The limits on damages: foreseeability, certainty and mitigation

Rockingham County, North Carolina, January nineteen twenty four. The county commissioners vote three to two to hire a company to build a bridge. The vote splits the board so badly that one of the three resigns, and a new commissioner is appointed. In February the reconstituted board resolves that the contract is not valid, that the road the bridge was to serve will not be built, and that the company should proceed no further. In March it resolves again. In April, again.
In September it resolves to pay no bills.
At the time of the first resolution the company had done about nineteen hundred dollars of work. It kept building. By November it had built a bridge in the middle of a forest, connected to nothing, and it sued the county for eighteen thousand three hundred and one dollars. The county admits the contract, admits it broke it, and says it owes the damages as of February, not November.
So here is the question. The county broke a valid contract. The company did exactly what it had promised. Why should it not be paid the price? Think about it before I go on, because the answer is the third of three limits that keep expectation damages from running to the horizon, and the first two limits are about what the defendant could foresee and what the plaintiff can prove.
And now the question I keep asking. What exactly did these people promise each other? A bridge for a price. Last lecture the measure was the value of performance. Today three doctrines cut that measure down. Damages must be foreseeable when the contract was made. They must be proved with reasonable certainty. And they must not include loss the plaintiff could reasonably have avoided.
Here is the first line for the board, foreseeability. The law awards damages for breach of contract to compensate for injury caused by the breach, injury which was foreseeable, that is, reasonably within the contemplation of the parties, at the time the contract was entered into. The rule is English, from Hadley against Baxendale in eighteen fifty four, a mill shaft sent late to the foundry. The loss must arise naturally from the breach, or from special circumstances the defendant knew.
Second line, certainty. Loss of profits may be recovered if it is shown with certainty that the loss was caused by the breach, and if the amount is capable of proof with reasonable certainty. The damages may not be merely speculative, possible or imaginary. A new business faces a stricter standard, because there is no track record from which to project.
Third line, mitigation. A plaintiff cannot hold a defendant liable for damages which need not have been incurred. The plaintiff must, so far as he can without loss to himself, mitigate the damages caused by the defendant's wrongful act. After a repudiation, he may not continue to perform and pile up damages. A wrongfully discharged employee must seek comparable work, but need not accept employment of a different or inferior kind.
Now the cases, and foreseeability and certainty together, in the largest lost profits claim in this course. Buffalo, nineteen sixty nine. Erie County contracts with a developer to build a domed stadium and lease it, or failing agreement on the lease, to have the developer's company manage it for twenty years. The county never builds. A jury, after a nine month trial, awards the management company damages for twenty years of lost profits, on the evidence of experts using data from other domed stadiums.
The Court of Appeals, in Kenford against County of Erie, nineteen eighty six, threw the award out.
It stated the rules. First, it must be demonstrated with certainty that such damages have been caused by the breach and, second, the alleged loss must be capable of proof with reasonable certainty. In other words, the damages may not be merely speculative, possible or imaginary, but must be reasonably certain and directly traceable to the breach, not remote or the result of other intervening causes.
In addition, there must be a showing that the particular damages were fairly within the contemplation of the parties to the contract at the time it was made.
Then it conceded the quality of the proof and rejected it anyway. The quantity of proof is massive and, unquestionably, represents business and industry's most advanced and sophisticated method for predicting the probable results of contemplated projects. Nevertheless, DSI's proof is insufficient to meet the required standard. Two reasons. Foreseeability first.
The proof does not satisfy the requirement that liability for loss of profits over a twenty year period was in the contemplation of the parties at the time of the execution of the basic contract. In the absence of any provision for such an eventuality, the commonsense rule to apply is to consider what the parties would have concluded had they considered the subject.
Certainty second. Despite the massive quantity of expert proof, the ultimate conclusions are still projections. At the time of the breach, there was only one other facility in this country to use as a basis of comparison, the Astrodome in Houston. The multitude of assumptions required to establish projections of profitability over the life of this contract require speculation and conjecture. And a sentence about sport.
The economic facts of life, the whim of the general public and the fickle nature of popular support for professional athletic endeavors must be given great weight in attempting to ascertain damages twenty years in the future.
Now the older, shorter version, and a fight that never happened. Nineteen twenty six. A Chicago promoter signs Jack Dempsey, heavyweight champion of the world, to fight Harry Wills in September. Dempsey gets ten dollars on signing and is promised three hundred thousand in August, five hundred thousand ten days before the fight, and half the profits over two million. In July the promoter wires him about insurance and training. Dempsey wires back.
Entirely too busy training for my coming Tunney match to waste time on insurance representatives. As you have no contract suggest you stop kidding yourself and me also. Jack Dempsey.
The promoter offered to prove that the fight would have grossed three million dollars and netted one million six hundred thousand. The Appellate Court of Illinois, in Chicago Coliseum Club against Dempsey, nineteen thirty two, would not hear it. 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.
What could the promoter recover? Nominal damages, at least. Not the fifty thousand it had promised the other fighter, because that contract was made before Dempsey's and was not caused by the breach. Not the cost of suing Dempsey in Indiana to stop the Tunney fight, because the plaintiff having been informed that the defendant intended to proceed no further under his agreement, took such steps at its own financial risk.
But the expenses it incurred between the signing and the breach, in furtherance of the performance, three hundred dollars to an architect for stadium plans, the wages of special assistants, a trip to Colorado for Dempsey's physical. Those went to the jury. That is the reliance measure, and it is where certainty sends you.
Now the other side of certainty, because the rule is about evidence, not about new businesses as such. Michigan, nineteen sixty five. A couple signs a ten year lease for a book and bottle shop in a proposed shopping centre. The landlord's affairs collapse, the lease is misplaced, and when the space is ready it has been let to someone else. The couple have never run this shop. They sue for lost profits and a jury gives them two hundred thousand dollars.
The Court of Appeals reverses, because a new business cannot recover lost profits.
The Supreme Court of Michigan, in Fera against Village Plaza, nineteen seventy six, reinstated the verdict. 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 the plaintiff must lay a basis for a reasonable estimate of the extent of his harm, measured in money. The issue becomes one of sufficiency of proof.
Corbin, quoted by the court, put it best. 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.
The couple had experience in liquor and book sales, called experts, and were cross-examined for days. The jury believed them. That is its prerogative.
Now mitigation, and back to the bridge in the forest. The Fourth Circuit, in Rockingham County against Luten Bridge, nineteen twenty nine, Judge Parker. It is true that the county had no right to rescind the contract, and the notice given plaintiff amounted to a breach on its part. But, after plaintiff had received notice of the breach, it was its duty to do nothing to increase the damages flowing therefrom.
His example is the one to remember. If A enters into a binding contract to build a house for B, B, of course, has no right to rescind the contract without A's consent. But if, before the house is built, he decides that he does not want it, and notifies A to that effect, A has no right to proceed with the building and thus pile up damages.
His remedy is to treat the contract as broken when he receives the notice, and sue for the recovery of such damages as he may have sustained from the breach, including any profit which he would have realized upon performance.
The bridge, built in the midst of the forest, is of no value to the county because of this change of circumstances. When, therefore, the county gave notice to the plaintiff that it would not proceed with the project, plaintiff should have desisted from further work. It had no right thus to pile up damages by proceeding with the erection of a useless bridge. The measure?
Labor and materials expended and expense incurred in the part performance of the contract, prior to its repudiation, plus the profit which would have been realized if it had been carried out in accordance with its terms.
Notice that the company is not punished. It gets everything the contract would have given it, the profit on the whole job and its costs to date. What it does not get is the cost of work done after it knew the work was pointless. Mitigation is not a duty in the ordinary sense. It is a limit on what counts as loss caused by the breach.
Last, mitigation in employment, and the most famous actress in the casebooks. Nineteen sixty five. Twentieth Century-Fox contracts with a well known actress to star in a musical, Bloomer Girl, to be filmed in California, for seven hundred and fifty thousand dollars over fourteen weeks.
In April nineteen sixty six the studio cancels the picture and offers her instead the lead in Big Country, Big Man, a western to be filmed in Australia, at the same pay, but without the approval rights over director and screenplay that her original contract gave her. She refuses and sues for the full fee.
The Supreme Court of California, in Parker against Twentieth Century-Fox, nineteen seventy, gave it to her on summary judgment. The general rule is that the measure of recovery by a wrongfully discharged employee is the amount of salary agreed upon for the period of service, less the amount which the employer affirmatively proves the employee has earned or with reasonable effort might have earned from other employment.
However, the employee's rejection of or failure to seek other available employment of a different or inferior kind may not be resorted to in order to mitigate damages.
Was the western different or inferior? The female lead as a dramatic actress in a western style motion picture can by no stretch of imagination be considered the equivalent of or substantially similar to the lead in a song-and-dance production. And the loss of the approval rights made it inferior.
The deprivation or infringement of an employee's rights held under an original employment contract converts the available other employment relied upon by the employer to mitigate damages, into inferior employment which the employee need not seek or accept.
The dissent, Justice Sullivan, thought that was a question for a jury, and worried about the doctrine. It has never been the law that the mere existence of differences between two jobs in the same field is sufficient, as a matter of law, to excuse an employee wrongfully discharged from one from accepting the other in order to mitigate damages. Such an approach would effectively eliminate any obligation of an employee to attempt to minimize damage arising from a wrongful discharge.
He would have sent it to trial. The majority did not.
Put the five cases side by side. Kenford, twenty years of stadium profits, unforeseeable and unprovable. Dempsey, a fight's profits, unprovable, but reliance expenses recoverable. Fera, a new shop's profits, provable to a jury's satisfaction, and so recovered. Luten Bridge, a useless bridge, cost after notice not recoverable. Parker, a substitute job different and inferior, so no deduction. Three limits, all serving the same idea.
The defendant pays what his breach cost, as the parties could have expected it, as the plaintiff can prove it, and as the plaintiff could not reasonably avoid.
Now let's change one fact. The Erie County contract had said, the County acknowledges that DSI's anticipated profits from twenty years of stadium management are the essence of this agreement and shall be recoverable in the event of the County's default. Choose an answer before I go on.
Now the foreseeability ground is gone, because the parties contemplated exactly this liability, and the Kenford court said its rule was about what the parties would have concluded had they considered the subject. They did consider it. The certainty ground remains, and the court's second reason would still stand. Projections built on one comparable facility remain speculation, however sophisticated. A clause can allocate the risk of a loss. It cannot make an unprovable amount provable.
Change one fact again. The bridge company had received the county's February resolution while its steel was already ordered and half delivered, and had finished only the piers before stopping. Choose.
Then it recovers the cost of the steel and the piers, plus its lost profit on the whole contract, and nothing for work after notice. The Fourth Circuit's measure covers labor and materials expended and expense incurred in the part performance of the contract, prior to its repudiation. Steel ordered before notice and not cancellable is expense incurred. What mitigation forbids is choosing to go on when stopping is possible. It never asks the plaintiff to lose money to save the defendant some.
Change one fact a third time. The studio had offered the actress the lead in a different musical, in California, with the same approval rights, at the same pay, and she had refused because she did not like the script. Choose.
Now the studio has a real mitigation defense. The substitute is not different in kind and not inferior in its terms, and a wrongfully discharged employee must accept comparable employment or have its earnings deducted. Whether she acted reasonably in refusing it, and what she would have earned, become questions for trial. The majority in Parker won because the offer changed the kind of work and stripped contract rights. Change those facts and even the majority's rule deducts.
Here is what people get wrong here, and why it is tempting. The first mistake is treating certainty as a rule against new businesses or new ventures. It is a rule about evidence, and Fera shows a new business winning. The second mistake is thinking mitigation makes the plaintiff work for the defendant. It only strips out loss the plaintiff chose to incur, and the bridge company still got its full profit.
The third mistake is thinking foreseeability is about what the defendant foresaw at breach. It is judged when the contract was made, because that is when the price was set.
Here is the rule, in one breath. Expectation damages are limited to loss that was reasonably within the parties' contemplation when the contract was made, that the plaintiff proves with reasonable certainty as to both cause and amount, and that the plaintiff could not have avoided by reasonable effort without undue risk or burden.
After a repudiation the plaintiff must stop performing and sue for costs to date plus lost profit, and a discharged employee must take comparable work but not work of a different or inferior kind. Now, five questions.