In today's lecture, we're going to look at a 1985 Massachusetts case called American Mechanical Corporation versus Union of Lynn. Using that case, we'll look at how to calculate contractual damages available to a seller when the buyer breaches, and we'll also talk about the seller's duty to mitigate damages. In American Mechanical, the plaintiff, American, contracted to sell its real estate for $100,000 and its business equipment for $35,000 to the defendant, Union. Union knew that American was in financial difficulty and that it was behind on its mortgage payments to Saugus Bank, and that Saugus was pressing American to sell its assets. Union issued a $5,000 down payment to be held in escrow until closing. A couple of weeks later, Union repudiated the contract. Saugus Bank took possession of both the property and business equipment from American and sold them for $55,000 and $35,000, respectively, the highest prices it was able to obtain. American sued Union for breach of contract. The trial court held for American but awarded only nominal damages. The instant court affirmed the judgment in favor of American as the non-breaching seller but reversed as to damages. So this is the central issue, is the plaintiff entitled to actual damages if the damages proved by the traditional formula are insufficient? The court held that it was and awarded American $45,000 plus interest. The traditional rule for calculating damages for breach of an agreement to sell real estate is to award the difference between the contract price and the market price at the date of breach. The trial court determined that the $55,000 obtained for the property at the foreclosure sale which took place seven months after the breach was not a fair estimate of the market value on the date of breach, and that American had failed to prove actual damages. Therefore, the court awarded only nominal damages. However, the appeals court held that the traditional formula is not a rigid one, and that the aim in measuring damages in the event of a breach is to place the injured party in as good a position as he would have been had the contract been performed. This is, of course, the standard for expectation damages. According to the court, an important aspect of this principle is that if a party suing for breach of contract has sustained a loss as a result of a breach and the loss is of such a nature that it was reasonably foreseeable by the parties, or actually within their contemplation at the time the contract was entered into, then that loss may be recovered in an action for damages. Since Union knew that if the sale the property did not go through, the result would be that Saugus Bank would enforce its right under the mortgage and that a foreclosure sale was likely, the correct measure of damages on traditional contract principles was the full amount of the actual loss, the contract price less the amount received for the property at the foreclosure sale. Therefore, American was entitled to $45,000, the difference between $100,000, the contract price, and the 55,000 foreclosure sale price. At what time is the market value of real estate relevant under the traditional rule for calculating damages? Suppose that American provided evidence that the market value was $75,000 at the date of the breach and $70,000 at the date set for closing, what result under the court's reasoning? Well, under the traditional rule, damages are equal to the difference between the contract price and the market price at the date of the breach. That would be 100,000 minus 75,000, or $25,000 in this case. Neither the trial court nor the appellate court applied the traditional formula. The traditional formula requires an estimate of the market value of the property at the date of breach. Since this was unavailable, the trial court held that damages could not be calculated and awarded only nominal damages. The appellate court, however, held that even though American didn't prove a required element of the market value formula it did prove a foreseeable loss, and that including this loss in the damage award more closely resonates with the metagoal of ex-post compensation. Such reasonably foreseeable losses are known as consequential damages. And we'll talk more about them in a later lecture when we cover a case called Hadley versus Baxendale. Consequential damages are usually, though, only awarded to a buyer when the sellers breach causes a foreseeable loss to the buyer who is denied the services flowing from the sellers' failure to perform. The UCC Section 2-715 expressly limits consequential damages that as those that are resulting from a seller's breach. But American Mechanical is a case where a buyer's breach causes foreseeable consequential damages. And while the UCC does not expressly provide for a seller's consequential damages, the Uniform Land Transaction Act does provide for a seller's consequential damages that include, "Any loss the buyer knew or at the time of contracting had reason to know, would result from the buyer's breach in which reasonably could not be avoided by the seller." American Mechanical also touches on this last point, the sellers duty to mitigate damages in the event of a breach by the buyer. The court noted that Union would of course be entitled to have American's damages reduced to the extent that American could reasonably have avoided the loss. In other words, if once it knew of the breach, American could reasonably have sold the property to someone else, it would be entitled to damages an amount no greater than the difference between the contract price and the price for which it could have sold the property. But the facts demonstrate that American was unable to secure another purchaser for the realty and equipment. The court also noted that the buyer bore the burden to prove that the losses could have been avoided by reasonable effort. Section 350 of the restatement describes the duty to mitigate. It says that, "Damages are not recoverable for loss that the injured party could have avoided without undue risk burden or humiliation, but that the injured party is not precluded from recovery to the extent that he has made reasonable but unsuccessful efforts to avoid loss." Let's look at the burden in American Mechanical, and how it shifts. First, the plaintiff has the burden of proving damages but the defendant has the burden to show that the plaintiff did not mitigate damages. Thus, the court uses the mitigation rule to shift the burden to prove the market value of the property at the date of breach from the plaintiff to the defendant. At trial, the defendant might not have known that it had this burden because the law was not well enough established. Arguably. It would have been more appropriate for the appellate court to remand for a new trial to see if Union could establish American's failure to mitigate damages. Let's review. Today, we talked about how to calculate contract damages when a buyer breaches. Under the traditional rule, damages are calculated as the difference between the contract price and the market price at the time of the breach. Damages may also include consequential damages, losses that are reasonably foreseeable in the event of a breach, although the seller has a duty to mitigate those damages.
