitation of Hadley v. Baxendale is found in section 351 of the R2d and article 7.4.4 of the UNIDROIT Principles. One is phrased in the negative, the other in the positive. Apart from this, is the standard that is expressed the same? Is there a difference in meaning caused by stating the standard in the positive or the negative?
Marquette Cement Manufacturing v. Louisville & Nashville R.R.
United States District Court, Eastern District, Tennessee 281 F. Supp. 944 (1967)
Wilson, District Judge.
[Marquette Cement sold cement to Vulcan Materials. Vulcan had two divisions: Rock Products, which made Ready-Mix concrete and Concrete Pipe, which made Concrete Pipe. Concrete Pipe always purchased air-entrained cement and Rock Products never did. Rock Products added its own air to specification after it received the cement. Because of a mistake by a railroad clerk, a carload of air-entrained cement intended for the Concrete Pipe Division was routed to the Rock Products Division.---Eds.]
[1]The carload of "air-entrained" cement was delivered to the Rock Products Division and was used by it in its ready-mix cement plant. At the time Rock Products Division had under order from Marquette more than one carload of cement. However, Rock Products Division did not expect to receive "air-entrained" cement and it is not possible to determine merely from appearance whether cement already contains an air-entraining agent or not. Accordingly, the Rock Products Division added an air-entraining agent to the cement after it had been unloaded and before receiving the notice of delivery from the L & N Railroad which would show that the cement was already air-entrained. On March 31st the cement was processed by Rock Products Division and delivered to certain job sites in and around Chattanooga. The majority of it went to the construction site of the Calsted Nursing Home in Chattanooga to be used by the H. E. Collins Contracting Company in the structural floor system thereof. Another portion of the concrete went to the J. C. Miller Construction Company for the purpose of constructing a small cement floor in a garage. The concrete p. 538 used in both of these jobs showed deficiencies and it was necessary that the same be removed in each instance.
[2]The bill of lading showed that the cement was air-entrained, but the train clerk at the L & N who re-routed the shipment from Concrete Pipe to Rock Products had not noted that the cement was air-entrained, and in fact was uninformed as to what the designation meant. He was likewise uninformed as to what use the Vulcan Materials Company made of the concrete it received at either of its two divisions or as to any difference in the concrete received at the two divisions.
[3]The value of the carload of cement was \$1,408.16 and the freight charges amounted to \$91.10. The cost to the plaintiffs for replacing the Calsted Nursing Home floor slab was \$9,558.30 and the cost of replacing the floor slab in the garage was \$167.00. The plaintiffs incurred additional costs of \$197.00 to a concrete testing laboratory. The plaintiffs seek to recover damages in the total sum of \$11,416.56,2 being the total of the above items of cost, plus interest.
[4]First, there can be no doubt that the defendant is liable unto the plaintiffs for breach of contract by virtue of its misdelivery of the carload of cement. It was the duty of the carrier to deliver the freight at the destination designated in the contract of shipment. The error in routing instructions would not relieve the carrier of the duty of making delivery to the destination designated on the bill of lading, nor permit the carrier to change the destination. The real question with which we are here concerned is the damages to which plaintiffs are entitled by virtue of the breach. Before discussing the rules governing the measure of damage in a breach of contract action for misdelivery, it is appropriate to consider the plaintiffs' alternate contention that a negligence action would also lie for misdelivery. No authority is cited by the plaintiff in support of its tort theory. While a contract may create a state of affairs in which a general duty arises the breach of which may constitute actionable negligence, negligence will not lie where the only duty breached is one created by contract. It is only where there is a breach of a general duty, even though it may arise out of a relationship created by contract, that breach of duty may constitute actionable negligence. Here the only duty breached was the duty to deliver under a contract of carriage. Accordingly, the Court need not consider the rules of law governing the measure of damage in a tort action.
[5]Returning to the plaintiffs' claim for damage for breach of contract, the plaintiffs claim the following elements of damages: (1) the cost of shipping charges (\$91.10), (2) the value of the carload of air-entrained cement (\$1,408.16), (3) the cost of removing the adulterated concrete from p. 539 the construction sites (\$9,725.30), and (4) the cost of the tests performed by the laboratory (\$197.00).
[6]The Court had occasion to examine the rules with respect to damages for breach of contract in the case of Clark v. Ferro Corp., 237 F.Supp. 230 (D.C.Tenn., 1964). To summarize briefly the principles involved, the general purpose of the law is to place the plaintiff in the position he would have been in had the contract been fulfilled in accordance with its terms. More specifically, under the rule of Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Reprint 145, 5 Eng.Rul.Cas. 502 (1854), damages recoverable for breach of contract are (1) such as may fairly and reasonably be considered as arising in the usual course of events from the breach of the contract itself or (2) such as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract. This is the rule in Tennessee. The rule has been stated in terms of "foreseeability" in the Restatement of Contracts (Sec. 330):
In awarding damages, compensation is given for only those injuries that the defendant had reason to foresee as a probable result of his breach when the contract was made. If the injury is one that follows the breach in the usual course of events, there is sufficient reason for the defendant to foresee it; otherwise it must be shown specifically that the defendant had reason to know the facts and to foresee the injury.
[7]The statement providing for "special" or "consequential" damages is merely a further extension of "foreseeability." McCormick, in speaking of the rule of Hadley v. Baxendale, observes:
This standard is in the main an objective one. It takes account of what the defendant who made the contract might then have foreseen as a reasonable man, in the light of the facts known to him, and does not confine the inquiry to what he actually did foresee. It the loss claimed is unusual, then it becomes necessary to ascertain whether the defaulting party was notified of the special circumstances'
McCormick on Damages, p. 565, sec. 138.
[The court then discussed and rejected arguments that special rules, rather the common law rules of contract damages, should apply.---Eds.]
[8]There remains to be considered which of the elements of damage claimed by the plaintiff fall within the common law rules of damage for breach of contract. In this regard it would appear clear that the plaintiff would be entitled to recover any damages sustained by it which may fairly be supposed to have been within the contemplation of the parties at the time the contract was made. These would be such damages as might naturally be expected to follow the breach of contract and would include p. 540 the value of the shipment and the transportation charges paid thereon. Thus the plaintiff would be entitled to recover the sum of \$1,408.16 as the value of the shipment and the sum of \$91.10 as the cost of shipment paid.
[9]With respect to the remaining items of damage claimed by the plaintiffs, that is the cost of testing and removing the defective concrete from construction sites, such damages may only be considered as special or consequential damages. With respect to their recovery the issue then arises as to whether the special circumstances giving rise to the damages were communicated to or known by the defendant at the time the contract of carriage was made. In order to recover special damages under the circumstances of this case, it must appear that at the time of the making of the contract of carriage the defendant had reasonable notice or knowledge of the special conditions rendering such damages the natural and probable result of the breach. The Court is of the opinion that the evidence does not establish such notice or knowledge upon the part of the defendant. It is true that the bill of lading did designate the shipment as "air-entrained cement." This information is not sufficient, however, to put the carrier on notice as to the use for which it was to be put. Nor was it sufficient to put the carrier on notice that an additional air-entraining agent would be added to the cement by the plaintiff, thereby rendering it unsuited for structural use. The notice here received by the carrier by the inclusion of the words "air-entrained cement" upon the bill of lading was not sufficient to render reasonably foreseeable the subsequent events which resulted in the expenses incurred by the plaintiff in testing and in removing the defective concrete. The defendant accordingly would not be liable for the sum of \$197.00 incurred by the plaintiff in having concrete tests performed nor the sum of \$9,725.30 incurred by the plaintiff in having defective concrete removed. The plaintiff would be entitled to recover the value of the shipment of cement and the shipping costs paid thereon, or the total sum of \$1,499.26.
A judgment will enter accordingly.
Stroh Brewery v. Grand Trunk Western R.R.
United States District Court, Eastern District Michigan 513 F. Supp. 827 (1981)
Cook, Jr., Judge.
Memorandum Opinion
[1]This is an action for damages brought against a common carrier under the provisions of 49 U.S.C. § 20(11), which is often referred to as the Carmack Amendments. Plaintiff, The Stroh Brewery Company (Stroh), is an Arizona corporation which does business within the State of Michigan. p. 541 Grand Trunk Western Railroad Company (Grand Trunk), is a Michigan corporation which does business within the State of Michigan.
[2]On or about September 14, 1976, a carload of "Stroh Bulk Type Malt," which had been ordered by Stroh from the Rahr Malting Company in Shakopee, Minnesota, was placed in hopper car number CNW 172379 (Stroh Malt Car) and shipped by rail to Detroit. The malt was to be delivered to Stroh at Greater Northern Feed, Inc. (Great Northern) which, in addition to being a wholly owned subsidiary, was Stroh's agent for taking delivery of railroad cars.
[3]On or about September 9, 1976, a carload of barley, which had been ordered by Rickel Malting Company, Inc. (Rickel) from Fleischmann Malting Company, in Minneapolis, Minnesota, was placed in hopper car number CNW 173379 (Rickel Barley Car) and shipped by rail to Rickel.
[4]Both cars were transferred to the Grand Trunk line in Chicago. Thereafter, they were transported to Grand Trunk's Farnsworth Siding in Detroit, Michigan, arriving on or about September 20, 1976. Farnsworth Siding has eight tracks upon which Grand Trunk stores railroad cars until delivery. The only "hopper cars" that were stored on the Farnsworth Siding were those cars which were scheduled for delivery to Stroh and Rickel.
[5]Simultaneously with, or prior to, the arrival of the Stroh Malt Car and the Rickel Barley Car at Farnsworth Siding, Grand Trunk sent "Constructive Placement Notices" (which had been prepared from inbound billings) to Stroh and Rickel, informing them that their respective cars had arrived. (These inbound billings described the respective contents as "Bulk Stroh Type Malt" and "Bulk Barley.")
[6]During the morning of September 21, 1976, Stroh called William Abbey, the Yardmaster of the Farnsworth Yard and an employee of Grand Trunk, and, according to the usual practices of these two parties, requested delivery of eight cars (six hopper cars and two empty boxcars) in a specific order at Great Northern. The Stroh Malt Car was included in that list of cars. Abbey transcribed the car numbers on his "Switch List" in the order, as requested by Stroh. In the afternoon of September 21st, a copy of the "Switch List" was given to the switch crew (Joseph Lippai, John Wrubel, a third unknown individual and an engineer). Instead of delivering the Stroh Malt Car at Great Northern as requested, the switch crew mistakenly placed the Rickel Barley Car upon the Great Northern Siding for use and consumption by Stroh.
[7]Although Great Northern had expected delivery of the Stroh Malt Car, its employees did not notice that the Rickel Barley Car had been delivered in its place. On Wednesday, September 22, 1976, Parrinello, a Stroh employee, was instructed to unload all of the cars. Stroh's standard procedures for unloading cars at Great Northern were as follows:
p. 542 Covered hopper cars of malt or grits are placed on GNFI (Great Northern Feed, Inc.) rail siding for unloading into malt and grit storage bins. Before unloading procedure begins, material is inspected in each compartment of each car. Car numbers are checked to ensure each car is placed on siding in sequence for unloading. Records are kept such as a "Daily Loading & Unloading" track sheet which the employees fill out as they unload cars, recording the seal numbers, card number and bin number. One sample is taken from each compartment and labeled appropriately as to the car number, date unloaded, supplier, type of material and compartment number.
Deposition Exhibit 6.
[8]At all times that are relevant hereto, Stroh had the correct car number on its business records. It had an opportunity to discover that (1) one of the cars bore the wrong car number and (2) the contents within the car was barley, not malt.
[9]The content from the Rickel Barley Car was unloaded, transported to Stroh and placed into the brewing process where it was mixed with existing Rahr Malt, which resulted in the contamination of the Rahr Malt and the burning out of certain grinding engines due to the texture of the barley. All of the contaminated Rahr Malt had to be removed from the bin by vacuum, and the grinding engines were replaced. On September 24, 1976, Stroh ultimately received the Stroh Malt Car. Stroh subsequently sold the contaminated malt-barley mixture as feed and paid Rickel for the value of the bulk barley.
[10]At all times that are pertinent to this inquiry, including the time at which the contracts of carriage were executed, the Yardmaster and members of the switch crew who misdelivered the Rickel Barley Car to Stroh at Great Northern knew that (1) the only hopper cars that were stored in Farnsworth Yard were those which had been consigned to Stroh or Rickel, (2) the Rickel hopper cars contained only barley, (3) the Stroh hopper cars, which were scheduled for delivery at Great Northern, contained only malt or corn grits, (4) the only hopper cars at Great Northern which contained either malt or corn grits, were for use by Stroh, (5) Rahr, Ladisch, Shrot and Lauhoff were names of some of the manufacturers of the malt and corn grits, (6) all of the Stroh hopper cars had to be delivered in a specific order because of the different contents in the cars, (7) Great Northern had two unloading pits over which the hopper cars would be placed by Grand Trunk, (8) each car would be emptied into one of two pits and then, by means of a screw elevator, its contents would be placed in a separate above ground storage bin from which the malt or corn grits would be deposited in a truck for delivery to Stroh, (9) the malt and corn grits would be utilized in the process of brewing Stroh's beer, and p. 543 (10) the malt and corn grits would be returned wet to Great Northern after the brewing process as a byproduct ("spent grain Mash") where it would then be dried, blown into Grand Trunk boxcars and shipped to a specific designation.
[11]Plaintiff has two claims for breach of contract against Defendant. The first contract of carriage involved the shipment of the Stroh Malt Car and the wrongful delivery of the Rickel Barley Car. Damages sought for this breach are for those out of pocket costs (e.g., the cost of the Rahr malt which was contaminated when mixed with the bulk barley; the cost of removing that mixture from brewing facility; the cost of the bulk barley delivered, less the amount received for the malt-barley mixture) which were allegedly caused by the misdelivery. Inasmuch as Stroh did receive the Stroh Malt Car, no claim has been made for the value of its contents.
[12]The second breach of contract of carriage is based upon Defendant's alleged failure to deliver the Rickel Barley Car to Rickel. Damages for both claims amount to \$19,198.99.
[13]The damages sought for the breach of the Stroh contract of carriage are considered special or consequential damages and must be decided upon the ability of a "reasonable man" to foresee the damages. The principles involved regarding the issue of "foreseeability" are aptly summarized in Marquette Cement Manufacturing Company v. Louisville and Nashville Railroad Company, 281 F.Supp. 944 (E.D. Tenn.1967):
Under the rule of Hadley v. Baxendale, (1854) 9 Ex. 314, 156 Eng. Reprint 145, 5 Eng.Rul.Cas. 502, damages recoverable for breach of contract are (1) such as may fairly and reasonably be considered as arising in the usual course of events from the breach of the contract itself or (2) such as may reasonably be supposed to have been in the contemplation of the parties at the time they made the contract . . . The rule has been stated in terms of "foreseeability" in the Restatement of Contracts (Sec. 330):
In awarding damages, compensation is given for only those injuries that the defendant had reason to foresee as a probable result of his breach when the contract was made. If the injury is one that follows the breach in the usual course of events, there is sufficient reason for the defendant to foresee it; otherwise it must be shown specifically that the defendant had reason to know the facts and to foresee the injury.
The statement providing for "special" or "consequential" damages is merely a further extension of "foreseeability." McCormick, in speaking of the rule of Hadley v. Baxendale, observes:
p. 544 This standard is in the main an objective one. It takes account of what the defendant who made the contract might have foreseen as a reasonable man, in the light of the facts known to him, and does not confine the inquiry to what he actually did foresee. I(f) the loss claimed is unusual, then it becomes necessary to ascertain whether the defaulting party was notified of the special circumstances.
McCormick on Damages, p. 565, sec. 138.
[14]Defendant had vast experience in the hauling and the delivery of grain. It, through employees, knew the importance of the order in which the cars were to be delivered, and that Stroh received malt and corn grits for the purpose of making beer.
[15]Thus, applying the Marquette principles to the instant cause, the Court is of the opinion that the damages, which resulted from the misdelivery of barley to Stroh, were reasonably foreseeable.
[16]The reasonable foreseeableness that the mistake would not be caught is increased because of the similarities in the numbers on the cars and the similarities in the appearance of the contents within the cars.
[17]Although it is clearly obvious that Plaintiff was not free from negligence, the Court disagrees with Defendant's position that the only foreseeable consequence which would normally arise from the misdelivery of the cars was that (1) Stroh would have discovered the wrong car and (2) rejected delivery, resulting in only a minor inconvenience to Stroh and Grand Trunk. The Court believes that implicit in such a defense is the admission that it was also foreseeable that the mistake would not be caught by Stroh.
[18]The Court believes that the Marquette case, wherein the Plaintiffs' claims for special or consequential damages under the Carmack Amendment was not allowed by the Court, is similar to, but distinguishable from, the instant case. In Marquette, the plaintiff regularly sold and shipped cement to Vulcan Materials Company at its two separate Chattanooga plants. One of the plants manufactured ready-mix concrete while the other manufactured only concrete pipe. A carload of "air-entrained" cement, suitable only for utilization in making concrete pipe, was shipped by Marquette via a bill of lading consigning it to Vulcan's concrete pipe division. Due to an error in routing, the railroad misdelivered the carload of "air-entrained" cement, sending it to Chattanooga Rock Products, the ready-mix concrete division. The ready-mix concrete made from this cement was defective and had to be replaced. Chattanooga Rock Products and Marquette then brought suit against the railroad to recover the damages which resulted when the contents of the misdelivered shipment were used in the manufacturing process for which they were unsuited. The Court awarded the Plaintiff the value of the shipment and p. 545 the freight charges but refused to award any other damages. With regard to the special or consequential damages that were not awarded, the Court stated as follows:
With respect to the remaining items of damage claimed by the plaintiffs, that is the cost of testing and removing the defective concrete from construction sites, such damages may only be considered as special or consequential damages. With respect to their recovery the issue then a rises as to whether the special circumstances giving rise to the damages were communicated to or known by the defendant at the time the contract of carriage was made. In order to recover special damages under the circumstances of this case, it must appear that at the time of the making of the contract of carriage the defendant had reasonable notice or knowledge of the special conditions rendering such damages the natural and probable result of the breach. The Court is of the opinion that the evidence does not establish such notice or knowledge upon the part of the defendant. It is true that the bill of lading did designate the shipment as "air-entrained cement." This information is not sufficient, however, to put the carrier on notice as to the use for which it was to be put. Nor was it sufficient to put the carrier on notice that an additional air-entraining agent would be added to the cement by the plaintiff, thereby rendering it unsuited for structural use. The notice here received by the carrier by the inclusion of the words "air-entrained cement" upon the bill of lading was not sufficient to render reasonably foreseeable the subsequent events which resulted in the expenses incurred by the plaintiff in testing and removing the defective concrete.
At Pages 950, 951.
[19]In Marquette, unlike the case at bar, the only knowledge or notice that the defendant had with regard to the operation of the plaintiffs, the shipment or its intended use was the bill of lading which include the words "air-entrained" cement:
The bill of lading showed that the cement was air-entrained, but the train clerk at the L & N who rerouted the shipment from Concrete Pipe to Rock Products had not noted that the cement was air-entrained, and in fact was uninformed as to what the designation meant. He was likewise uninformed as to what use the Vulcan Materials Company made of the concrete it received at either of its two divisions or as to any difference in the concrete received at the two divisions.
[20]In the instant case, Defendant had that much knowledge and more. It is not necessary that Defendant have detailed knowledge of the p. 546 damages incurred. On the other hand, it is sufficient that Defendant possess sufficient notice of the facts and circumstances which would render damages probable.
[21]In L. E. Whitlock Truck Service, Inc. v. Regal Drilling Company, supra, the Court affirmed an Order of the district court which granted an award of special damages of lost profits for delay in delivery. In that case, an oil rig was being transported by a carrier who specialized in, and was experienced in, hauling oil rigs. The carrier knew it was the shipper's only oil rig. In finding for the shipper, the Court reasoned as follows:
There is adequate testimony in the record to support the award of special damages. The appellant specialized in and was experienced in the hauling of oil well equipment and was aware of the importance of time to those engaged in the drilling business. There is adequate evidence in the record to support the finding that the appellant knew of the need and the importance to the appellee of delivery of the rig on time and of damages which would result in the event appellee did not have the use of it. The appellant knew that the appellee had only the one drilling rig. Thus the appellant knew the circumstances upon which the special damages here awarded are based.
At Page 492.
[22]Based upon the foregoing analysis, it is, therefore, ordered that Stroh shall be, and is, allowed to recover the sum of \$19,198.993 from Grand Trunk for the breach of the Stroh and Rickel contracts of carriage.
[23]The foregoing constitutes the Court's findings of fact and conclusions of law as required by Fed. R. Civ. P. 52.
Notes and Questions
Stroh Brewery Company was founded in 1949 and closed down after a 50-year run in 1999. In 1996, it had about 10% of the United States beer market, producing its own brands like Stroh's, Augsburger, and Northern Plains, and serving as a contract brewer for August Brewery, Boston Beer Company, Fischer Brewing, and Pete's Brewing Company.
p. 547 Linc Equipment Services v. Signal Medical Services
United States Court of Appeals, Seventh Circuit 319 F.3d 288 (2003)
Easterbrook, Circuit Judge.
[1]Signal Medical leased from Linc Equipment a mobile magnetic resonance imager (MRI), an expensive device that had a monthly net rental in the \$30,000 range. (The "net" signifies that Signal covered expenses, including insurance and taxes, on top of the \$30,000.) Signal promised to return the MRI at the end of the lease in good condition, less normal wear and tear. Signal, which like Linc is a merchant in the business of renting medical equipment, subleased this MRI to a hospital, which later returned the machine directly to Linc. Unfortunately, the MRI was left on during transit, which damaged the magnet and required the machine to be taken out of service for 10 months while it was repaired. The repairs, which cost about \$130,000, were paid for by the insurance carrier. Linc sued in state court both Signal and the firm that handled the machine's transportation; the insurer intervened to make a third-party claim in subrogation against Signal.
[2]After the parties agreed to a bench trial, the district judge tackled damages ahead of the merits. The judge assumed that Signal is responsible for any harm to the MRI and held a hearing to explore the question whether it is liable for consequential damages (repair costs already having been resolved). As the judge understood Illinois law, which the parties agree governs, consequential damages may be awarded only if the signatories "expressly contemplated" them. The contract does not in so many words entitle Linc to consequential damages, and at the evidentiary hearing the persons who negotiated the lease testified that they had not discussed or thought about this subject. As a result, the judge concluded, consequential damages could not have been "expressly contemplated." This finding led to judgment on the merits in Signal's favor.
[3]We doubt that Illinois requires "express contemplation" of consequential damages---or that, if it does, this phrase implies a subjective as opposed to an objective inquiry. Although the district judge and the parties did not mention it, Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854), remains the dominant source of law on the recovery of consequential damages for breach of contract, and we have held that Illinois follows Hadley's approach. What Hadley holds is that a consequential loss is compensable only if "reasonably foreseeable," not that it must be "expressly contemplated." Although the phrase "expressly contemplated" crops up in some Illinois cases, that state's judiciary has explained that it is used as a synonym for foreseeability. Signal, which like Linc was a merchant in the medical-equipment-rental business, reasonably could have foreseen that return of the MRI in bad condition would cost Linc p. 548 rental revenue while it was being repaired. That the lease excluded consequential damages in an action by Signal, but not in an action by Linc, shows that the parties must have understood this possibility.
[4]What is more, it is hard to see why income lost because of inability to rent a chattel should be classified as "consequential" damages at all. Lost rental value is a direct outcome of the broken promise and does not depend on the details of Linc's business or any idiosyncratic way that Linc would employ the MRI---things that Signal might not know and therefore could not consider when deciding how much care to take with Linc's machine. To see this, suppose that Linc wanted to sell rather than rent the MRI immediately after its return from Signal's customer. The selling price of a MRI depends on expected net income (rental or billings to patients, less costs), plus scrap value at the end of its economically useful life, all discounted to present value. Suppose that this MRI in good condition would have had 60 months of service remaining before becoming obsolete. The same machine, with the damage actually sustained, would have had only 50 months' service remaining (deferred for 10 months) and required a \$130,000 capital investment to repair. It therefore would have sold for less than the same machine in operable condition. The difference between what the MRI would have fetched in a sale immediately after its return in damaged condition, and what it could have been sold for had Signal kept its promise to return it in good condition, is the real economic loss caused by transporting the machine with the magnet on. It fits nicely within standard measures of damages in contract cases. See generally E. Allan Farnsworth, III Farnsworth on Contracts § 12.9 (2d ed. 1990).
[5]Because the market price of rental equipment capitalizes the expected rental stream---not only reducing cash flows to present value but also taking into account the probability that some months will not fetch rentals, when machines are between customers or demand is slack---it would be double counting to award a lessor anything extra for lost rental income. Consider what should happen if one of Hertz's customers has an accident and the car must be taken out of the fleet for a month while being repaired. Would Hertz recover not only the cost of repair (say, \$1,000) but also the \$50 daily rental during that month (\$50 x 30 = \$1,500)? Such a measure frequently would overcompensate the lessor. If the accident caused the value of the used car to decline by, say, \$1,500 (from \$15,000 in good condition to \$13,500 with repairs pending), Hertz could sell the damaged car for \$13,500, invest an extra \$1,500, buy a used car equal in value to the one it expected to receive at the end of the rental, and rent that car for \$50 per day. Its full loss would be \$1,500 (the difference in resale prices); if Hertz neglected to cover in the market, and instead claimed a loss of \$2,500, it would be met with the defense that it had failed to mitigate damages. Just so with Linc. If it had a ready market for MRI machines, it could have covered when it learned of the problem and leased out the newly p. 549 purchased machine; then its full loss would have been the difference between the cost of cover and the amount it could have realized when selling the damaged machine.
[6]One must consider as well the possibility that MRI machines have lives that depend on accumulated use (wear and tear) rather than technological obsolescence. In that event, taking the machine out of service did not cost Linc ten months' rental but only postponed its receipt. Then damages would be limited to the time value of money (that is, to interest on the deferral of income). The magnet's rebuilding might even have extended the machine's useful life. All of this is captured automatically in the difference between the sale prices of sound and damaged MRI devices, which makes this calculation preferable to judicial attempts to determine how likely it was that a particular machine would have been rented during these particular months, what its expected useful life may have been, and so on. Best to take advantage of market prices that reflect this information, rather than try to generate the information on the witness stand. We know that this MRI was sold for \$475,000 immediately after the repairs were completed; such a price for a fully functional MRI, with many future months of rental in store, strongly implies that \$300,0004 would be an excessive award for the loss of 10 months' use.
[7]So the district court was right to conclude that Linc is not entitled to damages measured by the monthly rental times the number of months required for repair, but wrong to think that the cost of making repairs sets a cap on damages. The judgment is vacated, and the case is remanded for further proceedings consistent with this opinion.
Problem 19-1
Precision Sound, Inc. ("Seller") enters into a contract to sell an item of recording equipment to Solid Gold Recording Studios ("Buyer"). A few days later, Seller learns that Buyer needs this piece of equipment in order to fulfill its obligations under a major contract. Seller had no reason to foresee this at the time the contract was made. Shortly after learning this fact, Seller's general manager places the order for the equipment with the manufacturer. He makes a mistake in filling out the order form, and the manufacturer ships the wrong equipment. By the time the mistake has been rectified, the time for Seller to deliver the equipment to Buyer has passed and Buyer has lost the big contract. Can Buyer recover damages resulting from the loss of the contract? What is the policy behind this result?
p. 550 B.CERTAINTY
Chicago Coliseum Club v. Dempsey
Court of Appeals of Illinois 265 Ill. App. 542 (1932)
Mr. Justice Wilson delivered the opinion of the court.
[1]Chicago Coliseum Club, a corporation, as plaintiff, brought its action against William Harrison Dempsey, to recover damages for breach of a written contract executed March 13, 1926, but bearing date of March 6 of that year.
[2]Plaintiff was incorporated as an Illinois corporation for the promotion of general pleasure and athletic purposes and to conduct boxing, sparring and wrestling matches and exhibitions for prizes or purses. The defendant William Harrison Dempsey was well known in the pugilistic world and, at the time of the making and execution of the contract in question, held the title of world's Champion Heavy Weight Boxer.
[3]Under the terms of the written agreement, the plaintiff was to promote a public boxing exhibition in Chicago or some suitable place to be selected by the promoter, and had engaged the services of one Harry Wills, another well known boxer and pugilist, to engage in a boxing match with the defendant Dempsey for the championship of the world. By the terms of the agreement Dempsey was to receive \$10, receipt of which was acknowledged, and the plaintiff further agreed to pay to Dempsey the sum of \$30,000 on the 5th day of August 1926---\$500,000 in cash at least 10 days before the date fixed for the contest, and a sum equal to 50 per cent of the net profits over and above the sum \$2,000,000 in the event the gate receipts should exceed that amount. In addition the defendant was to receive 50 per cent of the net revenue derived from moving picture concessions or royalties received by the plaintiff, and defendant agreed to have his life and health insured in favor of the plaintiff in a manner and at a place to be designated by the plaintiff. Defendant further agreed not to engage in any boxing match after the date of the agreement and prior to the date on which the contest was to be held. Certain agreements previously entered into by the defendant with one Floyd Fitzsimmons for a Dempsey-Wills boxing match were declared to be void and of no force and effect. Certain other mutual agreements were contained in the written contract which are not necessary in a consideration of this case.
[4]March 6, 1926, the plaintiff entered into an agreement with Harry Wills, in which Wills agreed to engage in a boxing match with the Jack Dempsey named in the agreement hereinbefore referred to. Under this agreement the plaintiff, Chicago Coliseum Club was to deposit \$50,000 in escrow in the National City Bank of New York City, New York, to be paid over to Wills on the 10th day prior to the date fixed for the holding of the p. 551 boxing contest. Further conditions were provided in said contract with Wills, which, however, are not necessary to set out in detail. There is no evidence in the record showing that the \$50,0005 was deposited nor that it has ever been paid, nor is there any evidence in the record showing the financial standing of the Chicago Coliseum Club, a corporation, plaintiff in this suit. This contract between the plaintiff and Wills appears to have been entered into several days before the contract with Dempsey.
[5]March 8, 1926, the plaintiff entered into a contract with one Andrew C. Weisberg, under which it appears that it was necessary for the plaintiff to have the services of an experienced person skilled in promoting boxing exhibitions and that the said Weisberg was possessed of such qualifications and that it was necessary for the plaintiff to procure his help in the promoting of the exhibition. It appears further from the agreement that it was necessary to incur expenditures in the way of traveling expenses, legal services and other costs in and about the promotion of the boxing match, and Weisberg agreed to investigate, canvass and organize the various hotel associations and other business organizations for the purpose of securing accommodations for spectators and to procure subscriptions and contributions from such hotels and associations and others for the erection of an arena and other necessary expense in order to carry out the enterprise and to promote the boxing match in question. Under these agreements Weisberg was to furnish the funds for such purposes and was to be reimbursed out of the receipts from the sale of tickets for the expenses incurred by him, together with a certain amount for his services.
[6]Both the Wills contract and the Weisberg contract are referred to at some length, inasmuch as claims for damages by plaintiff are predicated upon these two agreements. Under the terms of the contract between the plaintiff and Dempsey and the plaintiff and Wills, the contest was to be held during the month of September, 1926.
[7]July 10, 1926, plaintiff wired Dempsey at Colorado Springs, Colorado, stating that representatives of life and accident insurance companies would call on him for the purpose of examining him for insurance in favor of the Chicago Coliseum Club, in accordance with the terms of his contract, and also requesting the defendant to begin training for the contest not later than August 1, 1926. In answer to this communication plaintiff received a telegram from Dempsey, as follows:
BM Colorado Springs Colo B. E. Clements July 10th 1926
President Chicago Coliseum Club Chgo Entirely too busy training for my coming Tunney match to waste time on insurance p. 552 representatives stop as you have no contract suggest you stop kidding yourself and me also.
Jack Dempsey
[8]We are unable to conceive upon what theory the defendant could contend that there was no contract, as it appears to be admitted in the proceeding here and bears his signature and the amounts involved are sufficiently large to have created a rather lasting impression on the mind of anyone signing such an agreement. It amounts, however, to a repudiation of the agreement and from that time on Dempsey refused to take any steps to carry out his undertaking. It appears that Dempsey at this time was engaged in preparing himself for a contest with Tunney to be held at Philadelphia, Pennsylvania, sometime in September, and on August 3, 1926, plaintiff, as complainant, filed a bill in the superior court of Marion county, Indiana, asking to have Dempsey restrained and enjoined from engaging in the contest with Tunney, which complainant was informed and believed was to be held on the 16th day of September, and which contest would be in violation of the terms of the agreement entered into between the plaintiff and defendant at Los Angeles, March 13, 1926.
[9]Personal service was had upon the defendant Dempsey in the proceeding in the Indiana court and on August 27, 1926, he entered his general appearance, by his attorneys, and filed his answer in said cause. September 13, 1926, a decree was entered in the superior court of Marion county, finding that the contract was a valid and subsisting contract between the parties, and that the complainant had expended large sums of money in carrying out the terms of the agreement, and entering a decree that Dempsey be perpetually restrained and enjoined from in any way, wise, or manner, training or preparing for or participating in any contracts or engagements in furtherance of any boxing match, prize fight or any exhibition of like nature, and particularly from engaging or entering into any boxing match with one Gene Tunney, or with any person other than the one designated by plaintiff.
[10]It is insisted among other things that the costs incurred by the plaintiff in procuring the injunctional order in Marion county, Indiana, were properly chargeable against Dempsey for his breach of contract and recoverable in this proceeding. Under the evidence in the record in this proceeding there appears to have been a valid subsisting agreement between the plaintiff and Dempsey, in which Dempsey was to perform according to the terms of the agreement and which he refused to do, and the plaintiff, as a matter of law, was entitled at least to nominal damages. For this reason, if for no other, judgment should have been for the plaintiff.
[11]During the proceeding in the circuit court of this county it was sought to introduce evidence for the purpose of showing damages, other p. 553 than nominal damages, and in view of the fact that the case has to be retried, this court is asked to consider the various items of expense claimed to have been incurred and various offers of proof made to establish damages for breach of the agreement. Under the proof offered, the question of damages naturally divides itself into the four following propositions:
1st.Loss of profits which would have been derived by the plaintiff in the event of the holding of the contest in question;
2nd.Expenses incurred by the plaintiff prior to the signing of the agreement between the plaintiff and Dempsey;
3rd.Expenses incurred in attempting to restrain the defendant from engaging in other contests and to force him into a compliance with the terms of his agreement with the plaintiff; and
4th.Expenses incurred after the signing of the agreement and before the breach of July 10, 1926.
[12]Proposition 1. Plaintiff offered to prove by one Mullins that a boxing exhibition between Dempsey and Wills held in the City of Chicago on September 22, 1926, would bring a gross receipt of \$3,000,000, and that the expense incurred would be \$1,400,000, leaving a net profit to the promoter of \$1,600,000. The court properly sustained an objection to this testimony. The character of the undertaking was such that it would be impossible to produce evidence of a probative character sufficient to establish any amount which could be reasonably ascertainable by reason of the character of the undertaking. The profits from a boxing contest of this character, open to the public, is dependent upon so many different circumstances that they are not susceptible of definite legal determination. The success or failure of such an undertaking depends largely upon the ability of the promoters, the reputation of the contestants and the conditions of the weather at and prior to the holding of the contest, the accessibility of the place, the extent of the publicity, the possibility of other and counter attractions and many other questions which would enter into consideration. Such an entertainment lacks utterly the element of stability which exists in regular organized business. This fact was practically admitted by the plaintiff by the allegation of its bill filed in the Marion county court of Indiana asking for an injunction against Dempsey. Plaintiff in its bill in that proceeding charged, as follows:
[13]"That by virtue of the premises aforesaid, the plaintiff will, unless it secures the injunctive relief herein prayed for, suffer great and irreparable injury and damages, not compensable by any action at law in damages, the damages being incapable of commensuration, and plaintiff, therefore, has no adequate remedy at law."
[14]Compensation for damages for a breach of contract must be established by evidence from which a court or jury are able to ascertain the p. 554 extent of such damages by the usual rules of evidence and to a reasonable degree of certainly. We are of the opinion that the performance in question is not susceptible of proof sufficient to satisfy the requirements and that the damages, if any, are purely speculative.
[15]Proposition 2: Expenses incurred by the plaintiff prior to the signing of the agreement between the plaintiff and Dempsey.
[16]The general rule is that in an action for a breach of contract a party can recover only on damages which naturally flow from and are the result of the act complained of. The Wills contract was entered into prior to the contract with the defendant and was not made contingent upon the plaintiff's obtaining a similar agreement with the defendant Dempsey. Under the circumstances the plaintiff speculated as to the result of his efforts to procure the Dempsey contract. It may be argued that there had been negotiations pending between plaintiff and Dempsey which clearly indicated an agreement between them, but the agreement in fact was never consummated until sometime later. The action is based upon the written agreement which was entered into in Los Angeles. Any obligations assumed by the plaintiff prior to that time are not chargeable to the defendant. Moreover, an examination of the record discloses that the \$50,000 named in the contract with Wills, which was to be payable upon a signing of the agreement, was not and never has been paid. There is no evidence in the record showing that the plaintiff is responsible financially, and, even though there were, we consider that it is not an element of damage which can be recovered for breach of the contract in question.
[17]Proposition 3: Expenses incurred in attempting to restrain the defendant from engaging in other contests and to force him into a compliance with the terms of his agreement with the plaintiff.
[18]After the repudiation of the agreement by the defendant, plaintiff was advised of defendant's match with Tunney which, from the evidence, it appears, was to take place in Philadelphia in the month of September and was in direct conflict with the terms of the agreement entered into between plaintiff and defendant. Plaintiff's bill, filed in the superior court of Marion county, Indiana, was an effort on the part of the plaintiff to compel defendant to live up to the terms of his agreement. The chancellor in the Indiana court entered his decree, which apparently is in full force and effect, and the defendant in violating the terms of that decree, after personal service, is answerable to that court for a violation of the injunctional order entered in said proceeding. The expenses incurred, however, by the plaintiff in procuring that decree are not collectible in an action for damages in this proceeding; neither are such similar expenses as were incurred in the trips to Colorado and Philadelphia, nor the attorney's fees and other expenses thereby incurred. The plaintiff having been informed that the defendant intended to proceed no further under his p. 555 agreement, took such steps at its own financial risk. There was nothing in the agreement regarding attorney's fees and there was nothing in the contract in regard to the services of the defendant from which it would appear that the action for specific performance would lie. After the clear breach of contract by the defendant, the plaintiff proceeded with this character of litigation at its own risk. We are of the opinion that the trial court properly held that this was an element of damages which was not recoverable.
[19]Proposition 4: Expenses incurred after the signing of the agreement and before the breach of July 10, 1926.
[20]After the signing of the agreement plaintiff attempted to show expenses incurred by one Weisberg in and about the furtherance of the project. Weisberg testified that he had taken an active part in promoting sports for a number of years and was in the employ of the Chicago Coliseum Club under a written contract during all of the time that his services were rendered in furtherance of this proposition. This contract was introduced in evidence and bore the date of March 8, 1926. Under its terms Weisberg was to be reimbursed out of the gate receipts and profits derived from the performance. His compensation depended entirely upon the success of the exhibition. Under his agreement with the plaintiff there was nothing to charge the plaintiff unconditionally with the costs and expenses of Weisberg's services. The court properly ruled against the admissibility of the evidence.
[21]We find in the record, however, certain evidence which should have been submitted to the jury on the question of damages sustained by the plaintiff. The contract on which the breach of the action is predicated shows a payment of \$10 by the plaintiff to the defendant and the receipt acknowledged. It appears that the stadium located in the South Park District, known as Soldier's Field, was considered as a site for the holding of the contest and plaintiff testified that it paid \$300 to an architect for plans in the event the stadium was to be used for the performance. This item of damage might have been made more specific and may not have been the best evidence in the case but, standing alone, it was sufficient to go to the jury. There were certain elements in regard to wages paid assistant secretaries which may be substantiated by evidence showing that they were necessary in furtherance of the undertaking. If these expenses were incurred they are recoverable if in furtherance of the general scheme. The defendant should not be required to answer in damages for salaries paid regular officials of the corporation who were presumed to be receiving such salaries by reason of their position, but special expenses incurred are recoverable. The expenses of Hoffman in going to Colorado for the purpose of having Dempsey take his physical examination for insurance, if before the breach and reasonable, are recoverable. The railroad fares for those who went to Los Angeles for the purpose of procuring the signing of the p. 556 agreement are not recoverable as they were incurred in a furtherance of the procuring of the contract and not after the agreement was entered into. The services of Shank in looking after railroad facilities and making arrangements with the railroad for publicity and special trains and accommodations were items which should be considered and if it develops that they were incurred in a furtherance of the general plan and properly proven, are items for which the plaintiff should be reimbursed.
[22]The items recoverable are such items of expense as were incurred between the date of the signing of the agreement and the breach of July 10, 1926, by the defendant and such as were incurred as a necessary expense in furtherance of the performance. Proof of such items should be made subject to the usual rules of evidence.
[23]For the reasons stated in this opinion the judgment of the circuit court is reversed and the cause remanded for a new trial.
Judgment reversed and cause remanded.
Hebel, P. J., and Friend, J., concur.
Notes and Questions
1.In the 1920s, a heavyweight championship fight was America's leading sporting event, what the Super Bowl is today. Jack Dempsey was, with the possible exception of Babe Ruth, the leading sports celebrity of the day. If you were Dempsey's manager, what would you have done to make sure that Dempsey (and of course, Dempsey's manager is reputed to have taken an outsize portion of Dempsey's pay), rather than the promoter, got most of the profits from the fight?
2.Around 1970, a group of oil company engineers identified a phenomenon that has come to be called "the winner's curse." The engineers noticed that every time their company won an auction for an oil lease, it ended up losing money on the deal. As they thought about it, the engineers realized that because no one knew exactly how much oil was recoverable under the lease, some bidders would overestimate the oil and some would underestimate it. The winner of the auction would normally be the company that overestimated by the largest margin and thus bid too much. Since that time the winner's curse has been the subject of several books and numerous Ph.D. dissertations. Businesses have hired consultants to help them structure their bids to avoid the winner's curse. But when the Chicago Coliseum Club signed its contract, no one had heard of the winner's curse. Is it possible Dempsey did the plaintiff a favor by breaching the contract?
3.The certainty limitation is found in section 352 of the R2d and article 7.4.3 of the UNIDROIT principles. They are phrased differently. What are the p. 557 substantive differences? Which is likely to lead to greater recovery by the non-breaching party?
4.Under the so-called "American Rule" attorneys' fees incurred in obtaining and enforcing a contract damage judgment are not recoverable absent a provision providing for them as allowable damages in the contract itself. This is in contrast with the so-called "English Rule" under which the prevailing party may recover its attorneys' fees from the other party. As a result of the American Rule, contract clauses providing for attorneys fees are common in American contracts. They are often, but need not be, in the form of a prevailing party attorneys' fee clause, which operates like the English Rule. But some contracts provide for attorneys' fee recovery for only one party to the contract. Should such "one way" clauses be enforceable? Some states say, "yes, but." For instance, the California Civil Code's section 1717 converts a one way clause into a bilateral clause allowing recovery by either party---so the clause is enforceable as modified by the statute. Is this good policy? What sort of incentives does the presence or absence of an enforceable attorneys' fee provision produce?
Ericson v. Playgirl
Court of Appeal of California 73 Cal. App. 3d 850, 140 Cal. Rptr. 921 (1977)
Fleming, Acting P.J.
[1]Were damages awarded here for breach of contract speculative and conjectural, or were they clearly ascertainable and reasonably certain, both in nature and in origin?
[2]The breach of contract arose from the following circumstances: plaintiff John Ericson, in order to boost his career as an actor, agreed that defendant Playgirl, Inc., could publish without compensation as the centerfold of its January 1974 issue of Playgirl photographs of Ericson posing naked at Lion Country Safari. No immediate career boost to Ericson resulted from the publication. In April 1974 defendant wished to use the pictures again for its annual edition entitled Best of Playgirl, a publication with half the circulation of Playgirl and without advertising. Ericson agreed to a rerun of his pictures in Best of Playgirl on two conditions: that certain of them be cropped to more modest exposure, and that Ericson's photograph occupy a quarter of the front cover, which would contain photographs of five other persons on its remaining three-quarters. Defendant honored the first of these conditions but not the second, in that as the result of an editorial mixup Ericson's photograph did not appear on the cover of Best of Playgirl. Ericson thereupon sued for damages, not for invasion of privacy from unauthorized publication of his pictures, but for p. 558 loss of the publicity he would have received if defendant had put Ericson's picture on the cover as it had agreed to do.
[3]All witnesses testified that the front cover of a magazine is not for sale, that a publisher reserves exclusive control over the front cover because its format is crucial to circulation, that consequently it is impossible to quote a direct price for front cover space. Witnesses also agreed that a picture on the front cover of a national magazine can provide valuable publicity for an actor or entertainer, but that it is difficult to put a price on this publicity. Analogies were sought in the cost of advertising space inside and on the back cover of national magazines. In July 1974 a full-page advertisement in Playgirl cost \$7,500 to \$8,000, a quarter page \$2,500, and the back cover \$11,000. However, Best of Playgirl carried no advertising and enjoyed only half the circulation of its parent magazine.
[4]The trial court awarded plaintiff damages of \$12,500,6 expressly basing its award on the testimony of Richard Cook, western advertising manager for TV Guide. According to Cook, the value to an entertainer of an appearance on the cover of a national magazine is "probably close to \$50,000, and I base that on this: That magazine lays on the newsstand, a lot of people that never buy it see it, and everybody that does buy it certainly sees it." Cook said that the circulation of a magazine affects the value of a cover appearance, as does the magazine's demographics, i.e., the specific audience it reaches. He based his opinion on his knowledge of Playgirl, for he had no knowledge of the circulation, demographics, or even existence of Best of Playgirl. He also quantified his opinion by stating that if the picture only occupied a quarter of the cover instead of the full cover, the value of the appearance would be only a fourth of \$50,000, which was the figure used by the trial court in fixing plaintiff's damages for loss of publicity at \$12,500.
I
[5]On appeal the sole substantial issue is that of damages, for it is clear the parties entered a contract which defendant breached.7
[6]In reviewing the issue of damages we first note that the cause of action is for breach of contract and not for a tort such as invasion of privacy. Defendant is not charged with committing a civil wrong but merely with failing to keep its promise. From this classification of the action as breach
p. 559 of contract, three important consequences affecting the measure of damages follow:
1.Damages may not be punitive or exemplary and may not be imposed as a form of chastisement.
2.Damages are limited to losses that might reasonably be contemplated or foreseen by the parties.
3.Damages must be clearly ascertainable and reasonably certain, both in their nature and origin.
[7]In each of these respects damages for breach of contract differ from damages in tort; accordingly, tort precedents on the measure of damages have no direct relevancy here. Of limited application, too, is the tort rule that when calculation of the fact and amount of damages has been made difficult by defendant's wrong, courts will adopt whatever means are at hand to right the wrong.
[8]Plaintiff's claim of damages for breach of contract was based entirely on the loss of general publicity he would have received by having his photograph appear, alongside those of five others, on the cover of Best of Playgirl. Plaintiff proved that advertising is expensive to buy, that publicity has value for an actor. But what he did not prove was that loss of publicity as the result of his nonappearance on the cover of Best of Playgirl did in fact damage him in any substantial way or in any specific amount. Plaintiff's claim sharply contrasts with those few breach of contract cases that have found damages for loss of publicity reasonably certain and reasonably calculable, as in refusals to continue an advertising contract. In such cases the court has assessed damages at the market value of the advertising, less the agreed contract price. Plaintiff's claim for damages more closely resembles those which have been held speculative and conjectural, as in the analogous cases of Jones v. San Bernardino Real Estate Board (1959) 168 Cal.App.2d 661, 665, where the court declined to award purely conjectural damages for loss of commissions, contacts, business associations, and clientele allegedly occasioned by plaintiff's expulsion from a local realty board; and of Fisher v. Hampton (1975) 44 Cal.App.3d 741, where the court rejected an award of damages for defendant's failure to drill a \$35,000 oil well when geological reports opined that oil would not be found and no evidence whatever established that plaintiff had been damaged. Under normal legal rules plaintiff's claim for damages failed to satisfy the requirements of reasonable foreseeability and reasonable certainty, and therefore took on a punitive hue.
[The court discussed special damage rules applicable to entertainers and decided they didn't help the plaintiff.---Eds.]
p. 560 III
[9]Plaintiff, however, is entitled to recover nominal damages for breach of contract. We evaluate plaintiff's right to nominal damages by analogy to Civil Code section 3344, which provides minimum statutory damages of \$300 for knowing commercial use of a person's name or likeness without his consent. The statute's obvious purpose is to specify an amount for nominal damages in situations where actual damages are impossible to assess. Accordingly, although we find no support for any assessment of compensatory damages in plaintiff's favor because of the wholly speculative nature of the detriment suffered by plaintiff as a result of his nonappearance on a fourth of the cover of Best of Playgirl, plaintiff is entitled to nominal damages for breach of contract, which we fix in the sum of \$300.
[10]The judgment is modified to reduce the amount of damages to \$300, and, as so modified, the judgment is affirmed. Costs on appeal to plaintiff.
Fera v. Village Plaza Inc.
Supreme Court of Michigan 396 Mich. 639, 242 N.W.2d 372 (1976)
Kavanagh, C.J.
[1]Plaintiffs received a jury award of \$200,0008 for loss of anticipated profits in their proposed new business as a result of defendants' breach of a lease. The Court of Appeals reversed. 52 Mich. App. 532, 218 N.W.2d 155 (1974). We reverse and reinstate the jury's award.
Facts
[2]On August 20, 1965 plaintiffs and agents of Fairborn-Village Plaza executed a ten-year lease for a "book and bottle" shop in defendants' proposed shopping center. This lease provided for occupancy of a specific location at a rental of \$1,000 minimum monthly rent plus 5% of annual receipts in excess of \$240,000. A \$1,000 deposit was paid by plaintiffs.
[3]After this lease was executed, plaintiffs gave up approximately 600 square feet of their leased space so that it could be leased to another tenant. In exchange, it was agreed that liquor sales would be excluded from the percentage rent override provision of the lease.
[4]Complications arose, including numerous work stoppages. Bank of the Commonwealth received a deed in lieu of foreclosure after default by
p. 561 Fairborn and Village Plaza. Schostak Brothers managed the property for the bank.
[5]When the space was finally ready for occupancy, plaintiffs were refused the space for which they had contracted because the lease had been misplaced, and the space rented to other tenants. Alternative space was offered but refused by plaintiffs as unsuitable for their planned business venture.
[6]Plaintiffs initiated suit in Wayne Circuit Court, alleging inter alia a claim for anticipated lost profits. The jury returned a verdict for plaintiffs against all defendants for \$200,000.
[7]The Court of Appeals reversed and remanded for new trial on the issue of damages only, holding that the trial court "erroneously permitted lost profits as the measure of damages for breach of the lease." 52 Mich. App. 532, 542, 218 N.W.2d 155, 160.
[8]In Jarrait v. Peters, 145 Mich. 29, 31--32, 108 N.W. 432 (1906), plaintiff was prevented from taking possession of the leased premises. The jury gave plaintiff a judgment which included damages for lost profits. This Court reversed:
It is well settled upon authority that the measure of damages when a lessor fails to give possession of the leased premises is the difference between the actual rental value and the rent reserved. 1 Sedgwick on Damages (8th ed.), § 185. Mr. Sedgwick says:
If the business were a new one, since there could be no basis on which to estimate profits, the plaintiff must be content to recover according to the general rule.
The rule is different where the business of the lessee has been interrupted.
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The evidence admitted tending to show the prospective profits plaintiff might have made for the ensuing two years should therefore have been excluded under the objections made by defendant, and the jury should have been instructed that the plaintiff's damages, if any, would be the difference between the actual rental value of the premises and the rent reserved in the lease.
[9]Six years later, in Isbell v. Anderson Carriage Co, 170 Mich. 304, 318, 136 N.W. 457 (1912), the Court wrote:
It has sometimes been stated as a rule of law that prospective profits are so speculative and uncertain that they cannot be recognized in the measure of damages. This is not because they p. 562 are profits, but because they are so often not susceptible of proof to a reasonable degree of certainty. Where the proof is available, prospective profits may be recovered, when proven, as other damages. But the jury cannot be asked to guess. They are to try the case upon evidence, not upon conjecture.
[10]These cases and others since should not be read as stating a rule of law which prevents every new business from recovering anticipated lost profits for breach of contract. The rule is merely an application of the doctrine that "[i]n order to be entitled to a verdict, or a judgment, for damages for breach of contract, the plaintiff must lay a basis for a reasonable estimate of the extent of his harm, measured in money." 5 Corbin on Contracts, § 1020, p. 124. The issue becomes one of sufficiency of proof. "The jury should not [be] allowed to speculate or guess upon this question of the amount of loss of profits." Kezeli v. River Rouge Lodge IOOF, 195 Mich. 181, 188, 161 N.W. 838 (1917).
Assuming, therefore, that profits prevented may be considered in measuring the damages, are profits to be divided into classes and kinds? Does the term "speculative profits" express one of these classes, differing in nature from nonspeculative profits? Do "uncertain" profits differ in kind from "certain" profits? The answer is assuredly, No. There is little that can be regarded as "certain," especially with respect to what would have happened if the march of events had been other than it in fact has been. Neither court nor jury is required to attain "certainty" in awarding damages; and this is just as true with respect to "value" as with respect to "profits." Therefore, the term "speculative and uncertain profits" is not really a classification of profits, but is instead a characterization of the evidence that is introduced to prove that they would have been made if the defendant had not committed a breach of contract. The law requires that this evidence shall not be so meager or uncertain as to afford no reasonable basis for inference, leaving the damages to be determined by sympathy and feelings alone. The amount of evidence required and the degree of its strength as a basis of inference varies with circumstances.
5 Corbin on Contracts, § 1022, pp. 139--40.
[11]The rule was succinctly stated in Shropshire v. Adams, 40 Tex.Civ.App. 339, 344, 89 S.W. 448, 450 (1905):
Future profits as an element of damage are in no case excluded merely because they are profits but because they are uncertain. In any case when by reason of the nature of the situation they may be established with reasonable certainty they are allowed.
p. 563 [12]It is from these principles that the "new business"/"interrupted business" distinction has arisen.
If a business is one that has already been established a reasonable prediction can often be made as to its future on the basis of its past history . . . If the business . . . has not had such a history as to make it possible to prove with reasonable accuracy what its profits have been in fact, the profits prevented are often but not necessarily too uncertain for recovery.
5 Corbin on Contracts, § 1023, pp. 147, 150--51.
[13]The Court of Appeals based its opinion reversing the jury's award on two grounds. First, that a new business cannot recover damages for lost profits for breach of a lease. We have expressed our disapproval of that rule. Secondly, the Court of Appeals held plaintiffs barred from recovery because the proof of lost profits was entirely speculative. We disagree.
[14]The trial judge in a thorough opinion made the following observations upon completion of the trial.
On the issue of lost profits, there were days and days of testimony. The defendants called experts from the Michigan Liquor Control Commission and from Cunningham Drug Stores, who have a store in the area, and a man who ran many other stores. The plaintiffs called experts and they, themselves, had experience in the liquor sales business, in the book sales business and had been representatives of liquor distribution firms in the area.
The issue of the speculative, conjectural nature of future profits was probably the most completely tried issue in the whole case. Both sides covered this point for days on direct and cross-examination. The proofs ranged from no lost profits to two hundred and seventy thousand dollars over a ten-year period as the highest in the testimony. A witness for the defendants, an expert from Cunningham Drug Company, testified the plaintiffs probably would lose money. Mr. Fera, an expert in his own right, testified the profits would probably be two hundred and seventy thousand dollars. The jury found two hundred thousand dollars. This is well within the limits of the high and the low testimony presented by both sides, and a judgment was granted by the jury.
The court cannot invade the finding of fact by the jury, unless there is no testimony to support the jury's finding. There is testimony to support the jury's finding. We must realize that witness Stein is an interested party in this case, personally. He is an officer or owner in Schostak Brothers. He may personally lose money as a result of this case. The jury had to weigh this in determining his credibility. How much credibility they gave his p. 564 testimony was up to them. How much weight they gave to counter-evidence was up to them. . . .
The court must decide whether or not the jury had enough testimony to take this fact from the speculative-conjecture category and find enough facts to be able to make a legal finding of fact. This issue [damages for lost profits] was the most completely tried issue in the whole case. Both sides put in testimony that took up days and encompassed experts on both sides. This fact was adequately taken from the category of speculation and conjecture by the testimony and placed in the position of those cases that hold that even though loss of profits is hard to prove, if proven they should be awarded by the jury. In this case, the jury had ample testimony to make this decision from both sides.
The jury award was approximately seventy thousand dollars less than the plaintiffs asked and their proofs showed they were entitled to. The award of the jury was well within the range of the proofs and the court cannot legally alter it, as determination of damages is a jury function and their finding is justified by the law in light of the evidence in this case.
The loss of profits are often speculative and conjectural on the part of witnesses. When this is true, the court should deny loss of profits because of the speculative nature of the testimony and the proofs. However, the law is also clear that where lost profits are shown, and there is ample proof on this point, they should not be denied merely because they are hard to prove. In this case, both parties presented testimony on this issue for days. This testimony took the lost profits issue out of the category of speculation and conjecture. The jury was given an instruction on loss of profits and what the proofs must show, and the nature of the proofs, and if they found them to be speculative they could not award damages therefor. The jury, having found damages to exist, and awarded the same in this case in accord with the proper instructions, the court cannot, now, overrule the jury's finding.
[15]As Judge Wickens observed, the jury was instructed on the law concerning speculative damages. The case was thoroughly tried by all the parties. Apparently, the jury believed the plaintiffs. That is its prerogative.
[16]The testimony presented during the trial was conflicting. The weaknesses of plaintiffs' specially prepared budget were thoroughly explored on cross-examination. Defendants' witnesses testified concerning the likelihood that plaintiffs would not have made profits if the contract had been performed. There was conflicting testimony concerning the availability of a liquor license. All this was spread before the jury. The jury p. 565 weighed the conflicting testimony and determined that plaintiffs were entitled to damages of \$200,000.
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[17]The Court of Appeals is reversed and the trial court's judgment on the verdict is reinstated.
[18]Costs to plaintiffs.
Coleman, J. (concurring in part, dissenting in part).
[19]Although anticipated profits from a new business may be determined with a reasonable degree of certainty such was not the situation regarding loss of profits from liquor sales as proposed by plaintiffs.
[20]First, plaintiffs had no license and a Liquor Control Commission regional supervisor and a former commissioner testified that the described book and bottle store could not obtain a license. Further, the proofs of possible profits from possible liquor sales---if a license could have been obtained---were too speculative. The speculation of possible licensing plus the speculation of profits in this case combine to cause my opinion that profits from liquor sales should not have been submitted to the jury.
[21]I agree with Judge O'Hara in his Court of Appeals dissent and would have allowed proof of loss from the bookstore operation to go to the jury, but not proof of loss from liquor sales. His remedy is also approved. I would affirm the trial court judgment conditioned upon plaintiffs' consenting within 30 days following the release of this opinion, to "remitting that portion of the judgment in excess of \$60,000. Otherwise, the judgment should be reversed and a new trial had." Plaintiffs are also entitled to the \$1,000 deposit.
Question
Have you ever seen a "book and bottle" shop in your neighborhood? Does that tell you something about the plaintiffs' business model?
p. 566 C.AVOIDABILITY
Restatement (Second) Section 3509 reads as follows:
Avoidability as a Limitation on Damages
(1)Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
(2)The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
In re WorldCom, Inc.
United States Bankruptcy Court, Southern District of New York 361 B.R. 675 (2007)
Arthur J. Gonzalez, Bankruptcy Judge.
Introduction
[1]Before the Court are cross-motions for summary judgment separately brought by Michael Jordan ("Jordan") and WorldCom, Inc. (hereafter referred to as the "Debtors" or "MCI").
Background
[2]On or about July 10, 1995, Jordan and the Debtors entered into an endorsement agreement (the "Agreement"). At that time, Jordan was considered to be one of the most popular athletes in the world. The Agreement granted MCI a ten-year license to use Jordan's name, likeness, "other attributes," and personal services to advertise and promote MCI's telecommunications products and services beginning in September 1995 and ending in August 2005. The Agreement did not prevent Jordan from endorsing most other products or services, although he could not endorse the same products or services that MCI produced. In addition to a \$5 million signing bonus, the Agreement provided an annual base compensation of \$2 million for Jordan. The Agreement provided that Jordan would be treated as an independent contractor and that MCI would not withhold any amount from Jordan's compensation for tax purposes. The Agreement provided that Jordan was to make himself available for four days, not to exceed four hours per day, during each contract year to produce television commercials and print advertising and for promotional appearances. The parties agreed that the advertising and promotional materials would be submitted to Jordan for his approval, which could not p. 567 be unreasonably withheld, fourteen days prior to their release to the general public. From 1995 to 2000, Jordan appeared in several television commercials and a large number of print ads for MCI.
[3]On July 1, 2002, MCI commenced a case under chapter 11 of [the Bankruptcy Code. In the case, Jordan sought compensation for MCI's breach of his endorsement contract.---Eds.]
The Parties' Contentions10
[4]MCI asserts two bases for disallowance of the Claim. One, MCI contends that the Agreement is an "employment contract" within the meaning of section 502(b)(7) of the Bankruptcy Code and that Jordan's claim is "capped" pursuant to that section. Second, MCI argues that Jordan had an obligation to mitigate his damages and failed to do so. MCI argues that these two bases entitle it to summary judgment with respect to its objection to the Claim, and assert that either under section 502(b)(7) or as a result of Jordan's failure to mitigate damages following the Debtors' rejection, the Claim should be reduced to \$4 million. MCI argues that it is under no obligation to pay Jordan for contract years 2004 and 2005.
[5]Jordan argues for summary judgment allowing the Claim in full and overruling and dismissing MCI's objections to the Claim. Jordan argues that because he was not an "employee" of MCI and because the Agreement was not an "employment agreement," section 502(b)(7) does not apply to cap his claim. Regarding MCI's mitigation argument, Jordan argues that the objection should be overruled and dismissed for three independent reasons (1) Jordan was a "lost volume seller" and thus mitigation does not apply, (2) there is no evidence that Jordan could have entered into a "substantially similar" endorsement agreement, and (3) Jordan acted reasonably when he decided not to pursue other endorsements after MCI's rejection of the Agreement.
Discussion
A.Summary Judgment Standard
[6]Under Federal Rule of Civil Procedure 56(c), made applicable to this proceeding by Federal Rule of Bankruptcy 7056, summary judgment is only appropriate where the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." See Fed. R. Civ. P. 56(c)
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B.Application of Section 502(b)(7)
[7]Jordan argues that section 502(b)(7) does not apply to his claim because he was an independent contractor and not an employee of MCI. p. 568 MCI argues that section 502(b)(7) does apply to the Claim because the Agreement was an Employment Contract and Jordan was an "employee" within the meaning of that statute.
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[8]Based upon a review of aforementioned, most specifically the factors cited in the case law, the Court finds that Jordan was not an "employee" and the Agreement was not an "employment contract" pursuant to section 502(b)(7). Therefore, there being no genuine issue of material facts as to Jordan's status, the Court grants summary judgment to Jordan on this point and holds that this basis for MCI's objection to the Claim is overruled and denied.
C.Mitigation
[9]The doctrine of avoidable consequences, which has also been referred to as the duty to mitigate damages, bars recovery for losses suffered by a non-breaching party that could have been avoided by reasonable effort and without risk of substantial loss or injury. The burden of proving that the damages could have been avoided or mitigated rests with the party that committed the breach.
[10]Jordan argues that as a "lost volume seller" he was under no obligation to mitigate damages. Alternatively, Jordan argues that MCI failed to establish that Jordan could have entered a "substantially similar" endorsement contract and that Jordan acted reasonably in not entering another endorsement agreement after MCI's breach. MCI counters that Jordan is not a lost volume seller and that MCI has shown that Jordan failed to take reasonable steps to mitigate damages.
[11]The damages for a contract's rejection are determined in accordance with the law that would govern the value of the claim outside the context of bankruptcy.
[12]The Court will look to the District of Columbia ("D.C.") as the applicable state law for mitigation and other consequences of MCI's rejection of the Agreement. The parties, under Section 16 of the Agreement, "Arbitration; Governing Law," provided that any controversy would be submitted to arbitration to be governed in accordance with D.C. law.
[13]The Court was not furnished nor did research reveal D.C. cases precisely on point. Therefore, the Court will discuss and rely on cases from other jurisdictions where needed.
1.Whether Jordan Was a "Lost Volume Seller"
[14]Jordan argues that MCI's mitigation defense does not apply here because Jordan is akin to a "lost volume seller." Jordan points to testimony demonstrating that he could have entered into additional endorsement contracts even if MCI had not rejected the Agreement.