Although a plaintiff may recover expectation damages, they are required to mitigate damages or risk losing all they won in a jury verdict. In other words, mitigating damages are to offset expectation damages. If the plaintiff is somewhat responsible for their damages, then it makes sense that they should not be entitled to their complete loss. This principle is also called the doctrine of “avoidable consequences.” However, there are a wide ways the courts evaluate whether damages have been mitigated depending on the case. For instance, personal service contract, land purchase contracts, and commercial contracts are all resolved differently.
Rockingham County v. Luten Bridge Co.
35 F.2d 301 (4th Cir. 1929).
Luten Bridge is the plaintiff who won in trial and the county appealed.
Can the bridge building company recover damages when they continued to work after the breach occurred?
When a breach has occurred, the injured party may recover for their expenses up to the breach plus the fulfillment of the profit they would have realized if there had been no breach. However, if the injured party continues to incur costs, they will be required to absorb those costs.
Plaintiff did not mitigate damages, reversed and a new trial granted.
The plaintiff made a contract with the county board that they could build a bridge for the county in a certain location. However, the dispute over whether a bridge should be built at all was so heavy that board members in favor of the bridge resigned. Then the new board ordered the contract to be stopped, and the bridge to not be built. However, by this point, the plaintiff had begun to build. Believing the board majority would be restored, they continued to build, even after they were put on notice of the breach. Later, the bridge sued for the damages they incurred for the breach of contract.
There is no doubt that a breach occurred. However, the bridge was put on notice early on about the breach. At that point, they were to stop working and stop driving up the cost of continued development. Because they failed to do so, the bridge company is not entitled to a full recovery. Instead, they are only entitled to what they lost before the breach and any profit therefrom. Thus, our equation for damages looks like this:
Actual incurred costs prior to breach + Expected profits that were lost from the breach – Any incurred costs after the breach = damages.
Although this case is an illustration of how a party should stop work to mitigate damages. However, there are circumstances when the best way to maximize the value (mitigate damages) is to finish the project (e.g. cheaper to finish and find a good buyer instead of stopping, removing, and stripping the project).
Once again, note the equation above to determine what the damages are:
“Actual incurred costs prior to breach + Expected profits that were lost from the breach – Any incurred costs after the breach = damages.”
Biggest takeaway: What is a commercially reasonable (the standard) way for a non breaching party to behave depending on the facts of the situation.
Commercially reasonable has an element of economics, “what is the cheapest/best way to salvage the materials?” Weigh your options, then pick the best one. However, the dollar amount is not a set deal of what is commercially reasonable. Sometimes there is a large burden to mitigate those damages. In these instances, the court will be fine with a somewhat less economic way to mitigate.
Maness v. Collins
2010 WL 4629614 (Tenn App. 2010).
Maness is the plaintiff who won in trial (in that there was a breach) but failed to receive any damages for failure to mitigate. As such, he appeals.
Whether Maness’s failure to search for a new job after his termination precludes him from recovering damages.
When there is a non-compete contract, it is the responsibility of the terminating party to show that the terminated employee could have found equal or better work elsewhere.
There was a breach of contract (affirmed) but Maness did not fail to mitigate his damages (reversed). This case is remanded with an order to execute judgment and calculate damages in Maness’s favor (without allowing the defendant to show any more evidence because the evidence was not presented at first trial).
Maness started a woodworking company which grew to 25 employees. He then began to sell his company to the defendants, Collins, Mike Smith, and Josh Smith. Colllins and Mike would work part-time at the company while Josh would work full-time. As part of the agreement, Maness would stay on as a full-time employee for 67,000 a year for 3 years. Additionally, Maness signed a non-compete agreement which restricted him from seeking work for 5 years after the termination of his agreement with the new owners.
Things started out great for the parties (as they usually do), but things turned sour quickly (again, as they usually do). Maness felt that he was being disrespected from the employees, stirred up by Josh Smith. Ultimately, Maness fired an employee and the owners rescinded that action, telling Maness that he did not have the authority to do so. After that point, Maness’s work product diminished and he sat in his office for most of the time. He argues that he was told to sit in his office while the owners say that he was only sulking. For his lack of work, he was fired.
However, there was testimony that Josh Smith was undermining Maness. Josh was telling the employees that Maness was no longer an owner and did not have authority to tell them what to do. Additionally, Josh told employees that Maness would shortly leave the company and worked with employees on the best way to get him to leave. Finally, Josh was a known drug user on the premises which ultimately influenced Maness’s firing. The court credited this testimony to show that the employment agreement was breached.
After his termination, Maness did not seek new work, but spent the next year building a home.
The application here is pretty short, sweet, and simple. At trial, the court did not abuse their discretion in crediting the testimony resulting in a conclusion of a breach of contract. As such, that section is affirmed.
Next, the court conducts an analysis to see if damages should be withheld because of a failure to mitigate. The rule says that an employer who terminates is to prove 1) that the plaintiff could have found comparable work and 2) that the plaintiff did not seek out that work. Here, the defendant’s are trying to persuade the court to adopt an exception that the first element should be removed. However, the court refuses to do so. So, although the plaintiff did not seek out new work, the plaintiff failed to show that he could have found comparable work. Thus, the plaintiff did not fail to mitigate his damages. Because the defendant chose not to present that evidence at trial, they are prevented from showing it upon remand.
- The plaintiff had the requirement to mitigate damages
- However, the defendant had the burden to show that he had failed to mitigate damages:
- He could have found reasonable work
- Chose not to seek out that work
- Here, there defendant failed to properly plead the defense so the plaintiff wins.
Jetz Service Co. v. Salina Properties
865 P.2d 1051 (Kan. App. 1993).
Jetz is the plaintiff who won in trail and was awarded damages as a “lost volume.” Salina Properties appeals.
Are the damages lost volume?
Lost volume is when an injured party:
- Has a contract
- The contract is breached by the other party
- The injured party enters into a new contract with a different party for similar benefits
- Finally, and most importantly, the new contract would have occurred regardless of the breach.
In other words, this is a question of, “did the create the reason for the new contract (mitigating contract), or was this contract made in addition to the existing contract?”
If this is an additional contract, not mitigating contract, this is lost volume and the plaintiff is entitled to recover profits from both contracts.
The breach resulted in lost volume. Thus, the plaintiff is entitled to recover the lost profits. Affirmed.
Jetz searches out leases to put washers and dryers into buildings to serve as a Laundromat. They executed a lease with Salina’s previous owner. The lease was to last five years. Salina eventually became the owners, and disconnected the equipment 16 months early. This disconnection required Jetz to incur costs to recover. Eventually, Jetz put about 80% of the machines in another location.
However, the Salina location was not the only location Jetz had. In addition to the 5 machines located in Salina, Jetz had about 1,000 more locations and had another 1,500 machines in a warehouse pending use.
Once again the analysis is simple. The new contract was made in addition to the contract Jetz had with Salina. Jetz had the means necessary and the opportunity available to enter the new location regardless of the fulfillment of the contract with Salina. As such, Jetz could have easily serviced both locations and would likely have done so, had the contract not been breached. Consequently, Jetz is entitled to the profits made from the new location in addition to the profits that would have been received under the original lease.
In other words, Jetz did not have to mitigate because they could not mitigate due to the nature and production of their service.
“The ‘lost volume seller’ measure of damages ‘refers to the lost volume of business the non-breaching seller incurs on buyer’s breach. When the seller resells the entity he expected to sell to the original buyer, he usually deprives himself of something of value – the sale to a new buyer of another similar entity.'” To simplify, if you contract to sell to one, the one breaches, and then sell to another, you lost the sell to the original buyer. Both would have purchased, regardless of the breach.
UCC §2-708(2) outlines the doctrine.
Restatement §250 comment d and 347 comment f also outlines the doctrine.
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