Handicapped Children’s Education Board of Sheboygan County, a municipal corporation, Plaintiff-Respondent-Petitioner, v. Elaine K. Lukaszewski, Defendant-Appellant.

Supreme Court

No. 81-1141.

Argued March 1, 1983.

Decided April 26, 1983.

(Also reported in 332 N.W.2d 774).

For the petitioner there was a brief (in court of appeals) by John E. Raftery, assistant corporation counsel, with whom on the brief was Alexander Hopp, corporation counsel, Sheboygan, and oral argument by Mr. Raftery.

For the defendant-appellant there was a brief by John S. Williamson, Jr., and Habush, Habush & Davis, S.C., Milwaukee, and oral argument by Mr. Williamson.

Amicus Curiae brief was filed by Michael L. Stoll, staff counsel, Madison, for the Wisconsin Education Association Council.

WILLIAM G. CALLOW, J.

This review arises out of an unpublished decision of the court of appeals which affirmed in part and reversed in part a judgment of the Ozaukee county circuit court, Judge Warren A. Grady.

In January of 1978 the Handicapped Children’s Education Board (the Board) hired Elaine Lukaszewski to serve as a speech and language therapist for the spring term. Lukaszewski was assigned to the Lightfoot School in Sheboygan Falls which was approximately 45 miles from her home in Mequon. Rather than move, she commuted to work each day. During the 1978 spring term, the Board offered Lukaszewski a contract to continue in her present position at Lightfoot School for the 1978-79 school year. The contract called for an annual salary of $10,760. Lukaszewski accepted.

In August of 1978, prior to the beginning of the school year, Lukaszewski was offered a position by the Wee Care Day Care Center which was located not far from her home in Mequon. The job paid an annual salary of $13,000. After deciding to accept this offer, Lukaszewski notified Thomas Morrelle, the Board’s director of special education, that she intended to resign from her position at the Lightfoot School. Morrelle told her to submit a letter of resignation for consideration by the Board. She did so, and the matter was discussed at a meeting of the Board on August 21, 1978. The Board refused to release Lukaszewski from her contract. On August 24, 1978, the Board’s attorney sent a letter to Lukaszewski directing her to return to work. The attorney sent a second letter to the Wee Care Day Center stating that the Board would take legal action if the Center interfered with Lukaszewski’s performance of her contractual obligations at the Lightfoot School. A copy of this letter was sent to the Department of Public Instruction.

Lukaszewski left the Wee Care Day Care Center and returned to Lightfoot School for the 1978 fall term. She resented the actions of the Board, however, and retained misgivings about her job. On September 8, 1978, she discussed her feelings with Morrelle. After this meeting Lukaszewski felt quite upset about the situation. She called her doctor to make an appointment for that afternoon and subsequently left the school.

Dr. Ashok Chatterjee examined Lukaszewski and found her blood pressure to be high. Lukaszewski asked Dr. Chatterjee to write a letter explaining his medical findings and the advice he had given her. In a letter dated September 11, 1978, Dr. Chatterjee indicated that Lukaszewski had a hypertension problem dating back to 1976. He reported that on the day he examined Lukaszewski she appeared agitated, nervous, and had blood pressure readings up to 180/100. It was his opinion that, although she took hypotensive drugs, her medical condition would not improve unless the situation which caused the problem was removed. He further opined that it would be dangerous for her to drive long distances in her agitated state.

Lukaszewski did not return to work after leaving on September 8, 1978. She submitted a letter of resignation dated September 13, 1978, in which she wrote:

“I enclose a copy of the doctor’s statement concerning my health. On the basis of it, I must resign. I am unwilling to jeopardize my health and I am also unwilling to become involved in an accident. For these reasons, I tender my resignation.”

A short time later Lukaszewski reapplied for and obtained employment at the Wee Care Day Care Center.

After Lukaszewski left, the Board immediately began looking for a replacement. Only one qualified person applied for the position. Although this applicant had less of an educational background than Lukaszewski, she had more teaching experience. Under the salary schedule agreed upon by the Board and the teachers’ union, this applicant would have to be paid $1,026.64 more per year than Lukaszewski. Having no alternative, the Board hired the applicant at the higher salary.

In December of 1978 the Board initiated an action against Lukaszewski for breach of contract. The Board alleged that, as a result of the breach, it suffered damage in the amount of the additional compensation it was required to pay Lukaszewski’s replacement for the 1978-79 school year ($1,026.64). A trial was held before the court. The trial court ruled that Lukaszewski had breached her contract and awarded the Board $1,249.14 in damages ($1,026.64 for breach of contract and $222.50 for costs).

Lukaszewski appealed. The court of appeals affirmed the circuit court’s determination that Lukaszewski breached her contract. However, the appellate court reversed the circuit court’s damage award, reasoning that, although the Board had to pay more for Lukaszewski’s replacement, by its own standards it obtained a proportionately more valuable teacher. Therefore, the court of appeals held that the Board suffered no damage from the breach. We granted the Board’s petition for review.

There are two issues presented on this review: (1) whether Lukaszewski breached her employment contract with the Board; and (2) if she did breach her contract, whether the Board suffered recoverable damages therefrom.

I.

It is undisputed that Lukaszewski resigned before her contract with the Board expired. The only question is whether her resignation was somehow justified. Lukaszewski argues that, because she resigned for health reasons, the trial court erred in finding a breach of contract. According to Lukaszewski, the uncontroverted evidence at trial established that her employment with the Board endangered her health. Therefore, her failure to fulfill her obligation under the employment contract was excused.

We recognize that under certain conditions illness or health dangers may excuse nonperformance of a contract. This court held long ago that “where the act to be performed is one which the promisor alone is competent to do, the obligation is discharged if he is prevented by sickness or death from performing it.” Jennings v. Lyons, 39 Wis. 553, 557 (1876). See also Restatement (Second) of Contracts sec. 262 (1981) ; 18 S. Williston, A Treatise on the Law of Contracts sec. 1940 (3d ed. 1978). Even assuming this rule applies to Lukaszewski’s failure to perform, we are not convinced that the trial court erred in finding a breach of contract.1

A health danger will not excuse nonperformance of a contractual obligation when the danger is caused by the nonperforming party. See Jennings v. Lyons, 39 Wis. at 557-58. Nor will a health condition or danger which was foreseeable when the contract was entered into justify its breach. Id. It would be fundamentally unfair to allow a breaching party to escape liability because of a health danger which by his or her own fault has precluded performance.

In the instant case the trial court expressly found that the danger to Lukaszewski's health was self-induced. Lukaszewski testified that it was stressful for her to return to the Lightfoot School in the fall of 1978 because she did not want to work there and because she resented the Board’s actions to compel her to do so. Citing this testimony, the court concluded: “The Court finds that the defendant’s medical excuse was a result of the stress condition she had created by an attempted repudiation of her contract, and was not the product of any unsubstantiated, so-called, harrassment [sic] by the plaintiff’s board.” Lukaszewski further complained about the hazard of driving 45 miles to and from Sheboygan Falls each day. She alone, however, caused this commute by choosing to live in Mequon. The trial court pointed out in its decision from the bench that she could have eliminated this problem by simply moving to Sheboygan Falls. Thus the court clearly found that any health danger associated with performance of the employment contract was the fault of Lukaszewski, not the Board. This factual finding alone is enough to invalidate the medical excuse for Lukaszewski’s breach.

The medical excuse is defective for a second reason. In order to excuse Lukaszewski’s nonperformance, the trial court would had to have made a factual finding that she resigned for health reasons. The oral decision and supplemental written decision of the trial court indicate that it found otherwise. In its written decision the court stated:

“[Lukaszewski’s] reasons for resignation were succinctly stated in her testimony, upon cross-examination . . . as follows: ‘. . . I had found a job that was closer in proximity to my home and it offered a different type of challenge, . . . also that the pay was, was more, and I asked them if I could be released from my contract.’ ”

The trial court did not include the health danger. Indeed, the court appeared to doubt that Lukaszewski resigned for health reasons. The trial judge observed that Lukaszewski had a history of hypertension dating back at least five or six years. Her blood pressure would fluctuate at the slightest provocation. He further noted that she was able to commute between Sheboygan Falls and Mequon from January, 1978, through the middle of the following summer. In short, the decisions indicate that the court believed Lukaszewski resigned for reasons other than her health.

These factual findings by the trial court invalidate Lukaszewski’s medical excuse and thereby establish a breach. The standard of review applicable to this issue is well settled.

“Findings of fact by the trial court will not be upset on appeal unless they are against the great weight and clear preponderance of the evidence. The evidence supporting the findings of the trial court need not in itself constitute the great weight or clear preponderance of the evidence; nor is reversal required if there is evidence to support a contrary finding. Rather, to command a reversal, such evidence in support of a contrary finding must itself constitute the great weight and clear preponderance of the evidence. In re Estate of Jones, 74 Wis. 2d 607, 611, 247 N.W.2d 168 (1976). In addition, when the trial judge acts as the finder of fact, and where there is conflicting testimony, the trial judge is the ultimate arbiter of the credibility of the witnesses. Gehr v. Sheboygan, 81 Wis. 2d 117, 122, 260 N.W.2d 30 (1977). When more than one reasonable inference can be drawn from the credible evidence, the reviewing court must accept the inference drawn by the trier of fact. Id.” Cogswell v. Robertshaw Controls Co., 87 Wis. 2d 243, 249-50, 274 N.W.2d 647 (1979).

We conclude that the trial court’s findings of fact are not against the great weight and clear preponderance of the evidence and, therefore, must be upheld. Accordingly, we affirm that portion of the court of appeals’ decision which affirmed the circuit court’s determination that Lukaszewski breached her employment contract.

II.

This court has long held that an employer may recover damages from an employee who has failed to perform an employment contract. Walsh v. Fisher, 102 Wis. 172, 179, 78 N.W. 437 (1899). Damages in breach of contract cases are ordinarily measured by the expectations of the parties. The nonbreaching party is entitled to full compensation for the loss of his or her bargain — that is, losses necessarily following from the breach which are proven to a reasonable certainty and were within contemplation of the parties when the contract was made. Lommen v. Danaher, 165 Wis. 15, 19, 161 N.W. 14 (1917) ; Pleasure Time, Inc. v. Kuss, 78 Wis. 2d 373, 385, 254 N.W.2d 463 (1977). Thus damages for breach of an employment contract include the cost of obtaining other services equivalent to that promised but not performed, plus any foreseeable consequential damages. Roth v. Speck, 126 A.2d 153, 155 (D.C. 1956) ; Annot., 61 A.L.R. 2d 1008 (1958).

In the instant case it is undisputed that, as a result of the breach, the Board hired a replacement at a salary exceeding what it had agreed to pay Lukaszewski. There is no question that this additional cost ($1,026.64) necessarily flowed from the breach and was within the contemplation of the parties when the contract was made. Lukaszewski argues and the court of appeals held, however, that the Board was not damaged by this expense. The amount a teacher is' paid is determined by a salary schedule agreed upon by the teachers’ union and the Board. The more education and experience a teacher has the greater her salary will be. Presumably, then, the amount of compensation a teacher receives reflects her value to the Board. Lukaszewski argues that the Board suffered no net loss because, while it had to pay more for the replacement, it received the services of a proportionately more valuable teacher. Accordingly, she maintains that the Board is not entitled to damages because an award would place it in a better position than if the contract had been performed.2

We disagree. Lukaszewski and the court of appeals improperly focus on the objective value of the services the Board received rather than that for which it had bargained. Damages for breach of contract are measured by the expectations of the parties. The Board expected to receive the services of a speech therapist with Lukaszewski’s education and experience at the salary agreed upon. It neither expected nor wanted a more experienced therapist who had to be paid an additional $1,026.64 per year. Lukaszewski’s breach forced the Board to hire the replacement and, in turn, to pay a higher salary. Therefore, the Board lost the benefit of its bargain. Any additional value the Board may have received from the replacement’s greater experience was imposed upon it and thus cannot be characterized as a benefit. We conclude that the Board suffered damages for the loss of its bargain in the amount of additional compensation it was required to pay Lukaszewski’s replacement.

This is not to say that an employer who is injured by an employee’s breach of contract is free to hire the most qualified and expensive replacement and then recover the difference between the salary paid and the contract salary. An injured party must take all reasonable steps to mitigate damages. Kuhlman, Inc. v. G. Heileman Brewing Co., 83 Wis. 2d 749, 752, 266 N.W.2d 382 (1978). Therefore, the employer must attempt to obtain equivalent services at the lowest possible cost. In the instant case the Board acted reasonably in hiring Lukaszewski’s replacement even though she commanded a higher salary. Upon Lukaszewski’s breach, the Board immediately took steps to locate a replacement. Only one qualified person applied for the position. Having no alternative, the Board hired this applicant. Thus the Board properly mitigated its damages by hiring the least expensive, qualified replacement available.

We hold that the Board is entitled to have the benefit of its bargain restored. Therefore, we reverse that portion of the court of appeals’ decision which reversed the trial court’s damage award.

By the Court. — The decision of the court of appeals is affirmed in part and reversed in part.

1

It must be noted that we do not decide whether this rule extends to the facts of the instant case.

2

We have held that an injured party is not entitled to be placed in a better position because of a breach of contract. Dehnart v. Waukesha Brewing Co., 21 Wis. 2d 583, 595-96, 124 N.W.2d 664 (1963); Pleasure Time, Inc. v. Kuss, 78 Wis. 2d 373, 385, 254 N.W.2d 463 (1977). However, because we find that the Board was damaged by Lukaszewski’s breach, this problem does not arise.

DAY, J.

(dissenting). I dissent. The majority opinion correctly states, “The only question is whether her resignation is somehow justified.” I would hold that it was.

Elaine Lukaszewski left her employment with the school board. She suffered from high blood pressure and had been treated for several years by her physician for the condition. She claimed her hypertension increased due to stress caused when the Board refused to cancel her teaching contract. Stress can cause a precipitous rise in blood pressure. High blood pressure can bring on damage to other organs of the body.

She was upset over what she perceived was the unreasonable attitude of her employer in refusing to cancel her contract. Following an unpleasant exchange with the Board’s Director of Special Education, Mr. Morrelle, she went to her physician. He found her blood pressure to be 180 over 100 which he testified was very high. He advised her to rest and to get out of the situation that was causing her symptoms which she properly interpreted to mean “quit the job.” He also told her that her elevated blood pressure made it dangerous for her to drive the ninety miles round-trip each day, that commuting from her home in Mequon to Sheboygan Falls entailed.

The trial court and the majority of this court conclude she could have obviated the danger of driving by moving to Sheboygan Falls. But the fact is that would not have eliminated her illness nor the hazards to her health that her condition posed. There is not a shred of medical evidence that her blood pressure problems would be cured or appreciably alleviated if she moved from her home to Sheboygan Falls.

Once the dangerous hypertension is established, and here the only medical testimony did just that, it should follow that one should be relieved of a contractual obligation for services unless malingering is shown. In this case no one denies she has the condition. But, the trial court says, the condition was one “she had created,” which the majority on this court refer to as “self induced.” The majority here seized on the rationale that illness that is “self induced” is somehow less worthy of judicial consideration than illness caused by others, or by outside forces over which the patient has no control.

It seems clear from the trial judge’s comments that if he had found her physical condition had been caused by the Board’s “harassment,” he would have let her out of the contract. This is the only logical conclusion from the statement by the trial judge that, “The Court finds that the defendant’s medical excuse was a result of the stress condition she had created by an attempted repudiation of her contract, and was not the product of any unsubstantiated, so-called, harrassment [sic] by the plaintiff’s board.”

In either instance, whether “caused” by the Board or “self induced” because of her gnawing feeling of being unfairly treated, the objective symptoms would be the same.

Either, in my opinion, should justify termination of the contract where the physical symptoms are medically certifiable as they admittedly are here.

The majority makes the following assertion, “It would be fundamentally unfair to allow a breaching party to escape liability because of a health danger which by his or her own fault has precluded performance.”

Happily no authority is cited for this sweeping statement which means that it will be easier to ignore it, gloss over it, “distinguish” it or overrule it in the future. Under this new found axiom, could a concert violinist under contract be sued to cover any added costs of his replacement if he lost an arm in an accident where he was found 100 percent negligent? Or could another party to a personal service contract be held liable if he was unable to perform because of a debilitating illness clearly caused by negligent health habits ?

The majority cites a hundred year old case, Jennings v. Lyons, 39 Wis. 553 (1876), for two propositions:

“A health danger will not excuse nonperformance of a contractual obligation when the danger is caused by the nonperforming party. See Jennings v. Lyons, 39 Wis. at 557-58. Nor will a health condition or danger which was foreseeable when the contract was entered into justify its breach.” (Supra, p. 203.)

Jennings is cited by the majority to bolster its position. The case is not really in point. In that case a, husband and wife contracted to work on a farm for one year for the sum of $300. He was to do outside work and she to do housework. After four and one-half months she had to leave to have a baby and the husband had to go with her. The employer refused to pay either of them anything and they brought suit to recover for the time they had worked. The trial court instructed the jury that if at the time the plaintiff and his wife quit working for defendant, the wife was sick and unable to do her part of the work, plaintiff was not bound to a further performance of the contract and was entitled to recover the value of his and his wife’s services for the time they actually worked. The trial court found for the plaintiff.

This court reversed and held that the defendant did not have to pay them anything. The court held that the rule is that performance is excused:

“. . . as where performance has been rendered impossible by an act of God, by the act of the law, or by the act of the other party.the obligation is discharged if he is prevented by sickness or death from performing it . . . sickness or death is generally recognized as an act of God in such a sense that it excuses the nonperformance, and a recovery is allowed upon a quantum merit. . . .” 39 Wis. at 557.

This court said that since the husband must have known his wife was four months pregnant when they took the job and that she would be unable to complete the year of work, therefore no recovery was allowed. This court said “For when performance becomes impossible by reason of contingencies which should have been foreseen and provided against in the contract, the promisor is held answerable.” 39 Wis. at 558. Nowhere did the Jennings court say “a health danger will not excuse nonperformance of a contractual obligation when the danger is caused by the nonperforming party.”

The precedential value of Jennings is doubtful but to the extent the rules stated may still be valid it provides no support for the majority. Here there is an illness, “an act of God,” there is nothing in the record to show that the severe increase in Elaine Lukaszewski's hypertension was foreseeable when she signed the contract. Thus, even under Jennings, the teacher should be excused from performance.

Hypertension is a health problem that when caused by stress, however induced, may require a job change. That is what occurred here.

But the majority has discovered what it apparently regards as a “fall back” position, that Elaine Lukaszew-ski really did not resign her teaching job for health reasons after all.

The majority says: “In short, the decisions [of the trial court] indicate that the court believed Lukaszewski resigned for reasons other than her health.” (Emphasis added.) (Supra, p. 205.)

The word “indicate” has picked up increasing popularity in the jargon of the legal profession in the past few years mostly, I believe, because it does not say anything one can pin down precisely. Webster’s Third New International Dictionary (1961) gives a wide range of possible meanings to the word “indicate,” among them are: “SUGGEST, INTIMATE, HINT . . . INDICATE signifies to serve as a sign or symptom pointing to (the inference or action), stressing only a general, unspecified connection between subject and object . . .”

“Indicate” seems to fall short on the definiteness required for a “finding of fact” by a trial court.

The first time the case came to the court of appeals they sent it back for further “findings” and it is the “original” remarks from the bench plus additional written comments by the judge on remand that form the bases for the appeal and this review.

What the trial court said was that the desire to take the better job brought on the physical symptoms when release from her contract by the Board was refused.

If the trial court had found that she quit merely for the better job and not because of her health problems brought on by the high blood pressure, this would be an entirely different case. However, that is not what the trial court found in my opinion. The trial court found her medical problems were self induced and concluded they were therefore unworthy of consideration.

I would reverse the court of appeals decision that held she breached her contract.

Because I would hold that on this record there was no breach, I would not reach the damage question.

American Standard, Inc., et al., Respondents, v Harold Schectman et al., Appellants. (And a Third-Party Action.)

Fourth Department,

May 15, 1981

APPEARANCES OF COUNSEL

Kavinoky, Cook, Sandler, Gardner, Wisbaum & Lipman (Wayne Wisbaum of counsel), for appellants.

Hodgson, Russ, Andrews, Woods & Goodyear (Victor Fuzak of counsel), for respondents.

OPINION OF THE COURT

Hancock, Jr., J.

Plaintiffs have recovered a judgment on a jury verdict of $90,000 against defendant for his failure to complete grading and to take out certain foundations and other subsurface structures to one foot below the grade line as promised. Whether the court should have charged the jury, as defendant Schectman requested, that the difference in value of plaintiffs’ property with and without the promised performance was the measure of the damage is the main point in his appeal.1 We hold that the request was properly denied and that the cost of completion—not the difference in value—was the proper measure. Finding no basis for reversal, we affirm.

Until 1972, plaintiffs operated a pig iron manufacturing plant on land abutting the Niagara River in Tonawanda. On the 26-acre parcel were, in addition to various industrial and office buildings, a 60-ton blast furnace, large lifts, hoists and other equipment for transporting and storing ore, railroad tracks, cranes, diesel locomotives and sundry implements and devices used in the business. Since the 1870’s plaintiffs’ property, under several different owners, had been the site of various industrial operations. Having decided to close the plant, plaintiffs on August 3, 1973 made a contract in which they agreed to convey the buildings and other structures and most of the equipment to defendant, a demolition and excavating contractor, in return for defendant’s payment of $275,000 and his promise to remove the equipment, demolish the structures and grade the property as specified.

We agree with Trial Term’s interpretation of the contract as requiring defendant to remove all foundations, piers, headwalls, and other structures, including those under the surface and not visible and whether or not shown on the map attached to the contract, to a depth of approximately one foot below the specified grade lines.2 The proof from plaintiffs’ witnesses and the exhibits, showing a substantial deviation from the required grade lines and the existence! above grade of walls, foundations and other structures, support the finding, implicit in the jury’s verdict, that defendant failed to perform as agreed. Indeed, the testimony of defendant’s witnesses and the position he has taken during his performance of the contract and throughout this litigation (which the trial court properly rejected), viz., that the contract did not require him to remove all subsurface foundations, allow no other conclusion.

We turn to defendant’s argument that the court erred in rejecting his proof that plaintiffs suffered no loss by reason of the breach because it makes no difference in the value of the property whether the old foundations are at grade or one foot below grade and in denying his offer to show that plaintiffs succeeded in selling the property for $183,000—only $3,000 less than its full fair market value. By refusing this testimony and charging the jury that the cost of completion (estimated at $110,500 by plaintiffs’ expert), not diminution in value of the property, was the measure of damage the court, defendant contends, has unjustly permitted plaintiffs to reap a windfall at his expense. Citing the definitive opinion of Judge Cardozo in Jacob & Youngs v Kent (230 NY 239), he maintains that the facts present a case “of substantial performance” of the contract with omissions of “trivial or inappreciable importance” (p 245) and that because the cost of completion was “grossly and unfairly out of proportion to the good to be attained” (p 244), the proper measure of damage is diminution in value.

The general rule of damages for breach of a construction contract is that the injured party may recover those damages which are the direct, natural and immediate consequence of the breach and which can reasonably be said to have been in the contemplation of the parties when the contract was made (see 13 NY Jur, Damages, §§ 46, 56; Chamberlain v Parker, 45 NY 569; Hadley v Baxendale, 9 Exch [Welsby, Hurlstone & Gordon] 341; Restatement, Contracts, § 346). In the usual case where the contractor’s performance has been defective or incomplete, the reasonable cost of replacement or completion is the measure (see Bellizzi v Huntley Estates, 3 NY2d 112; Spence v Ham, 163 NY 220; Condello v Stock, 285 App Div 861, mod on other grounds 1 NY2d 831; Along-The-Hudson Co. v Ayres, 170 App Div 218; 13 NY Jur, Damages, § 56, p 502; Restatement, Contracts, § 346). When, however, there has been a substantial performance of the contract made in good faith but defects exist, the correction of which would result in economic waste, courts have measured the damages as the difference between the value of the property as constructed and the value if performance had been properly completed (see Jacob & Youngs v Kent, supra; Droher & Sons v Toushin, 250 Minn 490; Restatement, Contracts, § 346, subd [1], par [a], cl [ii], p 573; comment b, p 574; 13 NY Jur, Damages, § 58; Ann., 76 ALR2d 805, § 4, pp 812-815). Jacob & Youngs is illustrative. There, plaintiff, a contractor, had constructed a house for the defendant which was satisfactory in all respects save one: the wrought iron pipe installed for the plumbing was not of Reading manufacture, as specified in the contract, but of other brands of the same quality. Noting that the breach was unintentional and the consequences of the omission trivial, and that the cost of replacing the pipe would be “grievously out of proportion” (Jacob & Youngs v Kent, supra, p 244) to the significance of the default, the court held the breach to be immaterial and the proper measure of damage to the owner to be not the cost of replacing the pipe but the nominal difference in value of the house with and without the Reading pipe.

Not in all cases of claimed “economic waste” where the cost of completing performance of the contract would be large and out of proportion to the resultant benefit to the property have the courts adopted diminution in value as the measure of damage. Under the Restatement rule, the completion of the contract must involve “unreasonable economic waste” and the illustrative example given is that of a house built with pipe different in name but equal in quality to the brand stipulated in the contract as in Jacob & Youngs v Kent (230 NY 239, supra) (Restatement, Contracts, § 346, subd [1], par [a], cl [ii], p 573; Illustration No. 2, p 576). In Groves v Wunder Co. (205 Minn 163), plaintiff had leased property and conveyed a gravel plant to defendant in exchange for a sum of money and for defendant’s commitment to return the property to plaintiff at the end of the term at a specified grade—a promise defendant failed to perform. Although the cost of the fill to complete the grading was $60,000 and the total value of the property, graded as specified in the contract, only $12,160 the court rejected the “diminution in value” rule, stating: “The owner’s right to improve his property is not trammeled by its small value. It is his right to erect thereon structures which will reduce its value. If that be the result, it can be of no aid to any contractor who declines performance. As said long ago in Chamberlain v. Parker, 45 N.Y. 569, 572: 'A man may do what he will with his own, and if he chooses to erect a monument to his caprice or folly on his premises, and employs and pays another to do it, it does not lie with a defendant who has been so employed and paid for building it, to say that his own performance would not be beneficial to the plaintiff.’ ” (Groves v Wunder Co., supra, p 168.)

The “economic waste” of the type which calls for application of the “diminution in value” rule generally entails defects in construction which are irremediable or which may not be repaired without a substantial tearing down of the structure as in Jacob & Youngs (see Bellizzi v Huntley Estates, 3 NY2d 112,115, supra; Groves v Wunder Co., supra; Slugg Seed & Fertilizer v Paulson Lbr., 62 Wis 2d 220; Restatement, Contracts, § 346, subd [1], Illustration Nos. 2, 4, pp 576-577; Ann., 76 ALR2d 805, § 4, pp 812-815).

Where, however, the breach is of a covenant which is only-incidental to the main purpose of the contract and completion would be disproportionately costly, courts have applied the diminution in value measure even where no destruction of the work is entailed (see, e.g., Peevyhouse v Garland Coal & Min. Co., 382 P2d 109 [Okla], cert den 375 US 906, holding [contrary to Groves v Wunder Co., supra] that diminution in value is the proper measure where defendant, the lessee of plaintiff’s lands under a coal mining lease, failed to perform costly remedial and restorative work on the land at the termination of the lease. The court distinguished the “building and construction” cases and noted that the breach was of a covenant incidental to the main purpose of the contract which was the recovery of coal from the premises to the benefit of both parties; and see Avery v Fredericksen & Westbrook, 67 Cal App 2d 334).

It is also a general rule in building and construction cases, at least under Jacob & Youngs (supra) in New York (see Groves v Wunder Co., supra; Ann., 76 ALR2d 805, § 6, pp 823-826), that a contractor who would ask the court to apply the diminution of value measure “as an instrument of justice” must not have breached the contract intentionally and must show substantial performance made in good faith (Jacob & Youngs v Kent, supra, pp 244, 245).

In the case before us, plaintiffs chose to accept as part of the consideration for the promised conveyance of their valuable plant and machines to defendant his agreement to grade the property as specified and to remove the foundations, piers and other structures to a depth of one foot below grade to prepare the property for sale. It cannot be said that the grading and the removal of the structures were incidental to plaintiffs’ purpose of “achieving a reasonably attractive vacant plot for resale” (cf. Peevyhouse v Garland Coal & Min. Co., supra). Nor can defendant maintain that the damages which would naturally flow from his failure to do the grading and removal work and which could reasonably be said to have been in the contemplation of the parties when the contract was made would not be the reasonable cost of completion (see 13 NY Jur, Damages, §§ 46, 56; Hadley v Baxendale, 9 Exch [Welsby, Hurlstone & Gordon] 341, supra). That the fulfillment of defendant’s promise would (contrary to plaintiffs’ apparent expectations) add little or nothing to the sale value of the property does not excuse the default. As in the hypothetical case, posed in Chamberlain v Parker (45 NY 569, supra) (cited in Groves v Wunder Co., 205 Minn 163, supra), of the man who "chooses to erect a monument to his caprice or folly on his premises, and employs and pays another to do it”, it does not lie with defendant here who has received consideration for his promise to do the work “to say that his own performance would not be beneficial to the plaintiff [s]” (Chamberlain v Parker, supra, p 572).

Defendant’s completed performance would not have involved undoing what in good faith was done improperly but only doing what was promised and left undone (cf. Jacob & Youngs v Kent, 230 NY 239, supra; Restatement, Contracts, § 346, subd [1], Illustration No. 2, p 576). That the burdens of performance were heavier than anticipated and the cost of completion disproportionate to the end to be obtained does not, without more, alter the rule that the measure of plaintiffs’ damage is the cost of completion. Disparity in relative economic benefits is not the equivalent of “economic waste” which will invoke the rule in Jacob & Youngs v Kent (supra) (see Groves v Wunder Co., supra). Moreover, faced with the jury’s finding that the reasonable cost of removing the large concrete and stone walls and other structures extending above grade was $90,000, defendant can hardly assert that he has rendered substantial performance of the contract or that what he left unfinished was “of trivial or inappreciable importance” (Jacob & Youngs v Kent, supra, p 245). Finally, defendant, instead of attempting in good faith to complete the removal of the underground structures, contended that he was not obliged by the contract to do so and, thus, cannot claim to be a “transgressor whose default is unintentional and trivial [and who] may hope for mercy if he will offer atonement for his wrong” (Jacob & Youngs v Kent, supra, p 244). We conclude, therefore, that the proof pertaining to the value of plaintiffs’ property was properly rejected and the jury correctly charged on damages.

The judgment and order should be affirmed.

Simons, J. P., Doerr, Denman and Schnepp, JJ., concur.

Judgment and order unanimously affirmed, with costs.

1

The judgment in the amount of $122,434.60 including interest and costs is jointly and severally against both defendants, viz., Harold Schectman, the contracting party, and the company which issued the performance bond, United States Fire Insurance Company. Inasmuch as the interests", of both defendants here are identical, for the purpose of this appeal and for the sake of simplicity we treat the defendants as one: i.e., the contracting party, Harold Schectman. A third-party action commenced by the bonding company on an indemnity agreement between it and defendant Schectman and others is not part of this appeal. The appeal is also taken from an order denying defendant’s motion to set aside the verdict and for a new trial.

2

Paragraph 7 of the agreement states in pertinent part: “7. After the Closing Date, Purchaser shall demolish all of the Improvements on the North Tonawanda Property included in the sale to Purchaser, cap the water intake at the pumphouse end, and grade and level the property, all in accordance with the provisions of Exhibit 'C’ and ‘C[1]' attached hereto.”

Exhibit C (notes on demolition and grading) contains specifications for the grade levels for four separate areas shown on Map Ci and the following instruction: “Except as otherwise excepted all structures and equipment including foundations, piers, headwalls, etc. shall be removed to a depth approximately one foot below grade lines as set forth above. Area common to more than one area will be faired to provide reasonable transitions, it being intended to provide a reasonably attractive vacant plot for resale.”

H. Max AMMERMAN et al., Appellants, v. CITY STORES COMPANY, Appellee.

No. 21097.

United States Court of Appeals District of Columbia Circuit.

Argued Sept. 18, 1967.

Decided April 4, 1968.

Mr. Edgar H. Brenner, Washington, D. C., with whom Messrs. Thurman Arnold, Melvin Spaeth and Michael Schneiderman, New York City, were on the brief, for appellants.

Mr. Robert Martin, Washington, D. C., with whom Messrs. Lloyd Symington, Marx Leva, Richard Shlakman and Richard K. Lyon, Washington, D. C., were on the brief, for appellee.

Before Danaher, Tamm and Robinson, Circuit Judges.

PER CURIAM:

Appellants, builders and developers of Tyson’s Corner Shopping Center in Fairfax County, Virginia,1 challenge the District Court’s decision (1) that the builders had given City Stores Company, owners of Lansburgh’s Department Store, a binding option to lease one of the major buildings to be constructed at the contemplated shopping center and (2) that the option-lease agreement is sufficiently definite and certain in terms of design, type of construction, and price to be specifically enforced.2

The appellants in their statement of points have here contended that the District Court erred: in ordering specific performance in that the existence and terms of the contract had not been established by clear and convincing evidence; in granting equitable relief despite the appellants’ claim that the appellee had been guilty of “laches and unclean hands”; and in ordering specific performance of the contract since some substantial details will require future negotiations and yet others are said to be unclear or can not be performed.

At the core of the dispute is an undated letter (text, infra), from the appellants to one Jagels, then President of Lansburgh’s, given at a time when the builders were attempting to obtain a ruling from the Fairfax Board of County Supervisors which would permit the rezoning of their tract of land for use as a shopping center. Prospects for a favorable outcome at a May 31, 1962, hearing, then yet in the future, were in doubt. The county planning commission and the planning staff - had already recommended against the appellants’ application, and another group of developers, Rouse-Reynolds, had a similar petition before the Board for a different center but in the same general area.

In early 1962, during the course of negotiations with Messrs. Gudelsky and Lerner for a lease at one of their developments in Maryland, Lansburgh’s president, Jagels, had expressed an interest in the Tyson’s Corner project. Thereafter Lerner requested a letter from Jagels, expressing Lansburgh’s preference for appellants’ site over the Rouse-Reynolds tract, which the builders could use in the Fairfax zoning hearing. Although Lansburgh’s would ordinarily have been unwilling to risk offending the Rouse-Reynolds group by committing itself to the Gudelsky-Lerner project,3 it was eager to improve its declining economic position in the Washington area by expanding into the suburbs. Jagels provided the requested letter4 which the appellants subsequently presented at the rezoning hearing to support their application.5

Judge Gasch agreed with the appellee that the Jagels letter was given in exchange for a promise that Lansburgh’s be given an opportunity to become a major tenant at Tyson’s Corner on terms equal to those given other major tenants. The trial judge further found that this promise had been memorialized in the following undated letter given to Mr. Jagels on or about May 29, 1962 6:

Dear Mr. Jagels:

We very much appreciate the efforts which you have expended in endeavoring to assist Mr. Gudelsky and me in our application for zoning at Tyson’s Corner for a Regional Shopping Center.

You have our assurance that in the event we are successful with our application, that [sic] we will give you the opportunity to become one of our contemplated center’s major tenants with rental and terms at least equal to that of any other major department store in the center. [Emphasis added.]

Sincerely yours,

/s/ Isadore M. Gudelsky

/s/ Theodore N. Lerner

I

Deeming the assistance afforded by the appellee to the appellants, particularly the May 29, 1962 letter, to be adequate consideration for a valid unilateral contract binding on the appellants, Judge Gasch considered whether the contract, so found, was an option. He noted that an option contract, defined as “a continuing offer for a fixed [or reasonable] period of time * * * which is binding on the offeror because given for a valuable consideration,” 7 usually describes in particularity what is offered. But he also recognized that “option” is a business concept,8 not a narrow legal term.

At the time the contract was made, the builders themselves had no more than a “chance” or “opportunity” to succeed in their Tyson’s Corner rezoning project. That it may thus have seemed futile to specify in detail the terms of the agreement, did not preclude a ruling that the Gudelsky-Lerner letter evidenced in Lansburgh’s favor a legally binding option to take a lease at the shopping center. The District Judge, finding that an exercise of the option was conditioned upon the happening of certain events, concluded:

The first condition precedent to the Lerner-Gudelsky obligation to Lansburgh’s was the securing of necessary zoning for its Tyson’s Corner tract. * * * The second * * * was its entering into leases with other major tenants for stores in the center, so the terms of those leases could provide the essential terms of a lease to be offered to [Lansburgh’s]. [Appellants] did secure the zoning, and they did, in the latter half of 1965, enter into leases with Woodward & Lothrop and Hecht department stores * * * [at which time appellants] were under an immediate contractual obligation to tender [Lansburgh’s] a lease which in all its material terms would be at least as favorable * * * as the two other leases were to their respective stores. * * * [B]oth the Hecht and Woodward & Lothrop leases * * * contain clauses to the effect that their terms will be at least equal to those offered to other lessees in the center. Thus, even though none of the stores * * * will be identical in design, it is apparent * * * that complete equality' of material terms governing occupancy, including amount of space and cost per square foot, and substantially equal terms on less material aspects of the lease, is within the customary contemplation of parties entering into shopping center agreements of the type at issue in this case.9

The appellants here have consistently refused to recognize the distinction between bilateral and unilateral contracts.10 The trial judge declared in-apposite the rule that there is no present legal obligation attached to an offer which reserves for future negotiation an element material to the contemplated agreement. We agree. An option is more than an offer, the trier noted; it is itself a contract and is not to be confused with the bilateral contract which it gives the optionee the power to bring into being.11

II

Judge Gasch found that Lansburgh’s had exercised its option and was entitled to an order compelling the builders to grant it a lease equal in terms to that of the Hecht lease.12 The appellants argue that the option-lease agreement is too indefinite and uncertain to be specifically enforced because substantial terms have been left to future negotiation.13 We approve the trial judge’s recognition as a rule of law that the mere fact that a contract, definite in material respects, contains some terms which are subject to further negotiation between plaintiff and defendant will not bar a decree for specific performance, if in the court’s discretion specific performance should be granted.14

The rule so stated violates no precedent in this jurisdiction,15 but rather is in accord with such of our cases as have considered not dissimilar situations.16

Treating the enforcement of construction contracts as a question novel to the District of Columbia,17 Judge Gasch emphasized that the essential basis for interposition by the court is the inadequacy or impracticability of the plaintiff’s legal remedy rather than the generic subject matter of the contract.18

Here it is apparent that Lansburgh’s could have had no adequate remedy in damages for any attempt in that respect would have been impractical because of the impossibility of an appropriate measurement. Moreover, damages could hardly compensate for the loss of the sought for opportunity to raise Lansburgh’s image and economic position in the Metropolitan Washington area by its anticipated expansion into the suburbs, and for that reason alone could have been deemed inadequate.

Thus, where the contractual obligation being enforced involves more than the mere construction of a building and the building is to be built on land controlled by its owner (making it impossible for the enforcing party to have the job done by another and charged to the defaulting owner), specific enforcement becomes entirely appropriate. Nor should relief be withheld merely because it would order construction unless the difficulties of supervision by the court outweigh the importance of enforcement to the plaintiff.19 In this case, as the District Judge found, the construction criteria set forth in the Hecht and Woodward & Lothrop leases are sufficiently detailed to allow the court, applying the standard of equality required by the option, to enforce the lease contract with little difficulty of supervision.20 The District Court here has retained jurisdiction and can appoint a special master to settle such details as the parties may not agree upon or which can not be resolved through arbitration.

Affirmed.

1

The principal appellant is the partnership of Tyson’s Corner Regional Shopping Center, made up of Messrs. Lerner and Ammerman, their wives, and the Gudelsky Company, which succeeded to the interest of Mr. Gudelsky when he died in 1963.

2

The opinion of District Judge Gasch appears as City Stores Co. v. Ammerman, 266 F.Supp. 766 (D.D.C.1967). He had presided at all proceedings in the District Court, so that evidence received upon the application for a preliminary injunction became part of the trial record. Fed.R.Civ.P. 65(a) (2).

3

Other major department stores, e.g., Hecht and Woodward & Lothrop, had refused to give such a commitment to the appellants’ site.

4

The text of the Jagels letter is reprinted in full:

May 29, 1962

Dear Mr. Gudelsky and Mr. Lerner:

In view of our several discussions on the Tyson’s Corner area as a place for a Regional Shopping Center, I am pleased to say that we have now completed our rather exhaustive surveys and are in a position to give you our firm position on the subject.

We are convinced that the Gudelsky Lerner tract, to which you refer as the Tyson’s Triangle, is superior to any other. Being located on the Beltway, it has an unexcelled advertising value. Its location on both Route 7 and Route 123 gives it access to all local traffic.

Since the Tyson’s Triangle site will be developed almost exclusively to commercial uses, it also assures a live center with no dead spots. It is also readily available to automobile traffic without other competing uses within the Triangle.

If you and your associates gain approval to build a Regional Shopping Center on this property, Lansburgh’s would be very interested in becoming a major tenant with a full line department store. This interest is, however, restricted to this particular location only and is further conditional upon their being only one regional center in the Tyson’s Corner area.

5

The trial court rejected the contention that Jagels wrote the letter to get the appellants’ help in becoming a tenant of their Maryland shopping center. Another meritless argument is that the agreement is void as against public policy because the sole consideration for it was an attempt to influence the decision of a public body and is proscribed by Hazelton v. Sheckels, 202 U.S. 71, 26 S.Ct. 567, 50 L.Ed. 939 (1906) (Holmes, J.); cf. United States v. Mississippi Vallee Generating Co., 364 U.S. 520, 550 n. 14, 81 S.Ct. 294, 5 L.Ed.2d 268 (1961). Aside from a failure to raise the issue below, the contention suffers the infirmity that Hazelton is inapplicable since it was not City Stores but the apellants who used the letter to influence the decision of a public body. The agreement embodied no “improper interest or dangerous tendency” that personal influence would be used to procure legislation. See Valdes v. Larrinaga, 233 U.S. 705, 709-710, 34 S.Ct. 750, 58 L.Ed. 1163 (1913) (Holmes, J.); cf. Muschany v. United States, 324 U.S. 49, 64-65, 65 S.Ct. 442, 89 L.Ed. 744 (1945).

6

The statute of frauds for the District of Columbia reads in pertinent part:

An action may not be brought * * * to charge a person upon * * * a contract or sale of real estate [or] of any interest in or concerning it * * * unless the agreement upon which the action is brought, or a memorandum or note thereof, is in writing, which need not state the consideration and signed by the party to be charged therewith * * *. D.C.Code § 28-3502 (1967).

The letter signed by these builders, together with appellee’s full performance of the requested services, is sufficient evidence of a unilateral contract to satisfy this statute. See 4 S. Williston, Law of Contracts § 571, at 53-55, 58-59 (Jaeger ed. 1961); cf. Schanck v. Jones, 97 U.S.App.D.C. 148, 229 F.2d 31 (1956). The appellee’s change of position induced by the appellants’ parol promise would estop the latter from setting up the statute of frauds. Brewood v. Cook, 92 U.S.App.D.C. 386, 389, 207 F.2d 439, 441 (1953). See generally 2 A. Corbin, Contracts § 498, at 679-81 (1950).

7

266 F.Supp. at 771.

8

See 5 S. Williston, Law of Contracts § 1441 (rev. ed. 1937). The appellants’ semantic and philological argument that “opportunity to become a tenant” does not mean “option to become a tenant” is interesting but without merit. See 1A A. Corbin, Contracts § 261A (1963). If there is any validity to their position here, they breached even this lesser obligation, in view of the failure of appellants’ counsel to give a satisfactory answer at oral argument to inquiry from the bench, put twice at different times and in different words: “When, and in what way did Messrs. Gudelsky and Lerner give Lansburgh’s the ‘opportunity’ to become one of the contemplated center’s major tenants?”

9

266 F.Supp. at 771. The builders’ argument that relief must be barred by laches falls in view of the trial court’s findings that (1) at all material times the appellee informed the builders that it intended to hold them to the agreement and (2) the appellee sued as soon as it learned that the final condition precedent, the leases to other stores, had been fulfilled. Id. at 779. The included contention that suit should have been brought between the appellants’ 1964 attempt to repudiate their obligation and their negotiation of said leases in 1965 is also groundless. Luxenberg v. Mayfair Extension, Inc., 127 U.S.App.D.C. 259, 261-262, 382 F.2d 475, 477-478 (1967).

10

See generally 1 S. Williston, Law or Contracts § 61A-D (Jaeger ed. 1957).

11

266 F.Supp. at 772.

12

The appellee submitted a proposed order; the appellants took advantage of their opportunity to object; the appellee replied; and both parties argued their positions at a hearing during which the appellants were allowed to put on a witness. The final order, filed with a supplemental memorandum on June 13,1967, in which the District Court retained jurisdiction to insure compliance, directed the appellants to sign the lease which resulted from the above proceedings, and enjoined them from leasing the third store to anyone but Lansburgh’s.

13

It might be noted that the appellants’ failure to distinguish bilateral from unilateral option-contracts has led them to confuse an indefiniteness which would vitiate the existence of any agreement at all with that indefiniteness which would preclude specific enforcement. See 1 A. Corbin, Contracts § 95, at 400-02, 407-10 (1963).

14

266 F.Supp. at 775. Accord, Grubb v. Starkey, 90 Va. 831, 20 S.E. 784 (1894).

15

Although some of the following cases recognized as a general rule the unenforceability of a contract indefinite in its terms, they are all distinguishable. Tucker v. Warfield, 73 App.D.C. 278, 119 F.2d 12 (1941) (vague and conflicting provisions in personal services, contract not enforced); Crowell v. Gould, 68 App.D.C. 297, 300, 96 F.2d 569, 572 (1938) (internal inconsistency of contract negated agreement on term, not enforced); Hearst Radio, Inc. v. Good, 67 App.D.C. 250, 91 F.2d 555 (1937) (no completed contract to be enforced); Cleborne v. Totten, 61 App.D.C. 69, 57 F.2d 435 (1932) (no lease renewal agreement to be enforced).

16

An option to buy realty for a specified price, under which plaintiff had partly performed, was not rendered unenforceable because it was “on terms to be agreed upon”; the latter meant only that the seller would “in fact agree with plaintiff upon reasonable terms of payment, and would not arbitrarily refuse to proceed with the sale.” Morris v. Ballard, 56 App.D.C. 383, 384, 16 F.2d 175, 176, 49 A.L.R. 1461 (1926). In an earlier case, the Supreme Court of the District of Columbia enforced an oral contract to lease a dwelling according to usual terms of similar leases, holding that specific enforcement, “where there is an omission as to the covenants of an agreement for a lease, will be decreed with usual covenants, according to the nature of the lease, and such as are incident to it.” Walsh v. Rundlette, 9 D.C. (2 Mac.) 114, 122 (1875).

Moreover, the authorities including the Restatement, generally approve or advocate such an approach. See 5A A. Corbin, Contracts § 1174 (1964); Restatement of Contracts § 370, comment d (1932); and 1 S. Williston, Law of Contracts §§ 47, 48 (Jaeger ed. 1957); 5 S. Williston, Law of Contracts § 1424 (rev.ed.1937).

17

Despite a paucity of cases in this jurisdiction, we may properly look to the decisions of other courts, recognizing that the “principles and maxims of equity as they existed in England and the colonies in 1776” are part of the law of the District of Columbia by virtue of the Maryland Act of Cession of 1788 and the Organic Act of the District of Columbia, 2 Stat. 103 (1801). See D.C.Code at xvii (1967). The English Chancery long ago enforced a building contract. Holt v. Holt, 2 Vern. 322, 23 Eng.Rep. 808 (Ch. 1694). There the plaintiff’s father had “articled” to have a house built on part of his land but died intestate before it was constructed. The court ruled that the son, on whose inheritance the house was to be built, could compel the builder to build it and his father’s administratrix to pay for it. The rule so fixed was followed in Allen v. Harding, 2 Eq. Cas.Abr. 17, 22 Eng.Rep. 14 (1701), and recognized in City of London v. Nash, 3 Atk. 512, 515, 29 Eng.Rep. 1095, 1096 (1747). Although the Chancellor would not specifically enforce rebuilding contracts in two cases decided shortly after 1776, Errington v. Aynesly, 2 Bro.Ch. 341, 29 Eng.Rep. 191 (1788); Lucas v. Commerford, 3 Bro.Ch. 166, 29 Eng.Rep. 469 (1790), the conflict was resolved in Mosely v. Virgin, 3 Ves.Jr. 184, 30 Eng.Rep. 959 (1796), in a rule with a remarkably modern ring: “[I]f the transaction and agreement is in its nature defined, perhaps there would not be much difficulty to decree specific performance; but if it is loose and undefined, and it is not expressed distinctly, what the building is, so that the Court could describe it as a subject for the report of the Master, the jurisdiction could not apply.” Compare Wolverhampton Corp. v. Emmons, [1901] 1 K.B. 515, 525; see generally 2 J. Stobey, Equity Jurisprudence §§ 1006-10 (14th ed. 1918),.

18

4 J. Pomeboy, Equity Jurisprudence §§ 1401-03 (5th ed. 1941); Restatement of Contracts §§ 358, 361(c), (d) (1932); 5 S. Williston, Law of Contracts §. 1418 (rev. ed. 1937); see 5A A. Corbin, Contracts §§ 1136, 1141, 1172 (1964); 1 J. Storey, Equity Jurisprudence § 33 (14th ed. 1918).

19

See cases cited 266 F.Supp. at 777 & n. 5, 778. See 5A A. Corbin, Contracts § 1172, at 266-267 (1964); Restatement of Contracts § 371, comment a (1932); 5 S. Williston, Law op Contracts § 1423, at 3979 (rev. ed. 1937). Compare Tucker v. Warfield, 73 App.D.C. 278, 280-281, 119 F.2d 12, 14-15 (1941), wherein this approach was recognized but ruled inapplicable to the facts of that case.

20

See, e.g., Graver Tank & Mfg. Co. v. Linde Air Prod. Co., 339 U.S. 605, 608, 70 S.Ct. 854, 94 L.Ed. 1097 (1950) (patent infringing device had substantially same function to be performed in substantially same way to same result); Barnes v. Sind, 341 F.2d 676, 678-679 (4 Cir.), cert. denied, 382 U.S. 891, 86 S.Ct. 183, 15 L.Ed.2d 149 (1965), rev’g on other grounds 223 F.Supp. 572 (D.Md.1963) (agreement to supply substantially equivalent house); Phillips Petroleum Co. v. Buster, 241 F.2d 178, 183 (10 Cir.), cert. denied, 355 U.S. 816, 78 S.Ct. 18, 2 L.Ed.2d 33, (1957) (oral agreement to supply gas at reasonable price in quantities reasonably necessary); Armstrong v. Southern Prod. Co., 182 F.2d 238, 241 (5 Cir. 1950) (estimated cost to be agreed upon definite under industry standards); Shoemaker v. American Security & Trust Co., 82 U.S.App.D.C. 270, 273, 163 F.2d 585, 588 (1947) (equitable approximation enforcing testamentary trust by selling unsuitable and buying suitable land); In re Standard Gas & Elect. Co., 151 F.2d 326, 333 & n. 12 (3 Cir. 1945), cert. denied, Guaranty Trust Co. of New York v. Securities and Exchange Comm., 327 U.S. 796, 66 S.Ct. 820, 90 L.Ed. 1022 (1946), rev’g on other grounds, 59 F.Supp. 274, 279 (D.Del.1945) (“equitable equivalent” of right security holder surrendered in reorganization of solvent corporation); Moon Motor Car Co. v. Moon Motor Car Co., 29 F.2d 3 (2 Cir. 1928) (standard existed at time of performance).

IN THE COURTS OF EXCHEQUER

The first count of the declaration stated, that, before and at the time of the making by the defendants of the promises hereinafter mentioned, the plaintiffs carried on the business of millers and mealmen in copartnership, and were proprietors and occupiers of the City Steam-Mills, in the city of Gloucester, and were possessed of a steam-engine, by means of which they worked the said mills, and therein cleaned corn, and ground the same into meal, and dressed the same into flour, sharps, and bran, and a certain portion of the said steam-engine, to wit, the crank shaft of the said steam-engine, was broken and out of repair, whereby the said steam-engine was prevented from working, and the plaintiffs were desirous of having a new crank shaft made for the said mill, and had ordered the same of certain persons trading under the name of W. Joyce & Co., at Greenwich, in the country of Kent, who had contracted to make the said new shaft for the plaintiffs; but before they could complete the said new shaft it was necessary that the said broken shaft should be forwarded to their works at Greenwich, in order that the said new shaft might be made so as to fit the other parts of the said engine which were not injured, and so that it might be substituted for the said broken shaft; and the plaintiffs were desirous of sending the said broken shaft to the said W. Joyce & Co. for the purpose aforesaid; and the defendants, before and at the time of the making of the said promises, were common carriers of business of common carriers, under the name of "Pickford & Co."; and the plaintiffs, at the request of the defendants, delivered to them as such carriers the said broken shaft, to be conveyed by the defendants as such carriers from Gloucester to the said W. Joyce & Co., at Greenwich, and there to be delivered for the plaintiffs on the second day after the day of such delivery, for reward to the defendants; and in consideration thereof the defendants then promised the plaintiffs to convey the said broken shaft from Gloucester to Greenwich, and there on the said second day to deliver the same to the said W. Joyce & Co. for the plaintiffs. And although such second day elapsed before the commencement of this suit, yet the defendants did not nor would deliver the said broken shaft at Greenwich on the said second day, but wholly neglected and refused so to do for the space of seven days after the said shaft was so delivered to them as aforesaid.

The second count stated, that, the defendants being such carriers as aforesaid, the plaintiffs, at the request of the defendants, caused to be delivered to them as such carriers the said broken shaft, to be conveyed by the defendants from Gloucester aforesaid to the said W. Joyce & Co., at Greenwich, and there to be delivered by the defendants for the plaintiffs, within a reasonable time in that behalf, for reward to the defendants; and in consideration of the premises in this count mentioned, the defendants promised the plaintiffs to use due and proper care and diligence in and about the carrying and conveying the said broken shaft from Gloucester aforesaid to the said W. Joyce & Co., at Greenwich, and there delivering the same for the plaintiffs in a reasonable time then following for the carriage, conveyance, and delivery of the said broken shaft as aforesaid; and although such reasonable time elapsed long before the commencement of this suit, yet the defendants did not nor would use due or proper care or diligence in or about the carrying or conveying or delivering the said broken shaft as aforesaid, within such reasonable time as aforesaid, but wholly neglected and refused so to do; and by reason of the carelessness, negligence, and improper conduct of the defendants, the said broken shaft was not delivered for the plaintiffs to the said W. Joyce & Co., or at Greenwich, until the expiration of a long and unreasonable time after the defendants received the same as aforesaid, and after the time when the same should have been delivered for the plaintiffs; and by reason of the several premises, the completing of the said new shaft was delayed for five days, and the plaintiffs were prevented form working their said steam-mills, and from cleaning corn, and grinding the same into meal, and dressing the meal into flour, sharps, or bran, and from carrying on their said business as millers and mealmen for the space of five days beyond the time that they otherwise would have been prevented from so doing, and they thereby were unable to supply many of their customers with flour, sharps, and bran during that period, and were obliged to buy flour to supply some of their other customers, and lost the mans and opportunity of selling flour, sharps, and bran, and were deprived of gains and profits which otherwise would have accrued to them, and were unable to employ their workmen, to whom they were compelled to pay wages during that period, and were otherwise injured, and the plaintiffs claim 300l.

The defendants pleaded non assumpserunt to the first count; and to the second payment of 25l. into Court in satisfaction of the plaintiffs' claim under that count. The plaintiffs entered a nolle prosequi as to the first count; and as to the second plea, they replied that the sum paid into the Court was not enough to satisfy the plaintiffs' claim in respect thereof; upon which replication issue was joined.

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 11^th 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 12^th, and on the 13^ththe 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 plaintiffs' 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 an 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 2l. 4s. was paid for its carriage for the whole distance; at the same time the defendants' clerk was told that a special entry, if required, should e 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.

On the part of the defendants, it was objected 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 25l. damages beyond the amount paid into Court.

Whateley, in last Michaelmas Term, obtained a rule nisi for a new trial, on the ground of misdirection.

Keating and Dowdeswell (Feb. 1) shewed 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 party. The important subject is ably treated in Sedgwick on the Measure of Damages. And this particular branch of it is discussed in the third chapter, where, after pointing out the distinction between the civil and the French law, he says (page 64), "It is sometimes said, in regard to contracts, that the defendant shall be held liable for those damages only which both parties may fairly be supposed to have at the time contemplated as likely to result from the nature of the agreement, and this appears to be the rule adopted by the writers upon the civil law." In a subsequent passage he says, "In cases of fraud the civil law made a broad distinction" (page 66); and he adds, that "in such cases the debtor was liable for all consequences." It is difficult, however, to see what the ground of such principle is, and how the ingredient of fraud can affect the question. For instance, if the defendants had maliciously and fraudulently kept the shaft, it is not easy to see why they should have been liable for these damages, if they are not to be held so where the delay is occasioned by their negligence only. In speaking of the rule respecting the breach of a contract to transport goods to a particular place, and in actions brought on agreements for the sale and delivery of chattels, the learned author lays it down, that, "In the former case, the difference in value between the price at the point where the goods are and the place where they were to be delivered, is taken as the measure of damages, which, in fact, amounts to an allowance of profits; and in the latter case, a similar result is had by the application of the rule, which gives the vendee the benefit of the rise of the market price" (page 80). The several cases, English as well as American, are there collected and reviewed. 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 the plaintiffs suffered through the defendants' default. The authorities are in the plaintiffs' favour upon the general ground. In Nurse v. Barns (1 Sir T. Raym. 77) which was an action for breach of an agreement for the letting of certain iron mills, the plaintiff was held entitled to a sum of 500l., awarded by reason of loss of stock laid in, although he had only paid 10l. by way of consideration. InBorradaile v. Brunton (8 Taunt. 535, 2 B. Moo. 582), which was an action for the breach of the warranty of a chain cable that it should last two years as a substitute for a rope cable of sixteen inches, the plaintiff was held entitled to recover for the loss of the anchor, which was occasioned by the breaking of the cable within the specified time. These extreme cases, and the difficulty which consequently exists in the estimation of the true amount of damages, supports the view for which the plaintiffs contend, that the question is properly for the decision of a jury, and therefore that this matter could not properly have been withdrawn from their consideration. In Ingram v. Lawson (6 Bing. N.C. 212) the true principle was acted upon. That was an action for a libel upon the plaintiff, who was the owner and master of a ship, which he advertised to take passengers to the East Indies; and the libel imputed that the vessel was not seaworthy, and that Jews had purchased her to take out convicts. The Court held, that evidence shewing that the plaintiff's profits after the publication of the libel were 1500l below the usual average, was admissible, to enable the jury to form an opinion as to the nature of the plaintiff's business, and of his general rate of profit. Here, also, the plaintiffs have not sustained any loss beyond that which was submitted to the jury. Bodley v. Reynolds (8 Q. B. 779) and Kettle v. Hunt (Bull. N. P. 77) are similar in principle. In the latter, it was held that the loss of the benefit of trade, which a man suffers by the detention of his tools, is recoverable as special damage. The loss they had sustained during the time they were so deprived of their shaft, or until they could have obtained a new one. In Black v. Baxendale (1 Exch. 410), by reason of the defendant's omission to deliver the goods within a reasonable time at Bedford, the plaintiff's agent, who had been sent there to meet the goods, was put to certain additional expenses, and this Court held that such expenses might be given by the jury as damages. In Brandt v. Bowlby (2 B. & Ald. 932), which was an action of assumpsit against the defendants, as owners of a certain vessel, for not delivering a cargo of wheat shipped to the plaintiffs, the cargo reached the port of destination was held to be the true rule of damages." As between the parties in this cause," said Parke, J., "the plaintiffs are entitled to be put in the same situation as they would have been in, if the cargo had been delivered to their order at the time when it was delivered to the wrong party; and the sum it would have fetched at the time is the amount of the loss sustained by the non-performance of the defendants' contract." The recent decision of this Court, in Waters v. Towers (8 Ex. 401), seems to be strongly in the plaintiffs' favour. The defendants there had agreed to fit up the plaintiffs' mill within a reasonable time, but had not completed their contract within such time; and it was held that the plaintiffs were entitled to recover, by way of damages, the loss of profit upon a contract they had entered into with third parties, and which they were unable to fulfil by reason of the defendants' breach of contract. There was ample evidence that the defendants knew the purpose for which this shaft was sent, and that the result of its nondelivery in due time would be the stoppage of the mill; for the defendants' agent, at their place of business, was told that the mill was then stopped, that the shaft must be delivered immediately, and that if a special entry was necessary and natural result of their wrongful act. They also cited Ward v. Smith (11 Price, 19); and Parke, B., referred to Levy v. Langridge (4 M. & W. 337).

Whateley, Willes, and Phipson, in support of the rule (Feb. 2). It has been contended, on the part of the plaintiffs, that the damages found by the jury are a matter fit for their consideration; but still the question remains, in what way ought the jury to have been directed? It has been also urged, that, in awarding damages, the law gives compensation to the injured individual. But it is clear that complete compensation is not to be awarded; for instance, the non-payment of a bill of exchange might lead to the utter ruin of the holder, and yet such damage could not be considered as necessarily resulting from the breach of contract, so as to entitle the party aggrieved to recover in respect of it. Take the case of the breach of a contract to supply a rick-cloth, whereby and in consequence of bad weather the hay, being unprotected, is spoiled, that damage could not be recoverable. Many similar cases might be added. The true principle to be deduced form the authorities upon this subject is that which is embodied in the maxim: "In jure non remota cause sed proxima spectatur." Sedgwick says (page 38), "In regard to the quantum of damages, instead of adhering to the term compensation, it would be far more accurate to say, in the language of Domat, which we have cited above, 'that the object is discriminate between that portion of the loss which must be borne by the offending party and that which must be borne by the sufferer'. The law in fact aims not at the satisfaction but at a division of the loss." And the learned author also cites the following passage from Broom's Legal Maxims: "Every defendant," says Mr. Broom, "against whom an action is brought experiences some injury or inconvenience beyond what the costs will compensate him for."^[1] Again, at page 78, after referring to the case of Flureau v. Thornhill (2 W. Blac. 1078), he says, "Both the English and American Courts have generally adhered to this denial of profits as any part of the damages to be compensated and that whether in cases of contract or of tort. So, in a case of illegal capture, Mr. Justice Story rejected the item of profits on the voyage, and held this general language: 'Independent, however, of all authority, I am satisfied upon principle, that an allowance of damages upon the basis of a calculation of profits is inadmissible. The rule would be in the highest degree unfavourable to the interests of the community. The subject would be involved in utter uncertainty. The calculation would proceed upon contingencies, and would require acknowledge of foreign markets to an exactness, in point of time and value, which would sometimes present embarrassing obstacles; much would depend upon the length of the voyage, and the season of arrival, much upon the vigilance and activity of the master, and much upon the momentary demand. After all, it would be a calculation upon conjectures, and not upon facts; such a rule therefore has been rejected by Courts of law in ordinary cases, and instead of deciding upon the gains or losses of parties in particular cases, a uniform interest has been applied as the measure of damages for the detention of property." There is much force in that admirably constructed passage. We ought to pay all due homage in this country to the decisions of the American Courts upon this important subject, to which they appear to have given much careful consideration. The damages here are too remote. Several of the cases which were principally relied upon by the plaintiffs are distinguishable. In Waters v. Towers (1 Exch. 401) there was a special contract to do the work in a particular time, and the damage occasioned by the non-completion of the contract was that to which the plaintiffs were held to be entitled. In Borradale v. Brunton (8 Taunt. 535) there was a direct engagement that the cable should hold the anchor. So, in the case of taking away a workman's tools, the natural and necessary consequence is the loss of employment: Bodley v. Reynolds (8 Q. B. 779). The following cases may be referred to as decisions upon the principle within which the defendants contend that the present case falls: Jones v. Gooday (8 M. & W. 146), Walton v. Fothergill (7 Car. & P. 392), Boyce v. Bayliffe (1 Camp. 58) and Archer v. Williams (2. C. & K. 26). The rule, therefore, that the immediate cause is to be regarded in considering the loss, is applicable here. There was no special contract between these parties. A carrier has a certain duty cast upon him by law, and that duty is not to be enlarged to an indefinite extent in the absence of a special contract, or of fraud or malice. The maxim "dolus circuitu non purgatur", does not apply. The question as to how far liability may be affected by reason of malice forming one of the elements to be taken into consideration, was treated of by the Court of Queen's Bench in Lumley v. Gye (2 E. & B. 216). Here the declaration is founded upon the defendants' duty as common carriers, and indeed there is no pretence for saying that they entered into a special contract to bear all the consequences of the non-delivery of the article in question. They were merely bound to carry it safely, and to deliver it within a reasonable time. The duty of the clerk, who was in attendance at the defendants' office, was to enter the article, and to take the amount of the carriage; but a mere notice to him, such as was here given, could not make the defendants, as carriers, liable as upon a special contract. Such matters, therefore, must be rejected from the consideration of the question. If carriers are to be liable in such a case as this, the exercise of a sound judgment would not suffice, but they ought to be gifted also with a spirit of prophecy. "I have always understood," said Patterson, J., in Kelly v. Partington (5 B. & Ad. 651), "that the special damage must be the natural result of the thing done." That sentence presents the true test. The Court of Queen's Bench acted upon that rule in Foxall v. Barnett (2 E. & B. 928). This therefore is a question of law, and the jury ought to have been told that these damages were too remote; and that, in the absence of the proof of any other damage, the plaintiffs were entitled to nominal damages only: Tindall v. Bell (11 M. & W. 232). Siordet v. Hall (4 Bing. 607) and De Vaux v. Salvador (4 A. & E. 420) are instances of cases where the Courts appear to have gone into the opposite extremes: in the one case of unduly favouring the carrier, in the other of holding them liable for results which would appear too remote. If the defendants should be held responsible for the damages awarded by the jury, they would be in a better position if they confined their business to the conveyance of gold. They cannot be responsible for results which, at the time the goods are delivered for carriage, and beyond all human foresight. Suppose a manufacturer were to contract with a coal merchant or min owner for the delivery of a boat load of coals, no intimation being given that the coals were required for immediate use, the vendor in that case would not be liable for the stoppage of the vendee's business for want of the article which he had failed to deliver: for the vendor has no knowledge that the goods are not to go to the vendee's general stock. Where the contracting party is shewn to be acquainted with all the consequences that must of necessity follow from a breach on his part of the contract, it may be reasonable to say that he takes the risk of such consequences. If, as between vendor and vendee, this species of liability has no existence, a fortiori, the carrier is not to be burthened with it. In cases of personal injury to passengers, the damage to which the sufferer has been held entitled is the direct and immediate consequence of the wrongful act.

Cur. adv. vult.

The judgment of the Court was now delivered by

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. The Courts have done this on several occasions; and in Blake v. Midland Railway Company (18 Q. B. 93), the Court granted a new trial on this very ground, that the rule had not been definitely laid down to the jury by the learned Judge at Nisi Prius.

"There are certain establishing rules", this Court says, in Alder v. Keighley (15 M. & W. 117), "according to which the jury ought to find". And the Court, in that case, adds: "and here there is a clear rule, that the amount which would have been received if the contract had been kept, is the measure of damages if the contract is broken."

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, 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 of 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. 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 of 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 the mill.

But how do these circumstances shew 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 the 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 not sending down the new shaft in proper time, and that this 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 into consideration at all in estimating the damages. There must therefore be a new trial in this case.

Rule absolute.

[No. S068325.

Aug. 23, 1999.]

BARRY ERLICH et al., Plaintiffs and Respondents, v. JOHN MENEZES, Defendant, Cross-complainant and Appellant; RON REBALDO et al., Cross-defendants and Respondents.

Counsel

Edward J. Horowitz, Claudia Ribet; Knapp, Petersen & Clarke, Daniels, Baratta & Fine, Alan J. Carnegie, James L. Hsu and Stephen M. Harris for Defendant, Cross-complainant and Appellant.

Sonnenschein Nath & Rosenthal, Paul E. B. Glad, Paula M. Yost and Cheryl Dyer Berg for American Insurance Association and Crum & Forster Insurance Company as Amici Curiae on behalf of Defendant, Cross-complainant and Appellant.

Alister McAlister for National Association of Independent Insurers as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.

Crosby, Heafey, Roach & May, Kathy M. Banke and Kay Long-Marin for Continental Metroplex as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.

Fred J. Hiestand for the Association for California Tort Reform as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.

Cox, Castle & Nicholson, Sandra C. Stewart and Debbie L. Freedman for the Building Industry Legal Defense Foundation and the California Building Industry Association as Amici Curiae on behalf of Defendant, Cross-complainant and Appellant.

Morgenstein & Jubelirer, James L. McGinnis and Laura E. Gasser for Centex Homes as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.

Songstad, Randall & Ulich, Andrew K. Ulich and Thomas D. Deardorff II for Taylor Woodrow Homes, Inc., as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.

Chapin Fleming McNitt Shea & Carter, Craig H. Bell and Keith A. Turner for Truck Insurance Exchange as Amicus Curiae on behalf of Defendant, Cross-complainant and Appellant.

John R. DeLoreto; Law Offices of Victor G. Zilinskas, Zilinskas & Jacobs, Victor G. Zilinskas and Michael L. Smith for Plaintiffs and Respondents.

Williams, Wester & Hall and Scott A. Williams as Amici Curiae on behalf of Plaintiffs and Respondents.

Kasdan, Simonds, McIntyre, Epstein & Martin and David G. Epstein for Consumer Attorneys of California as Amicus Curiae on behalf of Plaintiffs and Respondents.

Keppleman & Associates and Richard D. Keppleman for Cross-defendant and Respondent Ron Rebaldo.

Borton, Petrini & Conron, Craig R. McCollum and Gary A. Bixler for Cross-defendant and Respondent John Cravens Plastering, Inc.

Opinion

BROWN, J.

We granted review in this case to determine whether emotional distress damages are recoverable for the negligent breach of a contract to construct a house. A jury awarded the homeowners the full cost necessary to repair their home as well as damages for emotional distress caused by the contractor’s negligent performance. Since the contractor’s negligence directly caused only economic injury and property damage, and breached no duty independent of the contract, we conclude the homeowners may not recover damages for emotional distress based upon breach of a contract to build a house.

I. Factual and Procedural Background

Both parties agree with the facts as ascertained by the Court of Appeal. Barry and Sandra Erlich contracted with John Menezes, a licensed general contractor, to build a “dream house” on their ocean-view lot. The Erlichs moved into their house in December 1990. In February 1991, the rains came. “[T]he house leaked from every conceivable location. Walls were saturated in [an upstairs bedroom], two bedrooms downstairs, and the pool room. Nearly every window in the house leaked. The living room filled with three inches of standing water. In several locations water ‘poured in in streams’ from the ceilings and walls. The ceiling in the garage became so saturated ... the plaster liquefied and fell in chunks to the floor.”

Menezes’s attempts to stop, the leaks proved ineffectual. Caulking placed around the windows melted, “ ‘ran down [the] windows and stained them and ran across the driveway and ran down the house [until it] . . . looked like someone threw balloons with paint in them at the house.’ ” Despite several repair efforts, which included using sledgehammers and jackhammers to cut holes in the exterior walls and ceilings, application of new waterproofing materials on portions of the roof and exterior walls, and more caulk, the house continued to leak—from the windows, from the roofs, and water seeped between the floors. Fluorescent light fixtures in the garage filled with water and had to be removed.

“The Erlichs eventually had their home inspected by another general contractor and a structural engineer. In addition to confirming defects in the roof, exterior stucco, windows and waterproofing, the inspection revealed serious errors in the construction of the home’s structural components. None of the 20 shear, or load-bearing walls specified in the plans were properly installed. The three turrets on the roof were inadequately connected to the roof beams and, as a result, had begun to collapse. Other connections in the roof framing were also improperly constructed. Three decks were in danger of ‘catastrophic collapse’ because they had been finished with mortar and ceramic tile, rather than with the light-weight roofing material originally specified. Finally, the foundation of the main beam for the two-story living room was poured by digging a shallow hole, dumping in ‘two sacks of dry concrete mix, putting some water in the hole and mixing it up with a shovel.’ ” This foundation, required to carry a load of 12,000 pounds, could only support about 2,000. The beam is settling and the surrounding concrete is cracking.

According to the Erlichs’ expert, problems were major and pervasive, concerning everything “related to a window or waterproofing, everywhere that there was something related to framing,” stucco, or the walking deck.

Both of the Erlichs testified that they suffered emotional distress as a result of the defective condition of the house and Menezes’s invasive and unsuccessful repair attempts. Barry Erlich testified he felt “absolutely sick” and had to be “carted away in an ambulance” when he learned the full extent of the structural problems. He has a permanent heart condition, known as superventricular tachyarrhythmia, attributable, in part, to excessive stress. Although the condition can be controlled with medication, it has forced him to resign his positions as athletic director, department head and track coach.

Sandra Erlich feared the house would collapse in an earthquake and feared for her daughter’s safety. Stickers were placed on her bedroom windows, and alarms and emergency lights installed so rescue crews would find her room first in an emergency.

Plaintiffs sought recovery on several theories, including breach of contract, fraud, negligent misrepresentation, and negligent construction. Both the breach of contract claim and the negligence claim alleged numerous construction defects.

Menezes prevailed on the fraud and negligent misrepresentation claims. The jury found he breached his contract with the Erlichs by negligently constructing their home and awarded $406,700 as the cost of repairs. Each spouse was awarded $50,000 for emotional distress, and Barry Erlich received an additional $50,000 for physical pain and suffering and $15,000 for lost earnings.

By a two-to-one majority, the Court of Appeal affirmed the judgment, including the emotional distress award. The majority noted the breach of a contractual duty may support an action in tort. The jury found Menezes was negligent. Since his negligence exposed the Erlichs to “intolerable living conditions and a constant, justifiable fear about the safety of their home,” the majority decided the Erlichs were properly compensated for their emotional distress.

The dissent pointed out that no reported California case has upheld an award of emotional distress damages based upon simple breach of a contract to build a house. Since Menezes’s negligence directly caused only economic injury and property damage, the Erlichs were not entitled to recover damages for their emotional distress.

We granted review to resolve the question.

II. Discussion

A.

In an action for breach of contract, the measure of damages is “the amount which will compensate the party aggrieved for all the detriment proximately caused thereby, or which, in the ordinary course of things, would be likely to result therefrom” (Civ. Code, § 3300), provided the damages are “clearly ascertainable in both their nature and origin” (Civ. Code, § 3301). In an action not arising from contract, the measure of damages is “the amount which will compensate for all the detriment proximately caused thereby, whether it could have been anticipated or not” (Civ. Code, § 3333).

“Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at that time; consequential damages beyond the expectation of the parties are not recoverable. [Citations.] This limitation on available damages serves to encourage contractual relations and commercial activity by enabling parties to estimate in advance the financial risks of their enterprise.” (Applied Equipment Corp. v. Litton Saudi Arabia Ltd. (1994) 7 Cal.4th 503, 515 [28 Cal.Rptr.2d 475, 869 P.2d 454] (Applied Equipment).) “In contrast, tort damages are awarded to [fully] compensate the victim for [all] injury suffered. [Citation.]” (Id. at p. 516.)

“ ‘[T]he distinction between tort and contract is well grounded in common law, and divergent objectives underlie the remedies created in the two areas. Whereas contract actions are created to enforce the intentions of the parties to the agreement, tort law is primarily designed to vindicate “social policy.” [Citation.]’” (Hunter v. Up-right, Inc. (1993) 6 Cal.4th 1174, 1180 [26 Cal.Rptr.2d 8, 864 P.2d 88], quoting Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 683 [254 Cal.Rptr. 211, 765 P.2d 373] (Foley).) While the purposes behind contract and tort law are distinct, the boundary line between them is not (Freeman & Mills, Inc. v. Belcher Oil Co. (1995) 11 Cal.4th 85, 106 [44 Cal.Rptr.2d 420, 900 P.2d 669] (conc. and dis. opn. of Mosk, J.) (Freeman & Mills)) and the distinction between the remedies for each is not “ ‘found ready made.’ ” (Ibid.., quoting Holmes, The Common Law (1881) p. 13.) These uncertain boundaries and the apparent breadth of the recovery available for tort actions create pressure to obliterate the distinction between contracts and torts—an expansion of tort law at the expense of contract principles which Grant Gilmore aptly dubbed “contorts.” In this case we consider whether a negligent breach of a contract will support an award of damages for emotional distress—either as tort damages for negligence or as consequential or special contract damages.

B.

In concluding emotional distress damages were properly awarded, the Court of Appeal correctly observed that “the same wrongful act may constitute both a breach of contract and an invasion of an interest protected by the law of torts.” (North American Chemical Co. v. Superior Court (1997) 59 Cal.App.4th 764, 774 [69 Cal.Rptr.2d 466], citing 3 Witkin, Cal. Procedure (4th ed. 1996) Actions, § 139, pp. 203-204.) Here, the court permitted plaintiffs to recover both full repair costs as normal contract damages and emotional distress damages as a tort remedy.1

The Court of Appeal also noted that “[a] contractual obligation may create a legal duty and the breach of that duty may support an action in tort.” This is true; however, conduct amounting to a breach of contract becomes tortious only when it also violates a duty independent of the contract arising from principles of tort law. (Applied Equipment, supra, 7 Cal.4th at p. 515.) “ ‘ “An omission to perform a contract obligation is never a tort, unless that omission is also an omission of a legal duty.” ’ ” (Ibid., quoting Jones v. Kelly (1929) 208 Cal. 251, 255 [280 P. 942].)

Tort damages have been permitted in contract cases where a breach of duty directly causes physical injury (Fuentes v. Perez (1977) 66 Cal.App.3d 163, 168, fn. 2 [136 Cal.Rptr. 275]); for breach of the covenant of good faith and fair dealing in insurance contracts (Crisci v. Security Ins. Co. (1967) 66 Cal.2d 425, 433-434 [58 Cal.Rptr. 13, 426 P.2d 173]); for wrongful discharge in violation of fundamental public policy (Tameny v. Atlantic Richfield Co. (1980) 27 Cal.3d 167, 175-176 [164 Cal.Rptr. 839, 610 P.2d 1330, 9 A.L.R.4th 314]); or where the contract was fraudulently induced. (Las Palmas Associates v. Las Palmas Center Associates (1991) 235 Cal.App.3d 1220, 1238-1239 [1 Cal.Rptr.2d 301].) In each of these cases, the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct which is both intentional and intended to harm. (See, e.g., Christensen v. Superior Court (1991) 54 Cal.3d 868, 885-886 [2 Cal.Rptr.2d 79, 820 P.2d 181].)

Plaintiff’s theory of tort recovery is that mental distress is a foreseeable consequence of negligent breaches of standard commercial contracts. However, foreseeability alone is not sufficient to create an independent tort duty. “ ‘Whether a defendant owes a duty of care is a question of law. Its existence depends upon the foreseeability of the risk and a weighing of policy considerations for and against imposition of liability.’ [Citation.]” (Burgess v. Superior Court (1992) 2 Cal.4th 1064, 1072 [9 Cal.Rptr.2d 615, 831 P.2d 1197].) Because the consequences of a negligent act. must be limited to avoid an intolerable burden on society (Elden v. Sheldon (1988) 46 Cal.3d 267, 274 [250 Cal.Rptr. 254, 758 P.2d 582]), the determination of duty “recognizes that policy considerations may dictate a cause of action should not be sanctioned no matter how foreseeable the risk.” (Ibid., fn. omitted.) “[T]here are clear judicial days on which a court can foresee forever and thus determine liability but none on which that foresight alone provides a socially and judicially acceptable limit on recovery of damages for [an] injury.” (Thing v. La Chusa (1989) 48 Cal.3d 644, 668 [257 Cal.Rptr. 865, 771 P.2d 814].) In short, foreseeability is not synonymous with duty; nor is it a substitute.

The question thus remains: is the mere negligent breach of a contract sufficient? The answer is no. It may admittedly be difficult to categorize the cases, but to state the rule succinctly: “[C]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.” (Freeman & Mills, supra, 11 Cal.4th at p. 107 (conc. and dis. opn. of Mosk, J.).) The familiar paradigm of tortious breach of contract in this state is the insurance contract. There we rely on the covenant of good faith and fair dealing, implied in every contract, to justify tort liability. (Foley, supra, 47 Cal.3d at pp. 689-690.) In holding that a. tort action is available for breach of the covenant in an insurance contract, we have “emphasized the ‘special relationship’ between insurer and insured, characterized by elements of public interest, adhesion, and fiduciary responsibility.” (Freeman & Mills, supra, 11 Cal.4th at p. 91; see Louderback & Jurika, Standards for Limiting the Tort of Bad Faith Breach of Contract (1982) 16 U.S.F. L.Rev. 187, 227.)

The special relationship test, which has been criticized as illusory and not sufficiently precise (Putz & Klippen, Commercial Bad Faith: Attorneys Fees—Not Tort Liability—Is the Remedy for “Stonewalling” (1987) 21 U.S.F. L.Rev. 419, 478-479), has little relevance to the question before us. Menezes is in the business of building single-family homes. He is one among thousands of contractors who provide the same service, and the Erlichs could take their choice among any contractors willing to accept work in the area where their home would be constructed. Although they undoubtedly relied on his claimed expertise, they were in a position to view, inspect, and criticize his work, or to hire someone who could. Most significantly, there is no indication Menezes sought to frustrate the Erlichs’ enjoyment of contracted-for benefits. He did build a house. His ineptitude led to numerous problems which he attempted to correct. And he remains ultimately responsible for reimbursing the cost of doing the job properly.

Moreover, since, as Foley noted, the insurance cases represented “a major departure from traditional principles of contract law,” any claim for automatic extension of that exceptional approach whenever “certain hallmarks and similarities can be adduced in another contract setting” should be carefully considered. (Foley, supra, 47 Cal.3d at p. 690.)

Our previous decisions detail the reasons for denying tort recovery in contract breach cases: the different objectives underlying tort and contract breach; the importance of predictability in assuring commercial stability in contractual dealings; the potential for converting every contract breach into a tort, with accompanying punitive damage recovery, and the preference for legislative action in affording appropriate remedies. (Freeman & Mills, supra, 11 Cal.4th at p. 98, citing approvingly Harris v. Atlantic Richfield Co. (1993) 14 Cal.App.4th 70, 81-82 [17 Cal.Rptr.2d 649].) The same concerns support a cautious approach here. Restrictions on contract remedies serve to protect the “ ‘freedom to bargain over special risks and [to] promote contract formation by limiting liability to the value of the promise.’ ” (11 Cal.4th at p. 98, quoting Harris, supra, 14 Cal.App.4th at p. 77.)

Generally, outside the insurance context, “a tortious breach of contract . . . may be found when (1) the breach is accompanied by a traditional common law tort, such as fraud or conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion or; (3) one party intentionally breaches the contract intending or knowing that such a breach will cause severe, unmitigable harm in the form of mental anguish, personal hardship, or substantial consequential damages.” (Freeman & Mills, supra, 11 Cal.4th at p. 105 (conc. and dis. opn. of Mosk, J.).) Focusing on intentional conduct gives substance to the proposition that a breach of contract is tortious only when some independent duty arising from tort law is violated. (Applied Equipment, supra, 7 Cal.4th at p. 515.) If every negligent breach of a contract gives rise to tort damages the limitation would be meaningless, as would the statutory distinction between tort and contract remedies.

In this case, the jury concluded Menezes did not act intentionally; nor was he guilty of fraud or misrepresentation. This is a claim for negligent breach of a contract, which is not sufficient to support tortious damages for violation of an independent tort duty.

It may ultimately be more useful, in attempting to develop a common law of tortious breach, to affirmatively identify specific practices utilized by contracting parties that merit the imposition of tort remedies (Freeman & Mills, supra, 11 Cal.4th at p. 107 (conc. and dis. opn. of Mosk, J.)), instead of comparing each new claim to a template for exceptions. In the interim, however, it is sufficient to note that more than mere negligence has been involved in each case where tort damages have been permitted. The benefits of broad compensation must be balanced against the burdens on commercial stability. “[C]ourts should be careful to apply tort remedies only when the conduct in question is so clear in its deviation from socially useful business practices that the effect of enforcing such tort duties will be ... to aid rather than discourage commerce.” (Freeman & Mills, supra, 11 Cal.4th at p. 109 (conc. and dis. opn. of Mosk, J.).)

C.

Even assuming Menezes’s negligence constituted a sufficient independent duty to the Erlichs, such a finding would not entitle them to emotional distress damages on these facts. “The fact that emotional distress damages may be awarded in some circumstances (see Rest.2d Torts, § 905, pp. 456-457) does not mean they are available in every case in which there is an independent cause of action founded upon negligence.” (Merenda v. Superior Court (1992) 3 Cal.App.4th 1, 7 [4 Cal.Rptr.2d 87] (Merenda).) “No California case has allowed recovery for emotional distress arising solely out of property damage” (Cooper v. Superior Court (1984) 153 Cal.App.3d 1008, 1012 [200 Cal.Rptr. 746]); moreover, a preexisting contractual relationship, without more, will not support a recovery for mental suffering where the defendant’s tortious conduct has resulted only in economic injury to the plaintiff. (Smith v. Superior Court (1992) 10 Cal.App.4th 1033, 1040, fn. 1 [13 Cal.Rptr.2d 133]; Mercado v. Leong (1996) 43 Cal.App.4th 317, 324 [50 Cal.Rptr.2d 569] [emotional distress damages are unlikely when the interests affected are merely economic]; Camenisch v. Superior Court (1996) 44 Cal.App.4th 1689, 1691 [52 Cal.Rptr.2d 450] (Camenisch) [emotional distress damages are not recoverable when attorney malpractice leads only to economic loss].)

Although the Court of Appeal, plaintiffs, and their amici curiae rely substantially on Potter v. Firestone Tire & Rubber Co. (1993) 6 Cal.4th 965 [25 Cal.Rptr.2d 550, 863 P.2d 795] (Potter), that case does not assist our inquiry. Potter, a toxic tort case, is readily distinguishable. First, the analysis there was narrowly circumscribed by the issue presented: “whether . . . emotional distress engendered by the fear of developing cancer in the future as a result of a toxic exposure is a recoverable item of damages in a negligence action.” (Id. at p. 981.) Thus, the language of Potter cannot be read in support of some larger proposition affording emotional distress damages for any other type of fear of future harm in actions involving negligent breach of contract.

Second, the water supply of the plaintiffs in Potter had already been contaminated. The prolonged exposure could not be undone. In contrast, the Erlichs could have avoided the threatened injury by moving out of the house until necessary repairs had been completed. If they had, relocation expenses would have been part of their damages. In any event, the general measure of damages where injury to property is capable of being repaired is the reasonable cost of repair together with the value of lost use during the period of injury. (6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, § 1462, pp. 934-935.)

In short, Potter permitted recovery, within stringent limits, for emotional distress resulting from a personal injury directly caused by the defendant’s tortious conduct. The Erlichs seek recovery for emotional distress engendered by an injury to their property.

To the extent Potter is relevant here, it reiterates that “unless the defendant has assumed a duty to plaintiff in which the emotional condition of the plaintiff is an object, recovery is available only if the emotional distress arises out of the defendant’s breach of some other legal duty and the emotional distress is proximately caused by [breach of the independent duty]. Even then, with rare exceptions, a breach of the duty must threaten physical injury, not simply damage to property or financial interests. [Citations.]” (Potter, supra, 6 Cal.4th at p. 985.) Although the Erlichs feared physical injury, Menezes’s negligent breach of contract resulted in only damage to their property, and they could have avoided any threat of harm.

The question was thoroughly explored in Merenda, supra, 3 Cal.App.4th 1, a legal malpractice action in which the plaintiff sought damages for the severe emotional distress she suffered when her attorney’s negligence caused the loss of expected damages from her claim for sexual assault and battery. “It is true that the ‘transaction,’ a contract for legal services, was intended to affect the plaintiff. However, the foreseeability of serious emotional harm to the client and the degree of certainty that the client suffered such injury by loss of an economic claim are tenuous. Litigation is an inherently uncertain vehicle for advancing one’s economic interests. The expectation of a recovery is rarely so certain that a litigant would be justified in resting her peace of mind upon the assurance of victory.” (Id. at p. 10.)

In Camenisch, supra, 44 Cal.App.4th 1689, the plaintiff sought emotional distress damages because the lawyer’s negligent estate planning advice thwarted his tax avoidance goals. The complaint alleged the attorney had been hired “ ‘for the express purpose of providing for [the plaintiffs’ family] and obtaining repose regarding their financial security.’ ” (Id. at p. 1692.) The trial court overruled the attorney’s demurrer. The Court of Appeal rejected the claim for emotional distress damages. Acknowledging that Merenda dealt with malpractice related to litigation, the court nevertheless found its reasoning dispositive. “Public policy reasons do not support a different result when the alleged malpractice is committed in a tax advice context, even if the tax advice is part of an estate plan, [ft As in a litigation context, the client’s primary protected interest is economic in a tax planning situation. The prospect of paying taxes is generally considered distressing, and the prospect of paying a greater levy than necessary is even more disquieting. However, the emotional upset derives from an inherently economic concern.” (Id. at p. 1697.)

In Lubner v. City of Los Angeles (1996) 45 Cal.App.4th 525 [53 Cal.Rptr.2d 24], two artists lost a substantial portion of their life’s work when a city trash truck, which had been parked on a hilltop, rolled down and crashed into their home, damaging the house, two cars, and much of their artwork. The Lubners filed a negligence action and sought damages for their emotional distress. Recognizing that the artwork may have been extremely important to the Lubners, the court nevertheless found they were not entitled to recover for emotional distress caused by injury to property. (Id. at p. 532.) The court based its ruling primarily on the absence of a preexisting relationship between the parties, but separately considered whether the defendant breached a duty of care to the plaintiffs. Noting that the moral blame on the defendant was only that which attends ordinary negligence and nothing in the record indicated bad faith or reckless indifference to the Lubners’ emotional tranquillity, the court concluded liability for negligent infliction of emotional distress was unwarranted. (Id. at p. 534.)

Public policy supports a similar limit where the negligence concerns the construction of a home. In Blagrove v. JB Mechanical, Inc. (Wyo. 1997) 934 P.2d 1273 (Blagrove), the homeowners sued a plumbing contractor to recover damages for mental anguish caused when flooding from a faulty plumbing connection damaged their home and destroyed personal possessions. The Wyoming Supreme Court held that, absent physical injury, emotional distress damages can be recovered only in limited circumstances involving intentional torts, constitutional violations, and the breach of the covenant of good faith and fair dealing in insurance contracts, and concluded a contrary rule would be poor public policy.

“In deciding whether the plaintiff’s interests are entitled to legal protection against the defendant’s conduct, we must balance the interest of the injured parties against the view that a negligent act should have some end to its legal consequences. . . . We are persuaded that the concerns which have acted to prevent recovery for emotional distress when property is damaged remain relevant and weigh against permitting recovery. While we do not doubt that the Blagroves were justifiably and seriously distressed over the damage to [their home], adopting a rule allowing trial on the issue and recovery if proved would result in unacceptable burdens for both the judicial system and defendants. We therefore hold that emotional distress damages in connection with property damages are not compensable.” (Blagrove, supra, 934 P.2d at pp. 1276-1277; see also Caradonna v. Thorious (1969) 17 Mich.App. 41 [169 N.W.2d 179, 182]; Jankowski v. Mazzotta (1967) 7 Mich.App. 483 [152 N.W.2d 49] [no mental anguish remedy available for ineptly constructed home].)

Here, the breach—the negligent construction of the Erlichs’ house—did not cause physical injury. No one was hit by a falling beam. Although the Erlichs state they feared the house was structurally unsafe and might collapse in an earthquake, they lived in it for five years. The only physical injury alleged is Barry Erlich’s heart disease, which flowed from the emotional distress and not directly from the negligent construction.

The Erlichs may have hoped to build their dream home and live happily ever after, but there is a reason that tag line belongs only in fairy tales. Building a house may turn out to be a stress-free project; it is much more likely to be the stuff of urban legends—the cause of bankruptcy, marital dissolution, hypertension and fleeting fantasies ranging from homicide to suicide. As Justice Yegan noted below, “No reasonable homeowner can embark on a building project with certainty that the project will be completed to perfection. Indeed, errors are so likely to occur that few if any homeowners would be justified in resting their peace of mind on [its] timely or correct completion . . . .” The connection between the service sought and the aggravation and distress resulting from incompetence may be somewhat less tenuous than in a malpractice case, but the emotional suffering still derives from an inherently economic concern.

D.

Having concluded tort damages are not available, we finally consider whether damages for emotional distress should be included as consequential or special damages in a contract claim, “Contract damages are generally limited to those within the contemplation of the parties when the contract was entered into or at least reasonably foreseeable by them at the time; consequential damages beyond the expectations of the parties are not recoverable. [Citations.] This limitation on available damages serves to encourage contractual relations and commercial activity by enabling parties to estimate in advance the financial risks of their enterprise.” (Applied Equipment, supra, 7 Cal.4th at p. 515.)

“ ‘[W]hen two parties make a contract, they agree upon the rules and regulations which will govern their relationship; the risks inherent in the agreement and the likelihood of its breach. The parties to the contract in essence create a mini-universe for themselves, in which each voluntarily chooses his contracting partner, each trusts the other’s willingness to keep his word and honor his commitments, and in which they define their respective obligations, rewards and risks. Under such a scenario, it is appropriate to enforce only such obligations as each party voluntarily assumed, and to give him only such benefits as he expected to receive; this is the function of contract law.’ ” (Applied Equipment, supra, 7 Cal.4th at p. 517.)

Accordingly, damages for mental suffering and emotional distress are generally not recoverable in an action for breach of an ordinary commercial contract in California. (Kwan v. Mercedes-Benz of North America, Inc. (1994) 23 Cal.App.4th 174, 188 [28 Cal.Rptr.2d 371] (Kwan); Sawyer v. Bank of America (1978) 83 Cal.App.3d 135, 139 [145 Cal.Rptr. 623].) “Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.” (Rest.2d Contracts, § 353.) The Restatement specifically notes the breach of a contract to build a home is not “particularly likely” to result in “serious emotional disturbance.” (Ibid.)

Cases permitting recovery for emotional distress typically involve mental anguish stemming from more personal undertakings the traumatic results of which were unavoidable. (See, e.g., Burgess v. Superior Court, supra, 2 Cal.4th 1064 [infant injured during childbirth]; Molien v. Kaiser Foundation Hospitals (1980) 27 Cal.3d 916 [167 Cal.Rptr. 831, 616 P.2d 813, 16 A.L.R.4th 518] [misdiagnosed venereal disease and subsequent failure of marriage]; Kately v. Wilkinson (1983) 148 Cal.App.3d 576 [195 Cal.Rptr. 902] [fatal waterskiing accident]; Chelini v. Nieri (1948) 32 Cal.2d 480 [196 P.2d 915] [failure to adequately preserve a corpse].) Thus, when the express object of the contract is the mental and emotional well-being of one of the contracting parties, the breach of the contract may give rise to damages for mental suffering or emotional distress. (See Wynn v. Monterey Club (1980) 111 Cal.App.3d 789, 799-801 [168 Cal.Rptr. 878] [agreement of two gambling clubs to exclude husband’s gambling-addicted wife from clubs and not to cash her checks]; Ross v. Forest Lawn Memorial Park (1984) 153 Cal.App.3d 988, 992-996 [203 Cal.Rptr. 468, 42 A.L.R.4th 1049] [cemetery’s agreement to keep burial service private and to protect grave from vandalism]; Windeler v. Scheers Jewelers (1970) 8 Cal.App.3d 844, 851-852 [88 Cal.Rptr. 39] [bailment for heirloom jewelry where jewelry’s great sentimental value was made known to bailee].)

Cases from other jurisdictions have formulated a similar rule, barring recovery of emotional distress damages for breach of contract except in cases involving contracts in which emotional concerns are the essence of the contract. (See, e.g., Hancock v. Northcutt (Alaska 1991) 808 P.2d 251, 258 [“contracts pertaining to one’s dwelling are not among those contracts which, if breached, are particularly likely to result in serious emotional disturbance”; typical damages for breach of house construction contracts can appropriately be calculated in terms of monetary loss]; McMeakin v. Roofing & Sheet Metal Supply (1990) 1990 Okla.Civ.App. 101 [807 P.2d 288] [affirming order granting summary judgment in favor of defendant roofing company after it negligently stacked too many brick tiles on roof, causing roof to collapse and completely destroy home, leading to plaintiff’s heart attack one month later]; Day v. Montana Power Co. (1990) 242 Mont. 195 [789 P.2d 1224] [owner of restaurant that was destroyed in gas explosion allegedly caused by negligence of utility company employee not entitled to recover damages for emotional distress]; Creger v. Robertson (La.Ct.App. 1989) 542 So.2d 1090 [reversing award for emotional distress damages caused by foul odor emanating from a faulty foundation, preventing plaintiff from entertaining guests in her residence]; Groh v. Broadland Builders, Inc. (1982) 120 Mich.App. 214 [327 N.W.2d 443] [reversing order denying motion to strike allegations of mental anguish in case involving malfunctioning septic tank system, and noting adequacy of monetary damages to compensate for pecuniary loss of “having to do the job over,” as distinguished from cases allowing recovery because situation could never be adequately corrected].)

Plaintiffs argue strenuously that a broader notion of damages is appropriate when the contract is for the construction of a home. Amici curiae urge us to permit emotional distress damages in cases of negligent construction of a personal residence when the negligent construction causes gross interference with the normal use and habitability of the residence.

Such a rule would make the financial risks of construction agreements difficult to predict. Contract damages must be clearly ascertainable in both nature and origin. (Civ. Code, § 3301.) A contracting party cannot be required to assume limitless responsibility for all consequences of a breach and must be advised of any special harm that might result in order to determine whether or not to accept the risk of contracting. (1 Witkin, Summary of Cal. Law (9th ed. 1987) Contracts, § 815, p. 733.)

Moreover, adding an emotional distress component to recovery for construction defects could increase the already prohibitively high cost of housing in California, affect the availability of insurance for builders, and greatly diminish the supply of affordable housing. The potential for such broad-ranging economic consequences—costs likely to be paid by the public generally—means the task of fashioning appropriate limits on the availability of emotional distress claims should be left to the Legislature. (See Tex. Prop. Code Ann. § 27.001 et seq. (1999); Haw. Rev. Stat. § 663-8.9 (1998).)

Permitting damages for emotional distress on the theory that certain contracts carry a lot of emotional freight provides no useful guidance. Courts have carved out a narrow range of exceptions to the general rule of exclusion where emotional tranquillity is the contract’s essence. Refusal to broaden the bases for recovery reflects a fundamental policy choice. A rule which focuses not on the risks contracting parties voluntarily assume but on one party’s reaction to inadequate performance, cannot provide any principled limit on liability.

The discussion in Kwan, a case dealing with the breach of a sales contract for the purchase of a car, is instructive. “[A] contract for [the] sale of an automobile is not essentially tied to the buyer’s mental or emotional well-being. Personal as the choice of a car may be, the central reason for buying one is usually transportation. . . . [¶] In spite of America’s much-discussed ‘love affair with the automobile,’ disruption of an owner’s relationship with his or her car is not, in the normal case, comparable to the loss or mistreatment of a family member’s remains [citation], an invasion of one’s privacy [citation], or the loss of one’s spouse to a gambling addiction [citation]. In the latter situations, the contract exists primarily to further or protect emotional interests; the direct and foreseeable injuries resulting from a breach are also primarily emotional. In contrast, the undeniable aggravation, irritation and anxiety that may result from [the] breach of an automobile warranty are secondary effects deriving from the decreased usefulness of the car and the frequently frustrating process of having an automobile repaired. While [the] purchase of an automobile may sometimes lead to severe emotional distress, such a result is not ordinarily foreseeable from the nature of the contract.” (Kwan, supra, 23 Cal.App.4th at p. 190.)

Most other jurisdictions have reached the same conclusion. (See Sanders v. Zeagler (La. 1997) 686 So.2d 819, 822-823 [principal object of a contract for the construction of a house was to obtain a place to live and emotional distress damages were not recoverable]; Hancock v. Northcutt, supra, 808 P.2d at pp. 258-259 [no recovery for emotional distress as a result of defective construction; typical damages for breach of house construction contracts can appropriately be calculated in terms of monetary loss]; City of Tyler v. Likes (Tex. 1997) 962 S.W.2d 489, 497 [mental anguish based solely on property damage is not compensable as a matter of law].)

We agree. The available damages for defective construction are limited to the cost of repairing the home, including lost use or relocation expenses, or the diminution in value. (Orndorff v. Christiana Community Builders (1990) 217 Cal.App.3d 683 [266 Cal.Rptr. 193].) The Erlichs received more than $400,000 in traditional contract damages to correct the defects in their home. While their distress was undoubtedly real and serious, we conclude the balance of policy considerations—the potential for significant increases in liability in amounts disproportionate to culpability, the court’s inability to formulate appropriate limits on the availability of claims, and the magnitude of the impact on stability and predictability in commercial affairs—counsel against expanding contract damages to include mental distress claims in negligent construction cases.

Disposition

The judgment of the Court of Appeal is reversed and the matter is remanded for further proceedings consistent with this opinion.

George, C. J., Kennard, J., Baxter, J., and Chin, J., concurred.

1

At oral argument, plaintiff cited Sloane v. Southern Cal. Ry. Co. (1896) 111 Cal. 668 [44 P. 320], a case involving a passenger wrongly ejected from a train, for the proposition that emotional distress damages arising out of breach of contract have been permitted in California for many years. In fact, Sloane specifically recognized the distinction between contract and tort remedies and held plaintiff could either “bring an action simply for the breach of . . . contract, or she could sue ... in tort” for the carrier’s violation of the duty, as a common carrier, which it assumed upon entering into the contract. (Id. at p. 677.)

WERDEGAR, J., Concurring and Dissenting.

I concur in the majority opinion insofar as it holds that a plaintiff may not recover damages for emotional distress based on a defendant’s negligent breach of a contract to build a house when the defendant has breached no duty independent of the contract. Although I read the record differently as to whether these plaintiffs did, in fact, present an independent claim for negligence, in view of the majority’s conclusion that plaintiffs did not present such a claim (see maj. opn., ante, at pp. 548, 554), the discussion in part C of the majority opinion (id., at pp. 554-558) is unnecessary. I therefore express no opinion on the circumstances under which a tort plaintiff may recover damages for emotional distress.

Mosk, J., concurred.

COUNSEL

Musick, Peeler & Garrett and Bruce A. Bevan, Jr., for Defendant and Appellant.

Benjamin Neuman for Plaintiff and Respondent.

OPINION

BURKE, J.

Defendant Twentieth Century-Fox Film Corporation appeals from a summary judgment granting to plaintiff the recovery of agreed compensation under a written contract for her services as an actress in a motion picture. As will appear, we have concluded that the trial court correctly ruled in plaintiff's favor and that the judgment should be affirmed.

Plaintiff is well known as an actress, and in the contract between plaintiff and defendant is sometimes referred to as the "Artist." Under the contract, dated August 6, 1965, plaintiff was to play the female lead in defendant's contemplated production of a motion picture entitled "Bloomer Girl." The contract provided that defendant would pay plaintiff a minimum "guaranteed compensation" of $53,571.42 per week for 14 weeks commencing May 23, 1966, for a total of $750,000. Prior to May 1966 defendant decided not to produce the picture and by a letter dated April 4, 1966, it notified plaintiff of that decision and that it would not "comply with our obligations to you under" the written contract.

By the same letter and with the professed purpose "to avoid any damage to you," defendant instead offered to employ plaintiff as the leading actress in another film tentatively entitled "Big Country, Big Man" (hereinafter, "Big Country"). The compensation offered was identical, as were 31 of the 34 numbered provisions or articles of the original contract.^[1] Unlike "Bloomer Girl," however, which was to have been a musical production, "Big Country" was a dramatic "western type" movie. "Bloomer Girl" was to have been filmed in California; "Big Country" was to be produced in Australia. Also, certain terms in the proffered contract varied from those of the original.^[2] Plaintiff was given one week within which to accept; she did not and the offer lapsed. Plaintiff then commenced this action seeking recovery of the agreed guaranteed compensation.

The complaint sets forth two causes of action. The first is for money due under the contract; the second, based upon the same allegations as the first, is for damages resulting from defendant's breach of contract. Defendant in its answer admits the existence and validity of the contract, that plaintiff complied with all the conditions, covenants and promises and stood ready to complete the performance, and that defendant breached and "anticipatorily repudiated" the contract. It denies, however, that any money is due to plaintiff either under the contract or as a result of its breach, and pleads as an affirmative defense to both causes of action plaintiff's allegedly deliberate failure to mitigate damages, asserting that she unreasonably refused to accept its offer of the leading role in "Big Country."

Plaintiff moved for summary judgment under Code of Civil Procedure section 437c, the motion was granted, and summary judgment for $750,000 plus interest was entered in plaintiff's favor. This appeal by defendant followed.

(1a) The familiar rules are that the matter to be determined by the trial court on a motion for summary judgment is whether facts have been presented which give rise to a triable factual issue. The court may not pass upon the issue itself. (2) Summary judgment is proper only if the affidavits or declarations^[3] in support of the moving party would be sufficient to sustain a judgment in his favor and his opponent does not by affidavit show facts sufficient to present a triable issue of fact. The affidavits of the moving party are strictly construed, and doubts as to the propriety of summary judgment should be resolved against granting the motion. Such summary procedure is drastic and should be used with caution so that it does not become a substitute for the open trial method of determining facts. (3) The moving party cannot depend upon allegations in his own pleadings to cure deficient affidavits, nor can his adversary rely upon his own pleadings in lieu or in support of affidavits in opposition to a motion; however, a party can rely on his adversary's pleadings to establish facts not contained in his own affidavits. (Slobojan v. Western Travelers Life Ins. Co. (1969) 70 Cal.2d 432, 436-437 [74 Cal. Rptr. 895, 450 P.2d 271]; and cases cited.) (1b) Also, the court may consider facts stipulated to by the parties and facts which are properly the subject of judicial notice. (Ahmanson Bank & Trust Co. v. Tepper (1969) 269 Cal. App.2d 333, 342 [74 Cal. Rptr. 774]; Martin v. General Finance Co. (1966) 239 Cal. App.2d 438, 442 [48 Cal. Rptr. 773]; Goldstein v. Hoffman (1963) 213 Cal. App.2d 803, 814 [29 Cal. Rptr. 334]; Thomson v. Honer (1960) 179 Cal. App.2d 197, 203 [3 Cal. Rptr. 791].)

As stated, defendant's sole defense to this action which resulted from its deliberate breach of contract is that in rejecting defendant's substitute offer of employment plaintiff unreasonably refused to mitigate damages.

(4) 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. (W.F. Boardman Co. v. Petch (1921) 186 Cal. 476, 484 [182] [199 P. 1047]; De Angeles v. Roos Bros., Inc. (1966) 244 Cal. App.2d 434, 441-442 [52 Cal. Rptr. 783]; de la Falaise v. Gaumont-British Picture Corp. (1940) 39 Cal. App.2d 461, 469 [103 P.2d 447], and cases cited; see also Wise v. Southern Pac. Co. (1970) 1 Cal.3d 600, 607-608 [83 Cal. Rptr. 202, 463 P.2d 426].)^[4] (5) However, before projected earnings from other employment opportunities not sought or accepted by the discharged employee can be applied in mitigation, the employer must show that the other employment was comparable, or substantially similar, to that of which the employee has been deprived; 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. (Gonzales v. Internat. Assn. of Machinists (1963) 213 Cal. App.2d 817, 822-824 [29 Cal. Rptr. 190]; Harris v. Nat. Union etc. Cooks, Stewards (1953) 116 Cal. App.2d 759, 761 [254 P.2d 673]; Crillo v. Curtola (1949) 91 Cal. App.2d 263, 275 [204 P.2d 941]; de la Falaise v. Gaumont-British Picture Corp., supra, 39 Cal. App.2d 461, 469; Schiller v. Keuffel & Esser Co. (1963) 21 Wis.2d 545 [124 N.W.2d 646, 651]; 28 A.L.R. 736, 749; 22 Am.Jur.2d, Damages, §§ 71-72, p. 106.)

In the present case defendant has raised no issue of reasonableness of efforts by plaintiffs to obtain other employment; the sole issue is whether plaintiff's refusal of defendant's substitute offer of "Big Country" may be used in mitigation. Nor, if the "Big Country" offer was of employment different or inferior when compared with the original "Bloomer Girl" employment, is there an issue as to whether or not plaintiff acted reasonably in refusing the substitute offer. Despite defendant's arguments to the contrary, no case cited or which our research has discovered holds or suggests that reasonableness is an element of a wrongfully discharged employee's option to reject, or fail to seek, different or inferior employment lest the possible earnings therefrom be charged against him in mitigation of damages.^[5]

(6) Applying the foregoing rules to the record in the present case, with all intendments in favor of the party opposing the summary judgment motion — here, defendant — it is clear that the trial court correctly ruled that plaintiff's failure to accept defendant's tendered substitute employment could not be applied in mitigation of damages because the offer of the "Big Country" lead was of employment both different and inferior, and that no factual dispute was presented on that issue. The mere circumstance that "Bloomer Girl" was to be a musical review calling upon plaintiff's talents as a dancer as well as an actress, and was to be produced in the City of Los Angeles, whereas "Big Country" was a straight dramatic role in a "Western Type" story taking place in an opal mine in Australia, demonstrates the difference in kind between the two employments; 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.

(7) Additionally, the substitute "Big Country" offer proposed to eliminate or impair the director and screenplay approvals accorded to plaintiff under the original "Bloomer Girl" contract (see fn. 2, ante), and thus constituted an offer of inferior employment. No expertise or judicial notice is required in order to hold that 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. (See Gonzales v. Internat. Assn. of Machinists, supra, 213 Cal. App.2d 817, 823-824; and fn. 5, post.)

(8) Statements found in affidavits submitted by defendant in opposition to plaintiff's summary judgment motion, to the effect that the "Big County" offer was not of employment different from or inferior to that under the "Bloomer Girl" contract, merely repeat the allegations of defendant's answer to the complaint in this action, constitute only conclusionary assertions with respect to undisputed facts, and do not give rise to a triable factual issue so as to defeat the motion for summary judgment. (See Colvig v. KSFO (1964) 224 Cal. App.2d 357, 364 [36 Cal. Rptr. 701]; Dashew v. Dashew Business Machines, Inc. (1963) 218 Cal. App.2d 711, 715 [32 Cal. Rptr. 682]; Hatch v. Bush (1963) 215 Cal. App.2d 692, 707 [30 Cal. Rptr. 397, 13 A.L.R.3d 503]; Barry v. Rodgers (1956) 141 Cal. App.2d 340, 342 [296 P.2d 898].)

In view of the determination that defendant failed to present any facts showing the existence of a factual issue with respect to its sole defense — plaintiff's rejection of its substitute employment offer in mitigation of damages — we need not consider plaintiff's further contention that for various reasons, including the provisions of the original contract set forth in footnote 1, ante, plaintiff was excused from attempting to mitigate damages.

The judgment is affirmed.

McComb, J., Peters, J., Tobriner, J., Kaus, J.,^[6] and Roth, J.,^[6] concurred.

SULLIVAN, Acting C.J.

The basic question in this case is whether or not plaintiff acted reasonably in rejecting defendant's offer of alternate employment. The answer depends upon whether that offer (starring in "Big Country, Big Man") was an offer of work that was substantially similar to her former employment (starring in "Bloomer Girl") or of work that was of a different or inferior kind. To my mind this is a factual issue which the trial court should not have determined on a motion for summary judgment. The majority have not only repeated this error but have compounded it by applying the rules governing mitigation of damages in the employer-employee context in a misleading fashion. Accordingly, I respectfully dissent.

The familiar rule requiring a plaintiff in a tort or contract action to mitigate damages embodies notions of fairness and socially responsible behavior which are fundamental to our jurisprudence. Most broadly stated, it precludes the recovery of damages which, through the exercise of due diligence, could have been avoided. Thus, in essence, it is a rule requiring reasonable conduct in commercial affairs. This general principle governs the obligations of an employee after his employer has wrongfully repudiated or terminated the employment contract. Rather than permitting the employee simply to remain idle during the balance of the contract period, the law requires him to make a reasonable effort to secure other employment.^[7] He is not obliged, however, to seek or accept any and all types of work which may be available. Only work which is in the same field and which is of the same quality need be accepted.^[8]

Over the years the courts have employed various phrases to define the type of employment which the employee, upon his wrongful discharge, is under an obligation to accept. Thus in California alone it has been held that he must accept employment which is "substantially similar" (Lewis v. Protective Security Life Ins. Co. (1962) 208 Cal. App.2d 582, 584 [25 Cal. Rptr. 213]; de la Falaise v. Gaumont-British Picture Corp. (1940) 39 Cal. App.2d 461, 469 [103 P.2d 447]); "comparable employment" (Erler v. Five Points Motors, Inc. (1967) 249 Cal. App.2d 560, 562 [57 Cal. Rptr. 516]; Harris v. Nat. Union etc. Cooks, Stewards (1953) 116 Cal. App.2d 759, 761 [254 P.2d 673]); employment "in the same general line of the first employment" (Rotter v. Stationers Corp. (1960) 186 Cal. App.2d 170, 172 [8 Cal. Rptr. 690]); "equivalent to his prior position" (De Angeles v. Roos Bros., Inc. (1966) 244 Cal. App.2d 434, 443 [52 Cal. Rptr. 783]); "employment in a similar capacity" (Silva v. McCoy (1968) 259 Cal. App.2d 256, 260 [66 Cal. Rptr. 364]); employment which is "not ... of a different or inferior kind...." (Gonzales v. Internat. Assn. of Machinists (1963) 213 Cal. App.2d 817, 822 [29 Cal. Rptr. 190].)^[9]

For reasons which are unexplained, the majority cite several of these cases yet select from among the various judicial formulations which they contain one particular phrase, "Not of a different or inferior kind," with which to analyze this case. I have discovered no historical or theoretical reason to adopt this phrase, which is simply a negative restatement of the affirmative standards set out in the above cases, as the exclusive standard. Indeed, its emergence is an example of the dubious phenomenon of the law responding not to rational judicial choice or changing social conditions, but to unrecognized changes in the language of opinions or legal treatises.^[10] However, the phrase is a serviceable one and my concern is not with its use as the standard but rather with what I consider its distortion.

The relevant language excuses acceptance only of employment which is of a different kind. (Gonzales v. Internat. Assn. of Machinists, supra, 213 Cal. App.2d 817, 822; Harris v. Nat. Union etc. Cooks, Stewards, supra, 116 Cal. App.2d 759, 761; de la Falaise v. Gaumont-British Picture Corp., supra, 39 Cal. App.2d 461, 469.) 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. The only alternative job offer an employee would be required to accept would be an offer of his former job by his former employer.

Although the majority appear to hold that there was a difference "in kind" between the employment offered plaintiff in "Bloomer Girl" and that offered in "Big Country" (ante, at p. 183), an examination of the opinion makes crystal clear that the majority merely point out differences between the two films (an obvious circumstance) and then apodically assert that these constitute a difference in the kind of employment. The entire rationale of the majority boils down to this: that the "mere circumstances" that "Bloomer Girl" was to be a musical review while "Big Country" was a straight drama "demonstrates the difference in kind" since a female lead in a western is not "the equivalent of or substantially similar to" a lead in a musical. This is merely attempting to prove the proposition by repeating it. It shows that the vehicles for the display of the star's talents are different but it does not prove that her employment as a star in such vehicles is of necessity different in kind and either inferior or superior.

I believe that the approach taken by the majority (a superficial listing of differences with no attempt to assess their significance) may subvert a valuable legal doctrine.^[11] The inquiry in cases such as this should not be whether differences between the two jobs exist (there will always be differences) but whether the differences which are present are substantial enough to constitute differences in the kind of employment or, alternatively, whether they render the substitute work employment of an inferior kind.

It seems to me that this inquiry involves, in the instant case at least, factual determinations which are improper on a motion for summary judgment. Resolving whether or not one job is substantially similar to another or whether, on the other hand, it is of a different or inferior kind, will often (as here) require a critical appraisal of the similarities and differences between them in light of the importance of these differences to the employee. This necessitates a weighing of the evidence, and it is precisely this undertaking which is forbidden on summary judgment. (Garlock v. Cole (1962) 199 Cal. App.2d 11, 14 [18 Cal. Rptr. 393].)

This is not to say that summary judgment would never be available in an action by an employee in which the employer raises the defense of failure to mitigate damages. No case has come to my attention, however, in which summary judgment has been granted on the issue of whether an employee was obliged to accept available alternate employment. Nevertheless, there may well be cases in which the substitute employment is so manifestly of a dissimilar or inferior sort, the declarations of the plaintiff so complete and those of the defendant so conclusionary and inadequate that no factual issues exist for which a trial is required. This, however, is not such a case.

It is not intuitively obvious, to me at least, that the leading female role in a dramatic motion picture is a radically different endeavor from the leading female role in a musical comedy film. Nor is it plain to me that the rather qualified rights of director and screenplay approval contained in the first contract are highly significant matters either in the entertainment industry in general or to this plaintiff in particular. Certainly, none of the declarations introduced by plaintiff in support of her motion shed any light on these issues.^[12] Nor do they attempt to explain why she declined the offer of starring in "Big Country, Big Man." Nevertheless, the trial court granted the motion, declaring that these approval rights were "critical" and that their elimination altered "the essential nature of the employment."

The plaintiff's declarations were of no assistance to the trial court in its effort to justify reaching this conclusion on summary judgment. Instead, it was forced to rely on judicial notice of the definitions of "motion picture," "screenplay" and "director" (Evid. Code, § 451, subd. (e)) and then on judicial notice of practices in the film industry which were purportedly of "common knowledge." (Evid. Code, § 451, subd. (f) or § 452, subd. (g).) This use of judicial notice was error. Evidence Code section 451, subdivision (e) was never intended to authorize resort to the dictionary to solve essentially factual questions which do not turn upon conventional linguistic usage. More important, however, the trial court's notice of "facts commonly known" violated Evidence Code section 455, subdivision (a).^[13] Before this section was enacted there were no procedural safeguards affording litigants an opportunity to be heard as to the propriety of taking judicial notice of a matter or as to the tenor of the matter to be noticed. Section 455 makes such an opportunity (which may be an element of due process, see Evid. Code, § 455, Law Revision Com. Comment (a)) mandatory and its provisions should be scrupulously adhered to. "[J]udicial notice can be a valuable tool in the adversary system for the lawyer as well as the court" (Kongsgaard, Judicial Notice (1966) 18 Hastings L.J. 117, 140) and its use is appropriate on motions for summary judgment. Its use in this case, however, to determine on summary judgment issues fundamental to the litigation without complying with statutory requirements of notice and hearing is a highly improper effort to "cut the Gordion knot of involved litigation." (Silver Land & Dev. Co. v. California Land Title Co. (1967) 248 Cal. App.2d 241, 242 [56 Cal. Rptr. 178].)

The majority do not confront the trial court's misuse of judicial notice. They avoid this issue through the expedient of declaring that neither judicial notice nor expert opinion (such as that contained in the declarations in opposition to the motion)^[14] is necessary to reach the trial court's conclusion. Something, however, clearly is needed to support this conclusion. Nevertheless, the majority make no effort to justify the judgment through an examination of the plaintiff's declarations. Ignoring the obvious insufficiency of these declarations, the majority announce that "the deprivation or infringement of an employee's rights held under an original employment contract" changes the alternate employment offered or available into employment of an inferior kind.

I cannot accept the proposition that an offer which eliminates any contract right, regardless of its significance, is, as a matter of law, an offer of employment of an inferior kind. Such an absolute rule seems no more sensible than the majority's earlier suggestion that the mere existence of differences between two jobs is sufficient to render them employment of different kinds. Application of such per se rules will severely undermine the principle of mitigation of damages in the employer-employee context.

I remain convinced that the relevant question in such cases is whether or not a particular contract provision is so significant that its omission creates employment of an inferior kind. This question is, of course, intimately bound up in what I consider the ultimate issue: whether or not the employee acted reasonably. This will generally involve a factual inquiry to ascertain the importance of the particular contract term and a process of weighing the absence of that term against the countervailing advantages of the alternate employment. In the typical case, this will mean that summary judgment must be withheld.

In the instant case, there was nothing properly before the trial court by which the importance of the approval rights could be ascertained, much less evaluated. Thus, in order to grant the motion for summary judgment, the trial court misused judicial notice. In upholding the summary judgment, the majority here rely upon per se rules which distort the process of determining whether or not an employee is obliged to accept particular employment in mitigation of damages.

I believe that the judgment should be reversed so that the issue of whether or not the offer of the lead role in "Big Country, Big Man" was of employment comparable to that of the lead role in "Bloomer Girl" may be determined at trial.

Appellant's petition for a rehearing was denied October 28, 1970. Mosk, J., did not participate therein. Sullivan, J., was of the opinion that the petition should be granted.

[1] Among the identical provisions was the following found in the last paragraph of Article 2 of the original contract: "We [defendant] shall not be obligated to utilize your [plaintiff's] services in or in connection with the Photoplay hereunder, our sole obligation, subject to the terms and conditions of this Agreement, being to pay you the guaranteed compensation herein provided for."

[2] Article 29 of the original contract specified that plaintiff approved the director already chosen for "Bloomer Girl" and that in case he failed to act as director plaintiff was to have approval rights of any substitute director. Article 31 provided that plaintiff was to have the right of approval of the "Bloomer Girl" dance director, and Article 32 gave her the right of approval of the screenplay.

Defendant's letter of April 4 to plaintiff, which contained both defendant's notice of breach of the "Bloomer Girl" contract and offer of the lead in "Big Country," eliminated or impaired each of those rights. It read in part as follows: "The terms and conditions of our offer of employment are identical to those set forth in the `BLOOMER GIRL' Agreement, Articles 1 through 34 and Exhibit A to the Agreement, except as follows:

"1. Article 31 of said Agreement will not be included in any contract of employment regarding `BIG COUNTRY, BIG MAN' as it is not a musical and it thus will not need a dance director.

"2. In the `BLOOMER GIRL' agreement, in Articles 29 and 32, you were given certain director and screenplay approvals and you had preapproved certain matters. Since there simply is insufficient time to negotiate with you regarding your choice of director and regarding the screenplay and since you already expressed an interest in performing the role in `BIG COUNTRY, BIG MAN,' we must exclude from our offer of employment in `BIG COUNTRY, BIG MAN' any approval rights as are contained in said Articles 29 and 32; however, we shall consult with you respecting the director to be selected to direct the photoplay and will further consult with you with respect to the screenplay and any revisions or changes therein, provided, however, that if we fail to agree ... the decision of ... [defendant] with respect to the selection of a director and to revisions and changes in the said screenplay shall be binding upon the parties to said agreement."

[3] In this opinion "affidavits" includes "declarations under penalty of perjury." (See Code Civ. Proc., § 2015.5.)

[4] Although it would appear that plaintiff was not discharged by defendant in the customary sense of the term, as she was not permitted by defendant to enter upon performance of the "Bloomer Girl" contract, nevertheless the motion for summary judgment was submitted for decision upon a stipulation by the parties that "plaintiff Parker was discharged."

[5] Instead, in each case the reasonableness referred to was that of the efforts of the employee to obtain other employment that was not different or inferior; his right to reject the latter was declared as an unqualified rule of law. Thus, Gonzales v. Internat. Assn. of Machinists, supra, 213 Cal. App.2d 817, 823-824, holds that the trial court correctly instructed the jury that plaintiff union member, a machinist, was required to make "such efforts as the average [member of his union] desiring employment would make at that particular time and place" (italics added); but, further, that the court properly rejected defendant's offer of proof of the availability of other kinds of employment at the same or higher pay than plaintiff usually received and all outside the jurisdiction of his union, as plaintiff could not be required to accept different employment or a nonunion job.

In Harris v. Nat. Union etc. Cooks, Stewards, supra, 116 Cal. App.2d 759, 761, the issues were stated to be, inter alia, whether comparable employment was open to each plaintiff employee, and if so whether each plaintiff made a reasonable effort to secure such employment. It was held that the trial court properly sustained an objection to an offer to prove a custom of accepting a job in a lower rank when work in the higher rank was not available, as "The duty of mitigation of damages ... does not require the plaintiff `to seek or to accept other employment of a different or inferior kind.'" (P. 764 [5].)

See also: Lewis v. Protective Security Life Ins. Co. (1962) 208 Cal. App.2d 582, 584 [25 Cal. Rptr. 213]: "honest effort to find similar employment...." (Italics added.)

de la Falaise v. Gaumont-British Picture Corp., supra, 39 Cal. App.2d 461, 469: "reasonable effort."

Erler v. Five Points Motors, Inc. (1967) 249 Cal. App.2d 560, 562 [57 Cal. Rptr. 516]: Damages may be mitigated "by a showing that the employee, by the exercise of reasonable diligence and effort, could have procured comparable employment...." (Italics added.)

Savitz v. Gallaccio (1955) 179 Pa.Super. 589 [118 A.2d 282, 286]; Atholwood Dev. Co. v. Houston (1941) 179 Md. 441 [19 A.2d 706, 708]; Harcourt & Co. v. Heller (1933) 250 Ky. 321 [62 S.W.2d 1056]; Alaska Airlines, Inc. v. Stephenson (1954) 217 F.2d 295, 299 [15 Alaska 272]; United Protective Workers v. Ford Motor Co. (7th Cir.1955) 223 F.2d 49, 52 [48 A.L.R.2d 1285]; Chisholm v. Preferred Bankers' Life Assur. Co. (1897) 112 Mich. 50 [70 N.W. 415]; each of which held that the reasonableness of the employee's efforts, or his excuses for failure, to find other similar employment was properly submitted to the jury as a question of fact. NB: Chisholm additionally approved a jury instruction that a substitute offer of the employer to work for a lesser compensation was not to be considered in mitigation, as the employee was not required to accept it.

Williams v. National Organization, Masters, etc. (1956) 384 Pa. 413 [120 A.2d 896, 901 [13]]: "Even assuming that plaintiff ... could have obtained employment in ports other than ... where he resided, legally he was not compelled to do so in order to mitigate his damages." (Italics added.)

[6] Assigned by the Acting Chairman of the Judicial Council.

[7] The issue is generally discussed in terms of a duty on the part of the employee to minimize loss. The practice is long-established and there is little reason to change despite Judge Cardozo's observation of its subtle inaccuracy. "The servant is free to accept employment or reject it according to his uncensored pleasure. What is meant by the supposed duty is merely this, that if he unreasonably reject, he will not be heard to say that the loss of wages from then on shall be deemed the jural consequence of the earlier discharge. He has broken the chain of causation, and loss resulting to him thereafter is suffered through his own act." (McClelland v. Climax Hosiery Mills (1930) 252 N.Y. 347, 359 [169 N.E. 605, 609], concurring opinion.)

[8] This qualification of the rule seems to reflect the simple and humane attitude that it is too severe to demand of a person that he attempt to find and perform work for which he has no training or experience. Many of the older cases hold that one need not accept work in an inferior rank or position nor work which is more menial or arduous. This suggests that the rule may have had its origin in the bourgeois fear of resubmergence in lower economic classes.

[9] See also 28 A.L.R. 736, 740-742; 15 Am.Jur. 431.

[10] The earliest California case which the majority cite is de la Falaise v. Gaumont-British Picture Corp., supra, 39 Cal. App.2d at p. 469. de la Falaise states "The `other employment' which the discharged employee is bound to seek is employment of a character substantially similar to that of which he has been deprived; he need not enter upon service of a different or inferior kind, ..." de la Falaise cites, in turn, two sources as authority for this proposition. The first is 18 R.C.L. (Ruling Case Law) 529. That digest, however, states only that the "discharged employee ... need not enter upon service of a more menial kind." (Italics added.) It was in this form that the rule entered California law explicitly, Gregg v. McDonald (1925) 73 Cal. App. 748, 757 [239 P. 373], quoting the text verbatim. The second citation is to 28 A.L.R. 737. The author of the annotation states: "The principal question with which this annotation is concerned is the kind of employment which the employee is under a duty to seek or accept in order to reduce the damages caused by his wrongful discharge. Must one who is skilled in some special work he is employed to do, as an actor, musician, accountant, etc., seek or accept employment of an entirely different nature?" (Italics added.) (28 A.L.R. 736.) In answering that question in the negative, the annotation employs the language adopted by the majority: The employee is "not obliged to seek or accept other employment of a different or inferior kind, ..." (Id. at p. 737.) Rather than a restatement of a generally agreed upon rule, however, the phrase is an epitomization of the varied formulations found in the cases cited. (See 28 A.L.R. 740-742.)

[11] The values of the doctrine of mitigation of damages in this context are that it minimizes the unnecessary personal and social (e.g., nonproductive use of labor, litigation) costs of contractual failure. If a wrongfully discharged employee can, through his own action and without suffering financial or psychological loss in the process, reduce the damages accruing from the breach of contract, the most sensible policy is to require him to do so. I fear the majority opinion will encourage precisely opposite conduct.

[12] Plaintiff's declaration states simply that she has not received any payment from defendant under the "Bloomer Girl" contract and that the only persons authorized to collect money for her are her attorney and her agent.

The declaration of Herman Citron, plaintiff's theatrical agent, alleges that prior to the formation of the "Bloomer Girl" contract he discussed with Richard Zanuck, defendant's vice president, the conditions under which plaintiff might be interested in doing "Big Country"; that it was Zanuck who informed him of Fox's decision to cancel production of "Bloomer Girl" and queried him as to plaintiff's continued interest in "Big Country"; that he informed Zanuck that plaintiff was shocked by the decision, had turned down other offers because of her commitment to defendant for "Bloomer Girl" and was not interested in "Big Country." It further alleges that "Bloomer Girl" was to have been a musical review which would have given plaintiff an opportunity to exhibit her talent as a dancer as well as an actress and that "Big Country" was a straight dramatic role; the former to have been produced in California, the latter in Australia. Citron's declaration concludes by stating that he has not received any payment from defendant for plaintiff under the "Bloomer Girl" contract.

Benjamin Neuman's declaration states that he is plaintiff's attorney; that after receiving notice of defendant's breach he requested Citron to make every effort to obtain other suitable employment for plaintiff; that he (Neuman) rejected defendant's offer to settle for $400,000 and that he has not received any payment from defendant for plaintiff under the "Bloomer Girl" contract. It also sets forth correspondence between Neuman and Fox which culminated in Fox's final rejection of plaintiff's demand for full payment.

[13] Evidence Code section 455 provides in relevant part: "With respect to any matter specified in Section 452 or in subdivision (f) of Section 451 that is of substantial consequence to the determination of the action: (a) If the trial court has been requested to take or has taken or proposes to take judicial notice of such matter, the court shall afford each party reasonable opportunity, before the jury is instructed or before the cause is submitted for decision by the court, to present to the court information relevant to (1) the propriety of taking judicial notice of the matter and (2) the tenor of the matter to be noticed."

[14] Fox filed two declarations in opposition to the motion; the first is that of Frank Ferguson, Fox's chief resident counsel. It alleges, in substance, that he has handled the negotiations surrounding the "Bloomer Girl" contract and its breach; that the offer to employ plaintiff in "Big Country" was made in good faith and that Fox would have produced the film if plaintiff had accepted; that by accepting the second offer plaintiff was not required to surrender any rights under the first (breached) contract nor would such acceptance have resulted in a modification of the first contract; that the compensation under the second contract was identical; that the terms and conditions of the employment were substantially the same and not inferior to the first; that the employment was in the same general line of work and comparable to that under the first contract; that plaintiff often makes pictures on location in various parts of the world; that article 2 of the original contract which provides that Fox is not required to use the artist's services is a standard provision in artists' contracts designed to negate any implied covenant that the film producer promises to play the artist in or produce the film; that it is not intended to be an advance waiver by the producer of the doctrine of mitigation of damages.

The second declaration is that of Richard Zanuck. It avers that he is Fox's vice president in charge of production; that he has final responsibility for casting decisions; that he is familiar with plaintiff's ability and previous artistic history; that the offer of employment for "Big Country" was in the same general line and comparable to that of "Bloomer Girl"; that plaintiff would not have suffered any detriment to her image or reputation by appearing in it; that elimination of director and script approval rights would not injure plaintiff; that plaintiff has appeared in dramatic and western roles previously and has not limited herself to musicals; and that Fox would have complied with the terms of its offer if plaintiff had accepted it.

PAUL WARTZMAN et al. v. HIGHTOWER PRODUCTIONS, LTD.

[No. 587,

September Term, 1982.]

Decided February 7, 1983.

The cause was argued before Moylan and Garrity, JJ., and James S. Getty, Chief Judge of the Fourth Judicial Circuit, specially assigned.

Mark D. Gately, with whom were James R. Eyler and Miles & Stockbridge on the brief, for appellants.

Leo Howard Lubow, with whom were Freishtat & Sandler on the brief, for appellee.

Getty, J.,

delivered the opinion of the Court.

Woody Hightower did not succeed in breaking the Guiness World Record for flagpole sitting; his failure to accomplish this seemingly nebulous feat, however, did generate protracted litigation. We are concerned here with whether Judge Robert L. Karwacki, presiding in the Superior Court of Baltimore City, correctly permitted a jury to consider the issue of "reliance damages” sustained by the appellees. Additionally, we are requested by the appellees, as cross-appellants, to determine if the trial court’s refusal to permit the jury to consider prejudgment interest is error.

Hightower Productions LTD. (appellees and cross-appellants) came into being in 1974 as a promotional venture conceived by Ira Adler, Frank Billitz and J. Daniel Quinn. The principals intended to employ a singer-entertainer who would live in a specially constructed mobile flagpole perch from April 1, 1975, until New Years Eve at which time he would descend in Times Square in New York before a nationwide television audience having established a new world record for flagpole sitting.

The young man selected to perform this feat was to be known as "Woody Hightower”. The venture was to be publicized by radio and television exposure, by adopting a theme song and by having the uncrowned champion make appearances from his perch throughout the country at concerts, state fairs and shopping centers.

In November, 1974, the three principals approached Michael Kaminkow of the law firm of Wartzman, Rombro, Rudd and Omansky, P.A., for the specific purpose of incorporating their venture. Mr. Kaminkow, a trial attorney, referred them to his partner, Paul Wartzman.

The three principals met with Mr. Wartzman at his home and reviewed the promotional scheme with him. They indicated that they needed to sell stock to the public in order to raise the $250,000 necessary to finance the project. Shortly thereafter, the law firm prepared and filed the articles of incorporation and Hightower Productions Ltd. came into existence on November 6, 1974. The Articles of Incorporation authorized the issuance of one million shares of stock of the par value of 100 per share, or a total of $100,000.00.

Following incorporation, the three principals began developing the project. With an initial investment of $20,000, they opened a corporate account at Maryland National Bank and an office in the Pikesville Plaza Building. Then began the search for "Woody Hightower”. After numerous interviews, twenty-three year old John Jordan emerged as "Woody Hightower”.

After selecting the flagpole tenant, the corporation then sought and obtained a company to construct the premises to house him. This consisted of a seven foot wide perch that was to include a bed, toilet, water, refrigerator and heat. The accommodations were atop an hydraulic lift system mounted upon a flat bed tractor trailer.

Hightower employed two public relations specialists to coordinate press and public relations efforts and to obtain major corporate backers. "Woody” received a proclamation from the Mayor and City Council of Baltimore and after a press breakfast at the Hilton Hotel on "All Fools Day” ascended his home in the sky.

Within ten days, Hightower obtained a live appearance for "Woody” on the Mike Douglas Show, and a commitment for an appearance on the Wonderama television program. The principals anticipated a "snow-balling” effect from commercial enterprises as the project progressed with no substantial monetary commitments for approximately six months.

Hightower raised $43,000.00 by selling stock in the corporation. Within two weeks of "Woody’s” ascension, another stockholders’ meeting was scheduled, because the corporation was low on funds. At that time, Mr. Wartzman informed the principals that no further stock could be sold, because the corporation was "structured wrong”, and it would be necessary to obtain the services of a securities attorney to correct the problem. Mr. Wartzman had acquired this information in a casual conversation with a friend who recommended that the corporation should consult with a securities specialist.

The problem was that the law firm had failed to prepare an offering memorandum and failed to assure that the corporation had made the required disclosures to prospective investors in accordance with the provisions of the Maryland Securities Act Article 32A. (The Act was repealed and re-enacted in 1975 as C A Sec. 11-101 to 11-805). Mr. Wartzman advised Hightower that the cost of the specialist would be between $10,000.00 and $15,000.00. Hightower asked the firm to pay for the required services and the request was rejected.

Hightower then employed substitute counsel and scheduled a shareholders’ meeting on April 28,1975. At that meeting, the stockholders were advised that Hightower was not in compliance with the securities laws; that $43,000.00, the amount investors had paid for issued stock, had to be covered by the promoters and placed in escrow; that the fee of a securities specialist would be $10,000.00 to $15,000.00 and that the additional work would require between six and eight weeks. In the interim, additional stock could not be sold, nor could "Woody” be exhibited across state lines. Faced with these problems, the shareholders decided to discontinue the entire project.

On October 8, 1975, Hightower filed suit alleging breach of contract and negligence for the law firm’s failure to have created a corporation authorized to raise the capital necessary to fund the venture. At the trial, Hightower introduced into evidence its obligations and expenditures incurred in reliance on the defendant law firm’s creation of a corporation authorized to raise the $250,000.00, necessary to fund the project. The development costs incurred included corporate obligations amounting to $155,339 including: initial investments by Adler and Billitz, $20,000; shareholders, excluding the three promoters, $43,010; outstanding liabilities exclusive of salaries, $58,929; liability to talent consultants, $25,000; and accrued salaries to employees, $8,400.

Individual liabilities to the three promoters, Adler, Billitz and Quinn, totaled $88,608, including loans to the corporation, $44,692; repayment of corporate debt to Maryland National Bank, $8,016; and loss of salaries, $36,000. The trial court disposed of the individual suit filed by the promoters, Adler, Billitz and Quinn and the cross complaint filed by the appellants. The only claim submitted for the jury’s consideration was the claim of the corporation, Hightower, against the defendant law firm.

The jury returned a verdict in favor of Hightower in the amount of $170,508.43. Wartzman, Rombro, Rudd and Omansky, P.A., appealed to this Court. Hightower filed a cross appeal alleging that the jury should have been permitted to consider prejudgment interest.

The appellants raise four issues for our consideration:

1. The trial court erred in permitting Hightower to recover "reliance damages” or "development costs”.

2. If "reliance damages” were recoverable, the trial court failed to properly instruct the jury on the law concerning their recovery.

3. The trial court erred in refusing to instruct the jury on the duty to mitigate damages.

4. The trial court erroneously permitted a member of the plaintiffs law firm to testify as a witness in the case.

Reliance Damages

The appellants first contend that the jury verdict included all of Hightower’s expenditures and obligations incurred during its existence resulting in the law firm being absolute surety for all costs incurred in a highly speculative venture. While they do not suggest the analogy, the appellants would no doubt equate the verdict as tantamount to holding the blacksmith liable for the value of the kingdom where the smith left out a nail in shoeing the king’s horse, because of which the shoe was lost, the horse was lost, the king was lost and the kingdom was lost. Appellants contend that there is a lack of nexus or causation between the alleged failure of Mr. Wartzman to discharge his duties as an attorney and the loss claimed by Hightower. Stated differently, an unjust result will obtain where a person performing a collateral service for a new venture will, upon failure to fully perform the service, be liable as full guarantor for all costs incurred by the enterprise.

Ordinarily, profits lost due to a breach of contract are recoverable. Where anticipated profits are too speculative to be determined, monies spent in part performance, in preparation for or in reliance on the contract are recoverable. 5 Corbin, Contracts, Sec. 1031, Restatement of Contracts, Sec. 333, cited with approval in Dialist Co. v. Pulford, 42 Md. App. 173 (1979).

In Dialist, supra, a distributor, Pulford, brought suit for breach of an exclusive contract that he had with Dialist. Pulford paid $2500.00 for the distributorship, terminated his employment with another company and expended funds in order to begin developing the area where the product was to be sold. When Pulford learned that another distributor was also given part of his territory he terminated his services.

This Court upheld the award of development costs to Pulford which included out of pocket expenses, telephone installation, office furniture, two months of forfeited salary and the value of medical insurance lost. The Court determined that the expenditures were not in preparation for or part performance of a contract, but in reliance upon it. "Such expenditures are not brought about by reason of the breach. They are induced by reliance on the contract itself and rendered worthless by its breach.” Id. at 181.

Recovery based upon reliance interest is not without limitation. If it can be shown that full performance would have resulted in a net loss, the plaintiff cannot escape the consequences of a bad bargain by falling back on his reliance interest. Where the breach has prevented an anticipated gain and made proof of loss difficult to ascertain, the injured party has a right to damages based upon his reliance interest, including expenditures made in preparation for performance, or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed. Restatement, Second, Contracts, Sec. 349, Holt v. United Security Life Ins. & Trust Co., 72 Atl. 301 (N.J.) (1909), In Re Yeager Company, 227 Fed. Supp. 92 (N.D. Ohio, E.D. 1963).

The appellants’ contention that permitting the jury to consider reliance damages in this case rendered the appellants’ insurers of the venture is without merit. Section 349 of the Restatement, cited above, expressly authorizes the breaching party to prove any loss that the injured party would have suffered had the contract been performed. Such proof would avoid making the breaching party a guarantor of the success of the venture.

As Judge Learned Hand stated in Albert & Son v. Armstrong Rubber Company, 178 F. 2d 182, (2d Cir. 1949),

"It is often very hard to learn what the value of the performance would have been; and it is a common expedient, and a just one, in such situations to put the peril of the answer upon that party who by his wrong has made the issue relevant to the rights of the other. On principle therefore the proper solution would seem to be that the promisee may recover his outlay in preparation for the performance, subject to the privilege of the promisor to reduce it by as much as he can show that the promisee would have lost if the contract had been performed.”

In the present case the appellants knew, or should have known, that the success of the venture rested upon the ability of Hightower to sell stock and secure advertising as public interest in the adventure accelerated. Appellants’ contention that their failure to properly incorporate Hightower was collateral and lacked the necessary nexus to permit consideration of reliance damages is not persuasive. The very life blood of the project depended on the corporation’s ability to sell stock to fund the promotion. This is the reason for the employment of the appellants. In reliance thereon, Hightower sold stock and incurred substantial obligations. When it could no longer sell its stock, the entire project failed. No greater nexus need be established. Aside from questioning the expertise of the promoters based upon their previous employment, the appellants were unable to establish that the stunt was doomed to fail. The inability to establish that financial chaos was inevitable does not make the appellants insurers and does not preclude Hightower from recovering reliance damages. The issue was properly submitted to the jury.

Appellants contend that the appellees should be limited to the recovery of damages under traditional contract and negligence concepts, citing Meyerberg, Sawyer and Rue v. Agee, 51 Md. App. 711, (1982).

Meyerberg, supra, involved a breach of contract action for certification of a title that was not marketable. The trial judge permitted the jury, in assessing damages, to consider:

1. Economic loss occasioned by increased costs of construction and financing.

2. Attorneys’ fees expended to establish access to the property.

3. Capital gains taxes paid for failure to purchase another property within the time limitations prescribed by law.

4. The amount of earned hazard insurance premium the appellees were required to purchase.

In affirming the decision of the trial court, this Court acknowledged that a contracting party is expected to take account of only those risks that are foreseeable at the time he makes the contract and is not liable in the event of breach for loss that he did not at the time of contracting have reason to foresee as a probable result of such a breach. This limitation is set forth in Restatement, Contracts, (2d), Sec. 351.

In Meyerberg, we noted that exceptional perception is not relevant to the test of foreseeability when applied to an attorney who is relied upon by a layman to protect his investment from pitfalls which are not readily apparent to those in foreign fields of endeavor.

Relying on Cochrane v. Little, 71 Md. 323, (1889) we further stated:

"A client who has employed an attorney has a right to his diligence, his knowledge and his skill; and whether he had not so much of these qualities as he was bound to have, or having them, neglected to employ them, the law properly makes him liable for the loss that has accrued to his employer.”

We find little solace for the appellants’ cause in the cases cited above.

The appellants are aggrieved by the amount of the verdict which they consider to be excessive. According to the docket entries, the appellants did not seek any modification of the verdict. It is difficult and arduous for this court to determine precisely the various costs that were presented for the jury’s consideration. Jury arguments were not transcribed and the court apparently gave limiting instructions and permitted counsel to argue specific development cost items. After reviewing nine hundred and seventy-five pages of testimony and a maze of exhibits, we note that in answer to interrogatories filed in October, 1981, corporate damages were stated to be $155,339.00. This figure included shareholders investments and accrued salaries amounting to $51,410. The court’s instructions precluded inclusion of these items as recoverable damages. It would appear, therefore, that the verdict may well have exceeded the guidelines set forth by the trial court. That issue is not before us, however, except that the appellants contend generally that reliance damages are improper in this case.

Instructions on Reliance Damages

Appellants’ primary exception to the court’s damage instruction relates to the failure to include suggested instruction 23b which states:

"You are instructed that you may not award any damages for unpaid expense of Hightower unless you find that these expenses were incurred by Hightower in justifiable reliance on the defendant’s causing Hightower to comply with the securities laws. If you find that the expenses were not incurred in reliance on the defendant’s performance, or if such reliance was not justified, then you may not award unpaid expenses as damages.”

The Court instructed the jury that in order to find liability that the plaintiff must prove three things:

"First, the employment of the defendants in behalf of the Plaintiff and the extent of the duties for which the Defendants were employed; secondly, that the Defendants neglected the duties undertaken in the employment and, thirdly, that such negligence resulted in and was the proximate cause of loss by the Plaintiff, that is that the Plaintiff was deprived of any right or parted with anything of value in reliance upon the negligence of the Defendants.”

The instruction given fairly apprised the jury of the Plaintiffs’ burden and adequately covered the reliance damage concept. Additionally, the court instructed the jury that they could not consider unpaid salaries due its officers or employees or amounts invested by stockholders as recoverable damages.

Appellants further object to the court’s refusal to grant its suggested instructions 23C and D designed to forbid recovery if the jury found that Hightower would not have been able to secure funds to remain in business regardless of the defendants’ breach. The instruction was properly refused. The very nature of reliance damages is that future gain cannot be measured with any reasonable degree of reliability. Had Hightower been able to show lost profits the theory of their right to recover may not have been development costs in reliance on the contract but loss based upon expectation interest instead. Appellants had the opportunity to minimize the recovery by showing that the venture could not succeed. This was difficult, but their failure to do so does not entitle them to an instruction that requires the jury to speculate on the ultimate success of the venture. We find no error in the instructions given by Judge Karwacki.

Duty to Mitigate Damages

Appellants further except to the trial court’s refusal to grant any instruction on the issue of Hightower’s obligation to mitigate its damages. The instruction offered by appellants is a correct statement of the law. Correctness alone, however, is insufficient to require the court to grant the prayer; there must be evidence to support the proposition to which it relates. Dorough v. Lockman, 224 Md. 168, (1961).

The evidence in this case establishes that Hightower did not have the $43,000.00 to place in escrow covering stock sold, did not have the $10,000.00 or $15,000.00 to employ a securities specialist and could not continue stock sales or exhibitions to obtain the necessary funds. Mr. Wartzman’s offer to set up an appointment for Hightower with an expert in security transactions at Hightower’s expense can hardly be construed as a mitigating device that Hightower was obligated to accept. The party who is in default may not mitigate his damages by showing that the other party could have reduced those damages by expending large amounts of money or incurring substantial obligations. Myerberg, supra. Since such risks arose because of the breach, they are to be borne by the defaulting party. 22 Am. Jur. 2d, Damages, Sec. 37, Griffin v. Bredouw, (Okla.), 420 Pac. 2d 546, (1966).

The doctrine of avoidable consequences, moreover, does not apply where both parties have an equal opportunity to mitigate damages. Appellants had the same opportunity to employ and pay a securities specialist as they contend Hightower should have done. They refused. Having rejected Hightower’s request to assume the costs of an additional attorney, they are estopped from asserting a failure by Hightower to reduce its loss. See D. Dobbs, Remedies, Sec. 37, (1973), 11 Williston, Contracts Sec. 1353, (1979).

There is no evidence in this case that the additional funds necessary to continue the operation pending a restructuring of the corporation were within the financial capabilities of Hightower. The Court properly declined to instruct the jury on the issue of mitigation.

Disqualification of Counsel

Appellants’ final contention relates to its motion to disqualify David Freishtat, a member of the firm representing Hightower, from acting as counsel in this case. The litigation was ongoing for more than four years before the motion was made which may well have caused additional delay and hardship if granted.

The basis of the motion was that the appellants intended to call Mr. Freishtat as a witness in a counter claim filed against the promoters of Hightower and this would prejudice the plaintiffs’ case.1 Appellants now contend that Mr. Freishtat’s testimony in the principal case, prejudiced the appellants. One cannot espouse one theory at trial and then resort to another alternative on appeal. Neither rule is applicable to the facts herein. Disciplinary Rule 5-101 permits a lawyer, to testify:

"(4) As to any matter, if refusal would work a substantial hardship on the client, because of the distinctive value of the lawyer or his firm as counsel in the particular case.”

Denial of appellants’ motion to disqualify rested in the sound discretion of the court and we discern no error.

Prejudgment Interest

Hightower, in its cross-appeal, alleges that the issue of pre-judgment interest should have been presented to the jury for its consideration. Applicable Maryland law provides that where a claim is for unliquidated damages, interest may run from the date of the judgment, but not before. Affiliated Distillers, 213 Md. 509, (1957), Taylor v. Wahby, 271 Md. 101, (1974).

The reliance damages sought in this case are not subject to pre-judgment valuation. "Reasonable and justified” damages incurred by reason of Mr. Wartzman’s representation of Hightower were not reasonably ascertainable until the jury rendered its verdict. Refusal to permit the jury to consider prejudgment interest, therefore, was not an abuse of discretion.

In conclusion, the final comment of Judge Lowe in Myerherg, supra, is equally apposite here.

"The unfortunate oversight on which this case was based was a costly one, but it was made by one who was hired precisely for the purpose of averting the consequent losses. It is he, and his firm, who must bear them.”

Judgment affirmed.

Costs assessed to appellants.

1

Mr. Freishtat was a witness, but not trial counsel in this litigation.

[639] Morris D. Rosen, Charleston, S. C. (George B. Bishop, Moncks Corner, S. C., on brief) for appellant.

[640] Herman H. Hamilton, Jr., Montgomery, Ala., and Ben Scott Whaley, Charleston, S. C. (Nathaniel L. Barnwell, Charleston, S. C., on brief) for appellees.

Before HAYNSWORTH, Chief Judge, BRYAN, Senior Circuit Judge, and CRAVEN, Circuit Judge.

CRAVEN, Circuit Judge:

May a subcontractor, who justifiably ceases work under a contract because of the prime contractor's breach, recover in quantum meruit the value of labor and equipment already furnished pursuant to the contract irrespective of whether he would have been entitled to recover in a suit on the contract? We think so, and, for reasons to be stated, the decision of the district court will be reversed.

The subcontractor, Coastal Steel Erectors, Inc., brought this action under the provisions of the Miller Act, 40 U.S.C.A. § 270a et seq., in the name of the United States against Algernon Blair, Inc., and its surety, United States Fidelity and Guaranty Company. Blair had entered a contract with the United States for the construction of a naval hospital in Charleston County, South Carolina. Blair had then contracted with Coastal to perform certain steel erection and supply certain equipment in conjunction with Blair's contract with the United States. Coastal commenced performance of its obligations, supplying its own cranes for handling and placing steel. Blair refused to pay for crane rental, maintaining that it was not obligated to do so under the subcontract. Because of Blair's failure to make payments for crane rental, and after completion of approximately 28 percent of the subcontract, Coastal terminated its performance. Blair then proceeded to complete the job with a new subcontractor. Coastal brought this action to recover for labor and equipment furnished.

The district court found that the subcontract required Blair to pay for crane use and that Blair's refusal to do so was such a material breach as to justify Coastal's terminating performance. This finding is not questioned on appeal. The court then found that under the contract the amount due Coastal, less what had already been paid, totaled approximately $37,000. Additionally, the court found Coastal would have lost more than $37,000 if it had completed performance. Holding that any amount due Coastal must be reduced by any loss it would have incurred by complete performance of the contract, the court denied recovery to Coastal. While the district court correctly stated the "`normal' rule of contract damages,"^[1] we think Coastal is entitled to recover in quantum meruit.^[2]

In United States for Use of Susi Contracting Co. v. Zara Contracting Co., 146 F.2d 606 (2d Cir. 1944), a Miller Act action, the court was faced with a situation similar to that involved here—the prime contractor had unjustifiably breached a subcontract after partial performance by the subcontractor. The court stated:

For it is an accepted principle of contract law, often applied in the case of construction contracts, that the promisee upon breach has the option to forego any suit on the contract and claim only the reasonable value of his performance.

146 F.2d at 610. The Tenth Circuit has also stated that the right to seek recovery under quantum meruit in a Miller [641] Act case is clear.^[3] Quantum meruit recovery is not limited to an action against the prime contractor but may also be brought against the Miller Act surety, as in this case.^[4] Further, that the complaint is not clear in regard to the theory of a plaintiff's recovery does not preclude recovery under quantum meruit. Narragansett Improvement Co. v. United States, 290 F.2d 577 (1st Cir. 1961). A plaintiff may join a claim for quantum meruit with a claim for damages from breach of contract.^[5]

In the present case, Coastal has, at its own expense, provided Blair with labor and the use of equipment. Blair, who breached the subcontract, has retained these benefits without having fully paid for them. On these facts, Coastal is entitled to restitution in quantum meruit.

The "restitution interest," involving a combination of unjust impoverishment with unjust gain, presents the strongest case for relief. If, following Aristotle, we regard the purpose of justice as the maintenance of an equilibrium of goods among members of society, the restitution interest presents twice as strong a claim to judicial intervention as the reliance interest, since if A not only causes B to lose one unit but appropriates that unit to himself, the resulting discrepancy between A and B is not one unit but two.

Fuller & Perdue, The Reliance Interest in Contract Damages, 46 Yale L.J. 52, 56 (1936).^[6]

The impact of quantum meruit is to allow a promisee to recover the value of services he gave to the defendant irrespective of whether he would have lost money on the contract and been unable to recover in a suit on the contract. Scaduto v. Orlando, 381 F.2d 587, 595 (2d Cir. 1967). The measure of recovery for quantum meruit is the reasonable value of the performance, Restatement of Contracts § 347 (1932); and recovery is undiminished by any loss which would have been incurred by complete performance. 12 Williston on Contracts § 1485, at 312 (3d ed. 1970). While the contract price may be evidence of reasonable value of the services, it does not measure the value of the performance or limit recovery.^[7] Rather, the standard for measuring the reasonable value of the services rendered is the amount for which such services could have been purchased from one in the plaintiff's position at the time and place the services were rendered.^[8]

[642] Since the district court has not yet accurately determined the reasonable value of the labor and equipment use furnished by Coastal to Blair, the case must be remanded for those findings.^[9] When the amount has been determined, judgment will be entered in favor of Coastal, less payments already made under the contract. Accordingly, for the reasons stated above, the decision of the district court is

Reversed and remanded with instructions.

[1] Fuller & Perdue, The Reliance Interest in Contract Damages, 46 Yale L.J. 52 (1936); Restatement of Contracts § 333 (1932).

[2] Where there is a distinction between federal and state substantive law, federal law controls in actions under the Miller Act. United States for Use and Benefit of Astro Cleaning & Packaging Co. v. Jamison Co., 425 F.2d 1281, 1282 n. 1 (6th Cir. 1970). But in this case the result would be the same, we think, under either state or federal law. Compare United States for Use of Susi Contracting Co. v. Zara Contracting Co., 146 F.2d 606 (2d Cir. 1944), with Gantt v. Morgan, 199 S.C. 138, 18 S.E.2d 672 (1942).

[3] Southern Painting Co. v. United States, 222 F.2d 431, 433 (10th Cir. 1955). See also Great Lakes Constr. Co. v. Republic Creosoting Co., 139 F.2d 456 (8th Cir. 1943) (dealing with a prior statute).

[4] Central Steel Erection Co. v. Will, 304 F.2d 548, 552 (9th Cir. 1962); Zara Contracting, 146 F.2d at 612. This is consistent with the liberal construction which is given to the Miller Act to effectuate its protective purposes. See United States ex rel. Sherman v. Carter, 353 U.S. 210, 216-217, 77 S.Ct. 793, 1 L.Ed.2d 776 (1957).

[5] North Am. Graphite Corp. v. Allan, 87 U.S.App.D.C. 154, 184 F.2d 387, 389 (1950); 12 Williston on Contracts § 1469, at 210 (3d ed. 1970).

[6] This case also comes within the requirements of the Restatements for recovery in quantum meruit. Restatement of Restitution § 107 (1937); Restatement of Contracts §§ 347-357 (1932).

[7]Scaduto v. Orlando, 381 F.2d 587, 595-596 (2d Cir. 1967); St. Paul-Mercury Indem. Co. v. United States ex rel. Jones, 238 F.2d 917, 924 (10th Cir. 1956); United States for Use of Susi Contracting Co. v. Zara Contracting Co., 146 F.2d 606, 610-611 (2d Cir. 1944).

It should be noted, however, that in suits for restitution there are many cases permitting the plaintiff to recover the value of benefits conferred on the defendant, even though this value exceeds that of the return performance promised by the defendant. In these cases it is no doubt felt that the defendant's breach should work a forfeiture of his right to retain the benefits of an advantageous bargain.

Fuller & Perdue, supra at 77.

[8] See United States for Use of F. E. Robinson Co. v. Alpha-Continental, 273 F.Supp. 758, 777 (E.D.N.C.1967), aff'd 404 F.2d 343 (4th Cir. 1968), and aff'd sub nom. Ling Elec., Inc. v. Federal Ins. Co., 406 F.2d 561 (4th Cir.), cert. denied, 395 U.S. 922, 89 S.Ct. 1774, 23 L.Ed.2d 239 (1969), and the cases cited in note 7, supra.

[9] Under the view of the case taken by the district court it was unnecessary to precisely appraise the value of services and materials rendered; an approximation was thought to suffice because the hypothetical loss had the contract been fully performed was greater in amount.

933 A.2d 382

BARRIE SCHOOL v. Andrew PATCH, et al.

No. 12,

Sept. Term, 2006.

Court of Appeals of Maryland.

Oct. 5, 2007.

Michael G. Campbell (Miller, Miller & Canby, Chtd., on brief), Rockville, for petitioner/cross-respondent.

Douglas V. Rigler, Arlington, VA, for respondents/cross-petitioners.

Argued before BELL, C.J. RAKER, WILNER *, CATHELL *, HARRELL, BATTAGLIA and GREENE, JJ.

*

Wilner and Cathell, JJ., now retired, participated in the hearing and conference of this case while active members of this Court; after being recalled pursuant to the Constitution, Article IV, Section 3A, they also participated in the decision and adoption of this opinion.

RAKER, J.

The primary question we must decide in this case is whether a non-breaching party to a contract has a duty to mitigate damages where the contract between the parties contains a valid liquidated damages clause. We shall answer that question in the negative and hold that a non-breaching party has no duty to mitigate damages where the parties agree to a valid liquidated sum in the event of a breach.

I.

Petitioner, The Barrie School, is a private, non-profit Montessori school located in Silver Spring, Maryland. Respondents, Andrew and Pamela Patch, are parents who enrolled their daughter, Christiana, in The Barrie School for the 2004-2005 academic year. The Patch’s entered into a re-enrollment agreement (the “Agreement”) with The Barrie School that contained a specific deadline for cancelling the Agreement. The Agreement stated that if respondents withdrew their child from The Barrie School after a specific date, respondents would pay tuition for the entire academic year as liquidated damages.

The Agreement provided for a $1,000.00 non-refundable deposit and payment of the remaining tuition balance of $13,490.00 in two installments. The Agreement contained an escape clause that allowed for unilateral cancellation, provided that the head of the school received written notice by certified letter before May 31, 2004. Under § 3 of the Agreement, respondents were obligated to pay the full tuition if they failed to meet the May 31, 2004 deadline for withdrawal. Section 3 of the Agreement provided as follows:

“I understand that unless the Student is withdrawn by written notice given by certified letter, return receipt requested, and received by the Head of School prior to May 31, 2004, I am liable for and agree to pay the entire year’s charges for the academic year, including expenses, as later defined, incurred by the School for collection. Withdrawal, dismissal, absences or illness of Student during the year do not release me from any portion of this obligation.”

The Patch’s did not cancel the Agreement on or before May 31, 2004.

On July 14, 2004, forty-four days after the withdrawal deadline noted in § 3 of the Agreement, the Patch’s sent a cancellation notice via facsimile to The Barrie School’s admissions office and demanded a refund of their initial deposit. Respondents refused to pay any of the remaining tuition balance to the school and enrolled Christiana in another school.

The Barrie School filed a breach of contract action against respondents in the District Court of Maryland, sitting in Montgomery County. The Barrie School sought the remaining tuition balance for the 2004-2005 academic year, plus 12% interest, and attorney’s fees. In their notice of intent to defend, respondents claimed that the Agreement had been procured by fraud, that it was a contract of adhesion, that the damages constituted a penalty, that The Barrie School had a duty to mitigate any damages, and that the Agreement was unenforceable because it violated public policy and Maryland’s anti-competition laws.1 Respondents also filed a counterclaim, seeking the return of their $1,000-00 deposit, interest, and attorney’s fees.

The case proceeded to trial before the District Court. Charles Shayler, the Chief Financial Officer of The Barrie School, testified for petitioner; Andrew and Pamela Patch testified on their own behalf. Respondents’ major argument at the close of evidence was that The Barrie School had a duty to mitigate its damages, notwithstanding the language of § 3 of the Agreement.

The District Court found that there was a valid contract between the parties, including a valid liquidated damages clause, that there was no fraud in the inducement to enter into the Agreement, and that the Agreement was not a contract of adhesion. Accordingly, the court denied respondents’ counterclaim. With respect to the liquidated damages clause, the court reasoned as follows:

“I am satisfied that it is a valid liquidated damages provision, that based on the testimony of Mr. Goss, that there was—it would have been next to impossible to assign an exact amount as to the impact of losing one child for the school year. And that in light of that, and the fact that A, it was agreed to by the parties, this was not a contract of adhesion, certainly as I understand a contract of adhesion to be. These people could simply have walked away from this. Their lives did not—did not depend on signing this contract. And that basing one year’s tuition or using one year’s tuition as the measure is certainly not unreasonable and in fact, Mr. Goss’ testimony was that it—probably the one year’s tuition probably represented less than the actual costs of educating the child at Barrie School. Okay, so I find the contract is okay, including the liquidated damages provision.”

The court next addressed respondents’ argument that, notwithstanding a valid liquidated damages clause, a non-breaching party has a duty to mitigate damages. The court concluded that The Barrie School’s failure to mitigate damages was fatal to its claim, reasoning as follows:

“There is obviously the issue that I was most concerned with, and that was the issue of what effect liquidated damages has on the general rule that a party in—Plaintiff in the face of a breach does have some duty to mitigate.

Even if the amount is difficult to determine, I don’t see why in the world they still shouldn’t do something to mitigate. And again, even if the tuition amount does not exactly hit the number, it sure comes close to it in terms of going toward making them whole.

And it’s unquestionable that they did absolutely nothing whatsoever to try to fill the space for this child once they got the word in July that she was—that she was not going to be there. They—they didn’t go through their old applications, they didn’t put out any advertisements. They did absolutely nothing. And I understand there is the black letter rule. But I think even black letter rules are subject to some exception, and I don’t see why, under the circumstances of this case, when they—even if it couldn’t exactly correspond to exact amount that they would have been harmed, they—again, could have done a lot to have helped themselves out, at least to the extent of the amount they’re suing for in this case. And that their failure to do so I do find to be fatal.

So for that reason I’m going to also grant a Defendants’ verdict on The Barrie School as Plaintiff.”

The court entered judgment in favor of respondents on The Barrie School claim.

The Barrie School noted a timely appeal to the Circuit Court for Montgomery County pursuant to Maryland Rule 7-102(b)(1).2 The question presented to the Circuit Court was as follows:

“Where the trial court finds that a private school tuition contract contains a valid liquidated damages clause, does the school have a duty to mitigate its damages by locating a new student after the parents breach the contract by withdrawing their child after an agreed deadline?”

Respondents noted a cross-appeal, arguing that the District Court committed error in (1) denying the fraudulent inducement claim, (2) finding that the liquidated damages clause did not constitute a penalty, and (3) denying portions of their discovery request as overly broad.

In a written opinion, the Circuit Court agreed with the District Court and held that even though the liquidated damages clause was valid and not a penalty, The Barrie School had a duty to mitigate damages. The court affirmed also the District Court holding that there was no fraud on The Barrie School’s part and found that the District Court did not err in denying portions of respondents’ discovery request. The Circuit Court stated as follows:

“The question is presented as to whether a party who is protected by a liquidated damages clause in a contract is excused of the normal contractual duty to mitigate its damages as a prerequisite to recovery. The court finds that such a duty does exist, notwithstanding the existence of a liquidated damages clause, and, thus, the District Court did not err as a matter of law in so finding. It is interesting to note that while no evidence of mitigation was presented, it would appear that mitigation had, in effect, already occurred when The Barrie School already enrolled more students than its budget projections called for.”

We granted The Barrie School’s petition for a writ of certiorari to this Court to address the following questions:

“(1) Is there a duty to mitigate damages in a breach of contract action where the trial court determines that the liquidated damages clause in the parties’ contract is valid and enforceable and is not a penalty?

“(2) Is it proper for a circuit court to consider new evidence and make new factual findings in an appeal heard on the record?”

We granted also respondents’ cross-petition to address the following questions:

“(1) May district and circuit courts deny discovery relating to the inducement, negotiation and formation of a contract containing a liquidated damages clause, on grounds that such discovery is ‘irrelevant’ in light of this court’s holding that a clause denominated as a liquidated damages clause, but, in fact, constituting a penalty is unenforceable?

“(2) When a contract provides an express provision that ‘ANY ALTERATIONS OR MODIFICATIONS TO THIS AGREEMENT WILL NOT BE ACCEPTED BY THE SCHOOL,’ may a court conclude, in the absence of contrary evidence, that the contract is not a contract of adhesion?

“(3) Having denied discovery relating to the inducement and formation of a contract on grounds that it is ‘irrelevant’ to an allegation of fraudulent or negligent inducement, may a court thereafter admit, over objection, and rely upon, hearsay evidence from the withholding party on the very same subject matter?”

Barrie School v. Patch, 392 Md. 724, 898 A.2d 1004 (2006).

II.

Before this Court, The Barrie School argues that a non-breaching party has no duty to mitigate damages where the parties have agreed to a valid liquidated sum in the event of breach. The school states that it is well settled that liquidated damages clauses are recognized and enforced in Maryland and that, when valid, such clauses do not require the injured party to reduce the agreed-upon amount by avoiding loss. The Barrie School contends also that the Circuit Court abused its discretion by making factual findings regarding projected school enrollment figures for the 2004-2005 academic year.3

Respondents do not appear to controvert petitioner’s argument that there exists a liquidated damages clause in the Agreement. Rather, respondents argue that the general law of contracts, ie., the general duty to mitigate damages in the event of a breach, applies to a contract containing a liquidated damages provision. Respondents argue that the purpose of a liquidated damages clause is “solely to agree on the amount of damages,” stating that “it does not have and should not have any effect on whether, avoidable damages should be mitigated.” In addition to their mitigation argument, respondents contend that The Barrie School suffered no actual damages from the breach because it enrolled more students than originally expected in the 2004-2005 enrollment projections. Respondents maintain also that the District Court erred in denying their discovery requests, that the Agreement was a contract of adhesion, and that they were entitled to recover their initial deposit because the Agreement was the product of fraudulent inducement and/or negligent misrepresentation.4

III.

Liquidated damages have been defined as a specific sum stipulated to and agreed upon by the parties at the time they entered into a contract, to be paid to compensate for injuries in the event of a breach of that contract. Board of Education v. Heister, 392 Md. 140, 155, 896 A.2d 342, 351 (2006) (stating that a liquidated damages clause is “a specific sum of money ... expressly stipulated by the parties to a ... contract as the amount of damages to be recovered by either party for a breach of the agreement by the other”). Whether a contract provision is a penalty or a valid liquidated damages clause is a question of law, reviewed de novo by this Court. Id. See also Hammaker v. Schleigh, 157 Md. 652, 667, 147 A. 790, 796 (1929).

Because respondents seek to set aside the bargained for contractual provision in the Agreement stipulating damages in the event of breach, respondents have the burden of proving that the clause should not be enforced. Placing the burden of proof on the challenger is consistent with giving the non-breaching party the advantage inherent in stipulated damages clauses, that of eliminating the need to prove damages, and with the general principle of Maryland law that assumes that bargains are enforceable and that the party asking the court to invalidate a bargain should demonstrate the justice of his or her view. See Dashiell v. Meeks, 396 Md. 149, 167, 913 A.2d 10, 20 (2006).

It has long been the rule in Maryland that valid liquidated damages provisions are enforceable. Our predecessors stated “the settled rule of law” with respect to liquidated damages as follows:

“[W]here the parties, at or before the time of the execution of the contract, agree upon and name a sum therein to be paid as liquidated damages, in lieu of anticipated damages which are in their nature uncertain and incapable of exact ascertainment, that the amount so named in the agreement will be regarded as liquidated damages and not as a penalty, unless the amount so agreed upon and inserted in the agreement be grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract. And whether it is excessive or whether the damages are incapable of exact ascertainment should be determined from the subject-matter of the contract considered in the light of all the surrounding facts and circumstances connected therewith and known to the parties at the time of its execution. That these questions should be considered and determined from the contract itself, its subject-matter and the surrounding facts and circumstances connected therewith with which the parties are confronted at the time of its execution, is made necessary in order to ascertain the intention of the parties, which is one of the essential factors in deciding whether the stipulation is for liquidated damages or is a penalty. It may afterwards be disclosed that the damages actually sustained are more or less than those anticipated at the time of the execution of the contract. If more, this fact would not characterize or stamp the stipulation as a penalty unless it was so exorbitant as to clearly show that such amount was not arrived at in a bona fide effort, made at or before the execution of the contract, to estimate the damages that might have been reasonably expected to result from a breach of it, and that it was named as a penalty for such breach. And on the other hand, if the amount stipulated was found to be inadequate, a greater amount could not be recovered for such breach, because of the agreement between the parties that the amount so named should be in lieu of the damages resulting therefrom.”

Balto. Bridge Co. v. United Rys. & Electric Co., 125 Md. 208, 214-15, 93 A. 420, 422-23 (1915). This Court has not strayed from the notion that, absent specific statutory provisions, the time of contract formation is the appropriate point from which to judge the reasonableness of a liquidated damages provision.

Writing for this Court, Judge Harrell elucidated more recently the elements of a liquidated damages provision, stating as follows:

“There are three essential elements of a valid and enforceable liquidated damages clause. First, such a clause must provide in clear and unambiguous terms for a certain sum. Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach. Thirdly, liquidated damage clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact. While the language used by the parties is instructive in determining the validity of a liquidated damages clause, the decisive element is the intention of the parties—whether they intended that the sum be a penalty or an agreed-upon amount as damages in case of a breach and this is to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.”

Heister, 392 Md. at 156, 896 A.2d at 352 (internal citations and quotations omitted).

Despite their general propriety, a clause purporting to provide liquidated damages will be deemed invalid as a penalty where the amount agreed upon is “grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such breach of the contract.” Balto. Bridge Co., 125 Md. at 215, 93 A. at 422. As Professor Williston has noted, “a liquidated damages provision will be held to violate public policy, and hence will not be enforced, when it is intended to punish, or has the effect of punishing, a party for breaching the contract, or when there is a large disparity between the amount payable under the provision and the actual damages likely to be caused by a breach, so that it in effect seeks to coerce performance of the underlying agreement by penalizing non-performance and making a breach prohibitively and unreasonably costly.” 24 Richard A. Lord, Williston on Contracts § 65:1, at 216-23 (4th ed.2002) (internal citations and footnotes omitted).

We have long recognized that “one of the most difficult and perplexing inquiries encountered in the construction of written agreements” is determining whether a contractual clause should be regarded as a valid and enforceable liquidated damages provision or as a penalty. Willson v. M. & C.C. of Baltimore, 83 Md. 203, 211, 34 A. 774, 775 (1896). Thus, “if there is doubt whether a contract provides for liquidated damages or a penalty, the provision will be construed as a penalty.” Goldman v. Conn. Gen. Life Ins. Co., 251 Md. 575, 581, 248 A.2d 154, 158 (1968).

Maryland courts will uphold a liquidated damages clause as valid, and not a penalty, if it satisfies two primary requirements. First, the clause must provide a fair estimate of potential damages at the time the parties entered into the contract. See Heister, 392 Md. at 157, 896 A.2d at 352; Goldman, 251 Md. at 582, 248 A.2d at 158; H.J. McGrath Co. v. Wisner, 189 Md. 260, 265, 55 A.2d 793, 795 (1947); Hammaker, 157 Md. at 667, 147 A. at 796; Balto. Bridge Co., 125 Md. at 214, 93 A. at 422. Second, the damages must have been incapable of estimation, or very difficult to estimate, at the time of contracting. See Heister, 392 Md. at 157, 896 A.2d at 352; Goldman, 251 Md. at 582, 248 A.2d at 158; Wisner, 189 Md. at 265, 55 A.2d at 795; Hammaker, 157 Md. at 667, 147 A. at 796; Balto. Bridge Co., 125 Md. at 214, 93 A. at 422.

As we have indicated, in the absence of a statute providing otherwise, Maryland courts determine the validity of a liquidated damages clause by looking to the stipulated loss at the time of the contract’s formation, and not actual losses resulting from breach.5 See Heister, 392 Md. at 158, 896 A.2d at 353 (stating that “whether the amount specified is a penalty or liquidated damages is to be determined as of the time of execution of the contract” (quoting Anne Arundel Co. v. Norair Engineering Corp., 275 Md. 480, 494, 341 A.2d 287, 294 (1975))); Hammaker, 157 Md. at 667, 147 A. at 796 (stating that in order for a “declared forfeit to become liquidated damages by interpretation, it must clearly appear that the amount named was reasonable compensation in fact at the time when the contract was made”).

In the case sub judice, the lower courts found correctly that § 3 of the Agreement was a valid liquidated damages clause and not a penalty. The sum in § 3 was a reasonable forecast of just compensation for potential harm caused by a breach of the Agreement. The damages contemplated in the Agreement were neither grossly excessive nor out of all proportion to those which might have been expected at the time of contracting.6 See Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 613 N.E.2d 183 (1993) (finding that a year’s tuition constitutes a reasonable liquidated sum for breach of a school enrollment contract); Wentworth Military Academy v. Marshall 225 Ark. 591, 283 S.W.2d 868 (1955) (same); Kentucky Military Institute v. Bramblet 158 Ky. 205, 164 S.W. 808 (1914) (same); Teeter v. Homer Military School 165 N.C. 564, 81 S.E. 767 (1914) (same).

The actual damages resulting from breach would have been very difficult to estimate at the time of contracting as well. The Barrie School’s Chief Financial Officer testified to this effect before the District Court, stating as follows:

“The budget’s developed in November and December of the preceding year, and reviewed and approved in January of the preceding year. We determine the total number of expenses, faculty and otherwise, to instruct our students, and we then, because we’re a non-profit and we try to have a balanced budget, we then determine what tuition level needs to be set, and the number of students to meet the revenue goal. So to parse out of that the effect of one student is very difficult.”

As the Circuit Court noted, “it would be next to impossible to assign an exact amount as to the impact of losing one child for the school year.” Section 3 of the Agreement constitutes a valid liquidated damages clause.

Respondents argue that there exists a duty to mitigate damages even in the face of a valid liquidated damages clause. Respondents would have us hold that there is such a duty because parties to a contract are required usually to minimize loss in the event of breach. In Circuit City v. Rockville Pike, 376 Md. 331, 829 A.2d 976 (2003), we addressed the concept of mitigation of damages, stating as follows:

“We have recognized generally that, when one party breaches a contract, the other party is required by the ‘avoidable consequences’ rule of damages to make all reasonable efforts to minimize the loss sustained from the breach and can charge the defending party only with such damages as, ‘with reasonable endeavors and expense and without risk of additional substantial loss or injury, he could not prevent.’ ”

Id. at 355, 829 A.2d at 990 (quoting Sergeant Co. v. Pickett, 285 Md. 186, 203, 401 A.2d 651, 660 (1979)). As we made clear in Circuit City, mitigation of damages helps to determine the proper amount of damages resulting from a breach of contract. In other words, it is part of the law of court-assessed damages.

Liquidated damages differ fundamentally from mitigation of damages. While mitigation is part of a court’s determination of actual damages that have resulted from a breach of contract, liquidated damages clauses are the remedy the parties to a contract have determined to be proper in the event of breach. Where the parties to a contract have included a reasonable sum that stipulates damages in the event of breach, that sum replaces any determination of actual loss. Professor Williston has explained this principle as follows:

“[0]ne purpose of a liquidated damages provision is to obviate the need for the nonbreaching party to prove actual damages. Thus, where the liquidated damages clause represents a reasonable attempt by the parties to agree in advance upon a sum that will compensate the nonbreacher for any harm caused by the breach, in lieu of the compensatory contract damage to which the nonbreacher would otherwise be entitled, the clause will be upheld.”

Lord, supra § 65:1, at 230 (internal citations and quotations omitted). See also 11 Arthur Linton Corbin, Corbin on Contracts § 1062, at 307 (interim ed.2002) (stating that a valid liquidation of damages makes other proof as to the amount of injury unnecessary). It follows naturally that once a court has determined that a liquidated damages clause is valid, it need not make further inquiries as to actual damages. This includes a determination of whether the parties attempted to mitigate damages resulting from breach.

Judge Richard Posner of the United States Court of Appeals for the Seventh Circuit noted the distinction between liquidated damages and the duty to mitigate in Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir.1985). That case involved a shipping contract in which one party to the contract failed to fulfill the terms of the agreement after market prices shifted. Although the court found that the contractual clause at issue was invalid as a penalty, the court nonetheless explained the distinction between mitigation of damages and liquidated damages, stating as follows:

“[M]itigation of damages is a doctrine of the law of court-assessed damages, while the point of a liquidated-damages clause is to substitute party assessment; and that point is blunted, and the certainty that liquidated-damages clauses are designed to give the process of assessing damages impaired, if a defendant can force the plaintiff to take less than the damages specified in the clause, on the ground that the plaintiff could have avoided some of them.”

Lake River Corp., 769 F.2d at 1291.

As Judge Posner noted in Lake River Corp., the purpose of § 3 of the Agreement would be “blunted” if The Barrie School were required to mitigate damages. The parties to the Agreement determined that a certain sum would be paid in order to avoid the necessity of determining actual damages that might have resulted from breach. As a necessary conclusion, § 3 of the Agreement was a comprehensive sum that eliminated the need to calculate actual losses, including any mitigation of damages that might have occurred. Maryland’s approach to liquidated damages supports this conclusion, as we view such clauses as “binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.” Heister, 392 Md. at 156, 896 A.2d at 352 (emphasis added) (internal citations and quotations omitted). Because mitigation of damages is part of a post-breach calculation of actual damages, in the absence of a statute mandating mitigation of damages, there exists no duty to mitigate damages where a valid liquidated damages clause exists.

Section 3 of the Agreement is a valid liquidated damages clause and not a penalty. Therefore, The Barrie School had no duty to mitigate damages and was entitled to the sum enumerated in § 3 of the Agreement.

Finally, in addition to arguing the duty to mitigate, respondents claim the defense of no-actual-harm. Respondents contend that because The Barrie School filled their daughter’s space and actually enrolled more students than anticipated originally, the school suffered no harm from its breach of the Agreement. We reject this defense in this context. The same rationale we rely on in rejecting the duty to mitigate in the face of a valid liquidated damages provision applies to the no-actual-harm defense. Such a defense negates the benefit of an agreed-upon or stipulated damages clause and deviates from our acceptance of the principle that the time of contract formation is the appropriate point from which to judge the reasonableness of a stipulated amount of damages. It would also breed uncertainty in the calculation of damages, because if we were to accept the no-actual-harm defense, why would courts not then give greater damages than contemplated when the damages actually exceeded the stipulated amount?

Courts around the country have addressed similar fact patterns and many have held that there is no duty to mitigate damages under these circumstances. See, e.g., Lake Ridge Academy, 66 Ohio St.3d 376, 613 N.E.2d 183; Wentworth Military Academy, 225 Ark. 591, 283 S.W.2d 868; Kentucky Military Institute, 158 Ky. 205, 164 S.W. 808; Horner Military School, 165 N.C. 564, 81 S.E. 767. In Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 613 N.E.2d 183, the Ohio Supreme Court considered whether a private school was entitled to a full year’s tuition, as stipulated within the enrollment contract, when the parent cancelled the contract after the agreed deadline. The court held that the parent had breached the contract and that the school was entitled to the full tuition as agreed upon in the contract. It noted that when the contract was formed, the damages that the school might suffer as a result of a breach by the parent were “uncertain as to amount and difficult of proof.” Id. at 188 (citation omitted). The court noted that the school goes through a long budgeting process, beginning in January and ending in the fall. The tuition money was pooled and went toward running the school, paying for such things as staff salaries and benefits, department budgets, student materials, maintenance, improvements, and utilities. The evidence presented at trial revealed that the school budget process is often an uncertain science and that the school would be unable to calculate and prove the precise damages caused by the loss of one student’s tuition.

The court in Lake Ridge Academy concluded that the stipulated damages in the enrollment contract constituted a valid liquidated damages clause and that the contract was not one of adhesion. Accordingly, the court rejected the parents’ argument that the school had a duty to mitigate its damages after it received notice of cancellation, noting as follows:

“A valid liquidated damages clause contemplates the non-breaching party’s inability to identify and mitigate its damages. If damages are ‘uncertain as to amount and difficult of proof,’ as they must be, the nonbreacher cannot be expected to reduce them after a breach. As a matter of law, because the liquidated damages clause is valid, Lake Ridge did not have a duty to mitigate its damages following Carney’s breach.”

Id. at 190.

IV.

We address respondents’ remaining contentions. Respondents argue that the Agreement was a contract of adhesion because it specified, in bold, capital letters that “ANY ALTERATIONS OR MODIFICATIONS TO THIS AGREEMENT WILL NOT BE ACCEPTED BY THE SCHOOL.” Respondents reason that because there was a gross inequity of bargaining power and The Barrie School imposed a liquidated damages provision in the Agreement, the provision was unenforceable. Both lower courts found that the Agreement was not a contract of adhesion. We agree with the lower courts.

We note that a contract of adhesion is not void per se. Walther v. Sovereign Bank, 386 Md. 412, 430, 872 A.2d 735, 746 (2005). A court will find a contract of adhesion unenforceable only if it is unconscionable. Id. In the instant case, the Agreement was neither a contract of adhesion nor unconscionable. An unconscionable contract involves extreme unfairness, “made evident by (1) one party’s lack of meaningful choice, and (2) contractual terms that unreasonably favor the other party.” Id. at 426, 872 A.2d at 743 (internal citations and quotations omitted). Respondents were not forced to enroll their child at The Barrie School. Moreover, the “escape clause” was put into the Agreement for the benefit of respondents. If respondents did not want to enroll their child at the school, all they needed to do was to notify school officials before May 31, 2004, and they would have incurred no financial liability. But for that provision respondents would have been bound to the Agreement without any opportunity for a refund. Respondents have not established that they had no choice but to enroll their child at The Barrie School, and the record does not suggest that the Agreement was anything but an arm’s-length business transaction. Therefore, we conclude that the District Court did not err in concluding that the Agreement was not a contract of adhesion.

Respondents contend also that they were induced to enter into the Agreement because of fraud on the part of The Barrie School. To prove fraud or deceit, a plaintiff must demonstrate that a false representation was made knowingly or recklessly, and that the misrepresentation was made for the purpose of defrauding. Ellerin v. Fairfax Savings, F.S.B., 337 Md. 216, 229, 652 A.2d 1117, 1123 (1995). The plaintiff must demonstrate further that he or she relied on the misrepresentation of the defendant and suffered a compensable injury. Id.

Maryland Rule 8-131 (c) makes clear that, where an action is tried without a jury, an appellate court “will not set aside the judgment of the trial court on the evidence unless clearly erroneous, and will give due regard to the opportunity of the trial court to judge the credibility of the witnesses.” The District Court judge concluded that there was no fraud in the inducement, stating as follows:

“I find that the contract that was entered into between the Patch’s and Barrie School was a valid contract. I don’t find that there was any fraudulent behavior on the part of people at The Barrie School. There may have been some misinformation passed along, may have been—at best it was misinformation. It was not intended to sucker or deceive.”

The finding of the trial court is not clearly erroneous. The District Court judge was in the best position to judge the credibility of the witnesses, weigh the evidence, and make factual determinations. We will not disturb those findings.

Finally, respondents contend that the District Court abused its discretion in denying certain portions of their discovery requests. It is well settled in Maryland that trial judges are vested with broad discretion with respect to discovery matters, and that discovery rulings will not be disturbed in the absence of an abuse of discretion. See Ehrlich v. Grove, 396 Md. 550, 560, 914 A.2d 783, 790 (2007). The District Court determined that portions of respondents’ discovery requests were overly broad. Nothing in the record would lead us to conclude that the District Court’s determination on this matter constituted an abuse of discretion. The District Court committed no error in denying portions of respondents’ discovery requests.

JUDGMENT OF THE CIRCUIT COURT FOR MONTGOMERY COUNTY REVERSED. CASE REMANDED TO THAT COURT WITH INSTRUCTIONS TO REMAND THE CASE TO THE DISTRICT COURT TO RENDER JUDGMENT CONSISTENT WITH THIS OPINION. COSTS IN THIS COURT AND THE CIRCUIT COURT TO BE PAID BY RESPONDENTS.

BELL, C.J., Dissents.

1

Based on the record from the District Court proceedings, it appears that respondents abandoned this final claim.

2

Maryland Rule 7-101 et seq., authorizes appeals from the District Court to the Circuit Court. Rule 7-102(b)(l) provides, in pertinent part, as follows:

"(b) On the record. An appeal shall be heard on the record made in the District Court in the following cases:

(1) a civil action in which the amount in controversy exceeds $5,000 exclusive of interest, costs, and attorney's fees if attorney's fees are recoverable by law or contract....”

3

Because we find that The Barrie School had no duty to mitigate damages, we do not address this argument.

4

Respondents did not raise the issue of negligent misrepresentation before the District Court, and for this reason, we do not address the claim here. See Maryland Rule 8-131(a) (stating that "[o]rdinarily, the appellate court will not decide any other issue unless it plainly appears by the record to have been raised in or decided by the trial court”).

5

For statutory provisions providing otherwise, see, for example, the Uniform Commercial Code § 2-718(1) and the corresponding Maryland provision applying to the sale of goods, Md.Code (1975, 2002 Repl. VoL), § 2-718(1) of the Commercial Law Article (stating that damages "may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach”), Md.Code (1975, 2005 Repl.Vol.), § 14-1106(c) of the Commercial Law Article (noting that under Maryland’s laws governing layaway sales, the seller may “retain as liquidated damages an amount not to exceed 10 percent of the layaway price or the total amount paid by the buyer to the date of default, whichever is less”), Md.Code (1975, 2005 Repl.Vol.), § 22-804(a) of the Commercial Law Article (noting that under the Maryland Uniform Computer Information Act, damages for breach of contract may be liquidated by either party in an amount that is reasonable in light of anticipated loss, actual loss, or actual or anticipated difficulties of proving loss in the event of breach), and Md.Code (1973, 2006 Repl.Vol.), § 10-410(a)(1) of the Courts and Judicial Proceedings Article (noting that any person whose wire, oral, or electronic communications are used in violation of that subtitle is entitled to "[a]ctual damages but not less than liquidated damages computed at the rate of $100 a day for each day of violation or $1,000, whichever is higher”).

6

We do not address the enforceability of specific contractual provisions related to liability for school tuition and related charges in the event of nonattendance under circumstances related to serious illness, military transfers, and the like.

BELL, C.J.

The Majority, agreeing that the liquidated damages clause embodied in § 3 of the re-enrollment agreement (“the Agreement”) between the appellant, The Barrie School (“the School”), and the appellees, Mr. and Mrs. Patch (“the Patches”), and on which the trial courts relied, is valid, reverses the judgment of the Circuit Court for Montgomery County because it concludes that where the liquidated damages clause is valid, there is no duty to mitigate. Barrie School v. Patch, 401 Md. 497, 512-13, 933 A.2d 382, 391-92 (2007). I disagree. I am troubled by the result reached by the Majority, as it undermines basic principles of contract law pertaining to the equity and reasonableness of contract remedies.

It is a long-held, and well-settled, general principle of contract law that contract remedies are to be compensatory, not punitive. Restatement (Second) of Contracts § 356, comment a (1981) (stating that “the central objective behind the system of contract remedies is compensatory, not punitive”). See 24 Richard A. Lord, Williston On Contracts § 65:1, pp. 213-15 (4th ed.2002) (noting that agreements pertaining to “the amount of damages recoverable ... will generally [be] enforced ... so long as the amount is not unconscionable, is not determined to be an illegal penalty, and is not otherwise violative of public policy.”); 11 Joseph M. Perillo, Corbin on Contracts, § 58.1, p. 396 (2006) (recognizing “the traditional equitable doctrine of unconscionability ... as a foundation for the rule against the enforcement of contractual penalties”). Liquidated damages provisions are not immune to this general rule. John Cowan, Inc. v. Meyer, 125 Md. 450, 462-63, 94 A. 18, 21 (1915). See 8 Maryland Law Encyclopedia, Damages § 51, pp. 104-105 (2001) (“In determining the scope of a provision in a contract for liquidated damages, it will be interpreted according to the rules applicable to contracts generally”).

This Court has defined liquidated damages as a “specific sum of money ... expressly stipulated by the parties to a ... contract as the amount of damages to be recovered by either party for a breach of the agreement by the other.” Traylor v. Grafton, 273 Md. 649, 661, 332 A.2d 651, 660 (1975), citing Massachusetts Indem. Life Ins. Co. v. Dresser, 269 Md. 364, 368, 306 A.2d 213, 216 (1973); Board of Education of Talbot County v. Heister, 392 Md. 140, 156, 896 A.2d 342, 352 (2006). More particularly, we have held that a liquidated damages clause is “an agree[d] upon and name[d] sum ... in lieu of anticipated damages which are in their nature uncertain and incapable of exact ascertainment.” Baltimore Bridge Co. v. United Railways & Electric Co., 125 Md. 208, 214, 93 A. 420, 422 (1915). Accord Anne Arundel County v. Norair Eng’g Corp., 275 Md. 480, 492, 341 A.2d 287, 293 (1975). Accord United Cable Television of Baltimore Ltd. v. Burch, 354 Md. 658, 674, 732 A.2d 887, 896 (1999). Such a clause will be upheld “unless the amount so agreed upon and inserted in the agreement be grossly excessive and out of all proportion to the damages that might reasonably have been expected to result from such a breach of contract.” Id.1 Furthermore, “the surrounding facts and circumstances connected therewith with which the parties are confronted at the time of [a contract’s] execution” should be considered “in order to ascertain the intention of the parties, which is one of the essential factors in deciding whether the stipulation is for liquidated damages or is a penalty.” Id.

Thus, the purpose of a liquidated damages clause is to establish a fixed sum as the amount of damages for a breach of contract as to which damages cannot be ascertained easily. It does not follow, however, that merely because a contract contains a liquidated damages clause, which facially is not punitive, upon breach, damages in the amount stipulated automatically will be awarded to the nonbreaching party. Even the Majority recognizes and correctly points out, “that one of the most difficult and perplexing inquiries encountered in the construction of written agreements is determining whether a contractual clause should be regarded as a valid and enforceable liquidated damages provision or as a penalty[,] ... and that if there is doubt whether a contract provides for a liquidated damages or penalty, the provision will be construed as a penalty.” 401 Md. at 510, 933 A.2d at 390 (internal quotations and citations omitted). Before there will be an award of liquidated damages, then, it must be determined whether the clause is valid.

Integral to the inquiry into the validity of a liquidated damages clause is determining whether the clause is fair and reasonable. The vantage point from which that determination is made is critical to, and may be dispositive of, that inquiry. The Majority maintains that “the time of the contract formation is the appropriate point from which to judge the reasonableness of a liquidated damages provision.” 401 Md. 497, 509, 933 A.2d 382, 389. Focusing exclusively on this “prospective view”2 leads the Majority to the conclusion it reaches.

There is another “view,” however. Because the validity of a liquidated damages does not become an issue until one of the parties breaches the contract to which it relates, it follows, logically, that the review of a liquidated damages clause to determine whether it is a penalty should include the effect of the breach, at the least, whether actual damage have been incurred. Commenting on this “retrospective view,” the first Restatement of Contracts noted:

“If the parties [to an agreement] honestly but mistakenly suppose that a breach will cause harm that will be incapable or very difficult of accurate estimation, when in fact the breach causes no harm at all or none that is incapable of accurate estimation without difficulty, their advance agreement fixing the amount to be paid as damages for the breach ... is not enforceable.”

§ 339 at comment e (emphasis added). The second Restatement is to like effect, stating:

“[T]wo factors combine in determining whether an amount of money fixed as damages is so unreasonably large as to be a penalty. The first factor is the anticipated or actual loss caused by the breach . . . . The second factor is the difficulty of proof of loss . . . . If the difficulty of proof of loss is great, considerable latitude is allowed in that approximation of anticipated or actual harm. If, on the other hand, the difficulty of proof of loss is slight, less latitude if allowed in that approximation. If, to take an extreme case, it is clear that no loss at all has occurred, a provision fixing a substantial sum as damages is unenforceable.”

§ 356 at comment b (emphasis added). See Mattingly Bridge Co., Inc. v. Holloway & Son Const. Co., 694 S.W.2d 702, 705 (Ky.1985), in which the Supreme Court of Kentucky, adopting Restatement (Second) Contracts § 356(1) (1981) “as a reasonable expression of the rule applicable to liquidated damages”3 acknowledged that liquidated damages clauses are “useful commercial tool[s] to avoid litigation to determine actual damages,” subject, however, to two restrictions: “they should be used only (1) where the actual damages sustained from a breach of contract would be very difficult to ascertain and (2) where, after the breach occurs, it appears that the amount fixed as liquidated damages is not grossly disproportionate to the damages actually sustained.” (emphasis added). As articulated further by Professor Corbin:

“The probable injury that the parties had reason to foresee is a fact that largely determines the question whether they made a genuine pre-estimate of that injury, but the justice and equity of enforcement depend also upon the amount of injury that has actually occurred.... It is to be observed that hindsight is frequently better than foresight, and that, in passing judgment upon the honesty and genuineness of the pre-estimate made by the parties, the court cannot help but be influenced by its knowledge of subsequent events.”

Corbin on Contracts, Vol. 11, § 58.11 at pp. 457-58 (emphasis added).

The viability of a liquidated damages clause, thus, does not depend solely on the fixed amount for which the parties contracted; rather, all of the surrounding circumstances are important, those existing at the time of contracting, as well as those existing at the time of the breach, and they include consideration of the actual damages sustained. See Baybank Middlesex v. 1200 Beacon Props., Inc., 760 F.Supp. 957, 964 (D.Mass.1991) (“In order to determine whether the liquidated damages provision is valid, this Court must examine the reasonableness of the liquidated damages provision, both retrospectively, and at the time the parties agreed to it.”) (emphasis added); Independent Sch. Dist. v. Dudley, 195 Iowa 398, 192 N.W. 261, 263 (Iowa 1923) (“[T]he tendency of the courts in recent years has been to look into all the circumstances and give effect to such an agreement only so far as equity and good conscience will permit, and if the sum stipulated is out of reasonable proportion to the loss or injury actually sustained ... it will be treated as a penalty only.”); Lake Ridge Academy v. Carney, 66 Ohio St.3d 376, 613 N.E.2d 183, 188 (1993) (“[W]hen a stipulated damages provision is challenged, the court must step back and examine it in light of what the parties knew at the time the contract was formed and in light of an estimate of the actual damages caused by the breach.”) (emphasis added). This is, in my view, the only way in which to be completely fair to both parties.

In the case sub judice, there is no doubt that the Patches breached their Agreement with the School. On the other hand, the record indicates that the School did not suffer harm commensurate to the sum fixed as liquidated damages. While the Patches’ daughter did not attend the School, it is undisputed that the School met its enrollment projections for that year; there was “no empty desk” for which budgetary projections were made, yet not realized.4 Looking at the provision retrospectively, it is clear that the School should not be awarded a full year’s tuition, as this amount is grossly disproportionate to, and in excess of, the harm it actually suffered. See In re Dow Corning Corp., 419 F.3d 543, 549-50 (6th Cir.2005) (stating that “if the liquidated damages are disproportionate to actual damages, the [liquidated damages] clause will not be enforced and recovery will be limited to the actual damages proven”); Northwest Fixture Co. v. Kilbourne & Clark Co., 128 F. 256, 261 (9th Cir.1904) (noting that “where the sum named in the contract to be paid on a breach thereof is evidently wholly disproportionate to the damage actually sustained, or where it is shown that no actual damage has been sustained by the breach, the courts will deem the parties to have intended to stipulate for a mere penalty to secure performance.”); Days Inns Worldwide v. Mandir, Inc., 393 F.Supp.2d 1240, 1249 (W.D.Okla.2005) (asserting that a “liquidated damages provision in a contract will be considered a penalty, and therefore unenforceable, if the amount provided for in the provision is ‘manifestly disproportionate’ to the amount of actual damages suffered.”); Wirth & Hamid Fair Booking v. Wirth, 265 N.Y. 214, 192 N.E. 297, 301 (1934) (stating that liquidated damages “must bear reasonable proportion to the actual loss”).

This conclusion is not inconsistent with the holding in Lake Ridge Academy v. Carney, supra, on which the Majority relies. The Majority cites Lake Ridge for the proposition that “a year’s tuition constitutes a reasonable liquidated sum for breach of a school enrollment contract.” 401 Md. at 512, 933 A.2d at 391.5 Moreover, it states that the liquidated damage amount “was a reasonable forecast of just compensation for potential harm caused by a breach of the Agreement. The damages contemplated in the Agreement were neither grossly excessive nor out of all proportion to those which might have been expected at the time of contracting.” Id. While perhaps correct about the reasonableness of the School’s estimate when the contract was executed,6 the Majority does not consider, or even take into account, the actual damages sustained by the School. See Shallow Brook Associates v. Dube, 135 N.H. 40, 599 A.2d 132, 137-38 (1991) (recognizing that a liquidated damages clause will not be enforced if the actual damages which occurs at the time of breach can easily be established and are substantially lower than the amount stipulated, even if the fixed sum was a reasonable estimate at the time of contract execution). See also, 24 Williston On Contracts § 65:17 at p. 304 (“[A] court may consider the damages actually sustained following the breach in evaluating the reasonableness of the estimate, reasoning that a substantial disparity between the amount agreed to as stipulated damages and the actual damages suffered may tend to show that the amount chosen was in fact unreasonable at the time of contracting.”).

In Lake Ridge, premised on the fact that “the school budget process is often an uncertain science [and that] Lake Ridge would be unable to calculate and prove the precise damages caused by the loss of one student’s tuition,” 613 N.E.2d at 188-89, the Ohio Supreme Court held that “the parent had breached the contract and the school was entitled to the full tuition as agreed upon in the contract.” 401 Md. 497, 515, 933 A.2d 382, 393. The Lake Ridge court elucidated:

“[T]he contract as a whole [is not] unreasonable. The headmaster testified that August 1 was chosen as the day before which notice of cancellation had to be given simply because the school had to know in order to meet its financial commitments. Carney had almost five months after he signed the contract to decide whether to cancel it. Because Lake Ridge’s financial commitments became more firm as the school year approached, it is reasonable to assume that by August 1 the school was relying on Carney’s full tuition payment.

“Finally, damages in the amount of the full tuition are not disproportionate to the actual damages suffered by Lake Ridge. Because by August 1 the Lake Ridge budget was nearly finalized and it assumed revenues which included Carney’s full tuition, it is not unreasonable to conclude that Lake Ridge’s actual damages were the equivalent of one full tuition. The headmaster testified that if Lake Ridge enjoyed any savings from Michael Carney’s withdrawal, they were ‘minuscule.’ While we cannot say that Lake Ridge’s actual damages were exactly equivalent to full tuition, we can say with conviction that full tuition is not disproportionate to the school’s actual damages.”

613 N.E.2d at 189 (emphasis in original). In Lake Ridge, the court focused on the actual damages the school suffered, in addition to the prospective damages on which the parties agreed as of the time of making the contract. Although it found the liquidated damages clause to be valid and, thus, compelled the parents to pay the agreed year’s tuition, it did so because the school, in the court’s view, suffered damages proportionate to the stipulated damages.

In the case sub judice, on the other hand and as stated earlier, the School had already met its enrollment projections when the 2004-2005 school year commenced. Thus, it logically follows, and in the instant case there is no evidence to the contrary,7 that the School, unlike Lake Ridge Academy, was not “relying” on, in the same way that Lake Ridge Academy was, the Patches’ tuition payment for any of its financial commitments.

Moreover, unlike the withdrawal of the student in Lake Ridge, which was just a week before commencement of the term, albeit after the specified deadline, the Patches withdrew their daughter five weeks prior to the beginning of the school term. Whether this difference matters really is the question that must be answered. To answer that question, we, like the Lake Ridge court, must examine the actual damages suffered by the School. When that is done, it is my opinion that this Court simply will not be able to say, with conviction, that the “liquidated damages,” the stipulated sum of a full year’s tuition, is in proportion to the actual damages suffered by the School. Indeed, the facts found by the District Court indicate that the School was not harmed by the Patches’ late withdrawal of their daughter. Therefore, I believe that giving the School the relief it seeks would result in a windfall for it, i.e., the School would be doubly compensated. See JKC Holding Co. v. Washington Sports Ventures, Inc., 264 F.3d 459, 468 (4th Cir.2001) (“Liquidated damages provisions are based on the principle of just compensation and may not be used to reap a windfall or to secure performance by the compulsion of disproportion.”) (citation omitted); Lake River Corp. v. Carborundum Co., 769 F.2d 1284, 1290 (7th Cir.1985) (where damage formula was designed always to assure nonbreaching party more than its actual damages, the court, calling the effect of the clause “a huge windfall,” found the clause to be a penalty, rather than a liquidation of damages). See also Priebe & Sons v. U.S., 332 U.S. 407, 418, 68 S.Ct. 123, 129, 92 L.Ed. 32 (1947) (Frankfurter, J., dissenting) (“The essence of the law’s remedy for breach of contract is that he who has suffered from a breach should be duly compensated for the loss incurred by non-performance. But one man’s default should not lead to another man’s unjust enrichment.”). See e.g. Northwest Fixture Co. v. Kilbourne & Clark Co., 128 F. at 261 (stating that “no provision in a contract for the payment of a fixed sum as damages, whether stipulated for as a penalty or as liquidated damages, will be enforced in a case where the court can see that no damages have been sustained”); Norwalk Door Closer Co. v. Eagle Lock & Screw Co., 153 Conn. 681, 220 A.2d 263, 268 (1966), quoting The Colombia, 197 F. 661, 664 (S.D.Ala.1912) (same): Wood v. Niagara Falls Paper Co., 121 F. 818, 819(2d Cir.1903) (noting that “when it is made to appear in an action for [a] breach that no actual damages have arisen, notwithstanding the parties have agreed upon stipulated damages, the party in default is entitled to be relieved”); Radloff v. Haase, 196 Ill. 365, 63 N.E. 729, 730 (1902) (holding that, when the plaintiff suffered no injury, the stipulated damages are a penalty, not liquidated damages); Crawford v. Allen, 189 N.C. 434, 127 S.E. 521, 525 (1925) (stating that “[a] court of equity, which does not favor forfeitures, and will not enforce penalties, but seeks to do justice in accordance with the rights of both parties, as determined by an enlightened conscience, will not be swift to sustain an undertaking to pay liquidated damages, where there has been no injury and no loss.”).

The Majority rejects “no-actual-harm” as a defense. It argues that “[s]uch a defense negates the benefit of an agreed-upon or stipulated damages clause[.]” 401 Md. 497, 515, 933 A.2d 382, 393. The Majority also believes that “[i]t would also breed uncertainty in the calculation of damages, because if we were to accept the no-actual-harm defense, why would courts not then give greater damages than contemplated when the damages actually exceeded the stipulated amount?” Id. This view is not supported by the precedent on which the Majority itself relies. In Baltimore Bridge, this Court opined:

“It may afterwards be disclosed that the damages actually sustained are more or less than those anticipated at the time of the execution of the contract. If less, this fact would not characterize or stamp the stipulation as a penalty unless it was so exorbitant as to clearly show that such amount was not aimed at in a bona fide effort, made at or before the execution of the contract, to estimate the damages that might have been reasonably expected to result from a breach of it, and that it was named as a penalty for such breach. And, on the other hand, if the amount stipulated was found to be inadequate, a greater amount could not be recovered for such breach, because of the agreement between the parties that the amount so named should be in lieu of the damages resulting therefrom.”

125 Md. at 215, 93 A. at 422-23. This is consistent with my position and with principles of fairness and equity; liquidated damages clauses limit recovery where the actual damages suffered are greater, while yet allowing exorbitant, excessive sums to be challenged. This is not at all contrary to the purpose of such clauses.

To be sure, the School is entitled to compensation for any and all damages it suffered as a result of the contract breach. When, however, considered retrospectively, it is determined that the School’s recovery will be excessive, the liquidated damages clause that provides for that recovery is invalid and unenforceable. That simply means that the School will have to prove its actual damages as it would in any breach of contract action and will be required, moreover, to mitigate its damages, if the circumstances make that appropriate.

The purpose of imposing a duty to mitigate damages is to “encourag[e] the injured party to attempt to avoid loss.” Restatement (Second) of Contracts § 350 at comment a. This Court has held, in accordance with this general “avoidable consequences” rule of damages, that “the ordinary rule with respect to minimization of damages ... [is] that ‘damages are not recoverable if the consequences of a breach are avoidable. In other words, a plaintiff is not entitled to a judgment for damages for a loss that he could have avoided by a reasonable effort without risk of additional loss or injury.’ ” Sergeant Co. v. Pickett, 285 Md. 186, 191-92, 401 A.2d 651, 654 (1979) quoting M & R Contractors & Builders v. Michael, 215 Md. 340, 354-55, 138 A.2d 350, 358 (1958); Circuit City Stores, Inc. v. Rockville Pike Joint Venture Ltd. Partnership, 376 Md. 331, 355-56, 829 A.2d 976, 990 (2003).

I am aware of the relationship between the mitigation of damages and liquidated damages clauses, and, indeed, do not dispute that, as the Majority notes, “[liquidated damages differ fundamentally from mitigation of damages.” 401 Md. at 513, 933 A.2d at 392. As to “the difference” between these two concepts, the Majority states:

“While mitigation is part of a court’s determination of actual damages that have resulted from a breach of contract, liquidated damages is the remedy the parties to a contract have determined to be proper in the event of a breach. Where the parties to a contract have included a reasonable sum that stipulates damages in the event of breach, that sum replaces any determination of actual loss.... It follows naturally that once a court has determined that a liquidated damages clause is valid, it need not make further inquiries as to actual damages. This includes a determination of whether the parties attempted to mitigate damages resulting from breach.”

Id. (Internal quotations and citations omitted) (emphasis added). Thus, relying on Lake River Corp. v. Carborundum Co., 769 F.2d 1284 (7th Cir.1985), it reasons, relevant to the case sub judice:

“[T]he purpose of § 3 of the Agreement would be blunted if The Barrie School were required to mitigate damages. The parties to the contract determined that a certain sum would be paid in order to avoid the necessity of determining actual damages that might have resulted from breach. As a necessary conclusion, § 3 of the Agreement was a comprehensive sum that eliminated the need to calculate actual losses, including any mitigation of damages that might have occurred---- Because mitigation of damages is part of a post-breach calculation of actual damages, in the absence of [a] statute mandating mitigation of damages, there exists no duty to mitigate damages where a valid liquidation damages clause exists.”

401 Md. at 513-14, 933 A.2d at 392 (internal quotations and citations omitted).

I do not agree. The liquidation of damages and the mitigation of damages are, indeed, distinct and separate concepts, which must be treated as such, i.e., there is no exception to the general contractual duty to mitigate simply because a fixed sum has been agreed upon by the parties in advance. That is to say, whether mitigation of damages applies, or not, should be determined when, post-breach, a court considers whether there have been actual damages incurred at all.8

I do not disagree with the proposition, offered by the Majority, that once a clause is determined to be valid, no inquiry should be made into whether mitigation is appropriate, reasonable. It is the process of making the validity determination that is problematic. It is my position that, in order to determine that the clause is, in fact, valid, it must be examined in context, both at the time of contracting and at the time of trial, after the breach has occurred. If the clause is upheld as valid, i.e., not disproportionate or excessive to the actual damages sustained, then the breaching party may not challenge, or seek to reduce, the amount of damages due to the non-breaching party; however, if the clause is determined to be punitive, then mitigation, as a separate concept, must be considered. This is not contrary to the view that:

“[w]hen the parties have made a reasonable forecast as to the just compensation for an injury that later in fact occurs and that is very difficult to estimate accurately, the defendant should never be allowed to introduce evidence the purpose of which is to substitute the estimate of a jury for the prior reasonable estimate of the parties. But the defendant should be allowed to show that there has in fact been no injury at all, or that the injury is not the one that the parties in fact estimated in advance.”

Corbin on Contracts, Vol. 11, § 58.1 at p. 463. See O’Brian v. Langley, 256 Va. 547, 507 S.E.2d 363, 365 (1998) (holding that a “party opposing the imposition of liquidated damages is entitled to conduct discovery and present relevant evidence that the damages resulting from breach of the contract are susceptible of definite measurement or that the stipulated damages are grossly in excess of the actual damages suffered by the nonbreaching party. Upon proof of either of these elements, a liquidated damages clause becomes an unenforceable penalty.”) (citation omitted). Thus, viewing a liquidated damages provision in retrospect, the non-breaching party’s failure to mitigate renders the clause a penalty and, thus, invalid. The clause is likewise invalid where the non-breaching party’s damages, in effect, have been—because not excessive, or exorbitant—mitigated. That arguably is the situation in the instant matter.

As stated earlier, a liquidated damages clause should not be enforced simply because it exists. See American Car Rental, Inc. v. Comm’r of Consumer Prot, 273 Conn. 296, 869 A.2d 1198, 1209-10 (2005) (noting that “[t]he mere fact that expected damages resulting from breach are uncertain in amount or difficult to prove does not justify enforcement of whatever amount the contract includes as damages for breach[.]”); O’Brian, 507 S.E.2d at 365 (stating that “[t]he fact that a party enters into a contract containing a liquidated damages clause does not prevent that party from later litigating the validity of the clause.”). Efforts to mitigate damages should be made when it is reasonable to do so. Similarly, where the non-breaching party has suffered no damages, or relatively insignificant damages in comparison to the stipulated sum, due to the breach, or has taken steps that mitigated the damages, that fact must be taken into account. See, e.g., Perez v. Aerospace Academy, Inc., 546 So.2d 1139, 1141 (Fla.App.1989) (stating that “where the school actually fills the place of the absent student, the school’s damages will be mitigated to the extent of the new student’s payments. To conclude otherwise would create a dual recovery for the school and a penalty to the parent[.... Thus,] insofar as the liquidated damages clause fails to provide credit for sums received from a replacement student (if any), the clause operates as a penalty.”). I do not agree, in short, contrary to the Majority’s view, that a liquidated damages clause automatically eliminates the need to calculate actual losses and, as required, to consider mitigation.

To uphold the liquidated damages clause in the case sub judice would be unfair to the Patches. General contract principles make that clear. I would affirm the judgment of the Circuit Court.

For the foregoing reasons, I dissent.

1

The Majority articulates the rule of liquidated damages as follows:

"There are three essential elements of a valid and enforceable liquidated damages clause. First, the clause must provide in clear and unambiguous terms for a certain sum. Secondly, the liquidated damages must reasonably be compensation for the damages anticipated by the breach. Thirdly, liquidated damages clauses are by their nature mandatory binding agreements before the fact which may not be altered to correspond to actual damages determined after the fact.”

401 Md. at 509, 933 A.2d at 389, quoting Board of Education of Talbot County v. Heister, 392 Md. 140, 156, 896 A.2d 342, 352 (2006) (emphasis added).

In Heister, we went on to state that, rather than the language of the clause, "the decisive element is the intention of the parties,” which is "to be gleaned from the subject matter, the language of the contract and the circumstances surrounding its execution.” Id. As will be seen, while I do not deny that the intention of the parties on the question is important, I do not agree that it is decisive. The effect of the clause is, in my view, just as, if not more, important.

2

Addressing the issue of when a liquidated damages clause will be deemed invalid, the Majority quotes Williston on Contracts:

"[A] liquidated damages provision will be held to violate public policy, and hence will not be enforced, when it is intended to punish, or has the effect of punishing, a party for breaching the contract, or when there is a large disparity between the amount plausible under the provision and the actual damages likely to be caused by a breach; so that it in effect seeks to coerce performance of the underlying agreement by penalizing non-performance and making a breach prohibitively and unreasonably costly.”

401 Md. 497, 510, 933 A.2d 382, 390 (quoting 24 Williston on Contracts § 65:1, p. 215 (4th ed.2002)). By acknowledging that "effect” may render a clause invalid, Williston arguably also acknowledges the "retrospective view.” The Majority nevertheless does not address it in its reasoning.

3

Restatement (Second) Contracts § 356(1) (1981) provided:

"Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.”

The court defined "anticipated and actual loss,” as used in the Restatement, stating

" 'Anticipated loss’ refers to the time of the making of the contract. 'Actual loss' refers to the circumstances upon occasion of the breach. These are two prongs, which apply alternately. If the award of liquidated damages exceeds any reasonable limitation by either one or the other, to such extent it is unenforceable.”

Mattingly Bridge Co., Inc. v. Holloway & Son Const. Co., 694 S.W.2d 702, 705 (Ky.1985) (emphasis added).

4

The School maintains that there was no empty "kindergarten" seat, and, thus, that the Patches’ daughter was not replaced. This argument is not helpful to the School. The fact that there was no empty desk in the section in which the Patches’ daughter was to be enrolled did not change the overall enrollment of the School, which both parties agreed met, and even exceeded, budgetary expectations. On this issue, the District Court found that "[t]he Barrie School [had] already enrolled more students than its budget projections called for.” It is, thus, logical to expect that the overall enrollment projections would determine whether the School was damaged, i.e. actually lost money, due to the Patches' withdrawal of their daughter, not whether the number of a specific section or class projection was realized.

5

Other cases cited by the Majority for this proposition, see 401 Md. at 512, 933 A.2d at 391, are distinguishable. Those cases involve students who have been either expelled or left school voluntarily. Those students, thus, all attended their subject respective institutions during the term. Therefore, the schools had allotted resources for those students, and presumably relied on their tuition payments.

In Wentworth Military Academy v. Marshall, the court reasoned:

'In several cases the right of a school to recover the full annual tuition charge when the pupil was expelled for proper cause, or left without reason before the close of the year has been allowed. The only justification for this can be the fact, if it is a fact, that one less pupil involves no saving of expense to the school.’ ”

225 Ark. 591, 283 S.W.2d 868, 870 (1955), quoting Williston on Contracts, Vol. 5, § 1352 (1937) (emphasis added). The Wentworth Court followed the "retrospective view,” noting that the standard of looking for a "savings,” would be impossible without taking into consideration the actual damages that may, or may not, have been incurred.

6

What the School knew when the contract was executed is not particularly clear from the record; there is conflicting evidence pertaining to the precise moment at which the School was aware that its budgetary projections were met. For that reason, I agree with the District Court that there was "no fraudulent behavior on the part of the people at The Barrie School[:]” however, to the extent that it is possible that the School already knew that its budgetary projections had been met when it contracted with the Patches, would further illustrate that one year’s tuition is not only disproportionate to its actual damages, but that this sum was excessive at the time of contracting and was intended to be a penalty, rather than a valid estimation of the sum of the School's anticipated damages.

7

As mentioned earlier, the School relies on the theory that there was "an empty seat” in the kindergarten class and the fact that the clause should be upheld because of the uncertainty of its budgeting process. The record, however, is devoid of any proof that the School actually suffered harm as a result of the Patches' withdrawal of their daughter. And, although the Circuit Court may have been correct in concluding that "it would be next to impossible to assign an exact amount as to the impact of losing one child for the school year[,]” if, or once, the enrollment projections for the School were met, whether or not an "empty seat” in a particular class was, in fact, filled, the provision became a penalty to the Patches.

8

It is important to note that the language from Lake River, relied upon by the Majority, is taken out of context. In that case, holding that it was necessary to refigure each party's damages, the court found the liquidated damages clause, which was based on a “formula” that would invariably result in a disproportionate award of damages to the non-breaching party, to be a penalty. The mitigation of damages argument about which the Lake River court spoke, was aimed at validating the liquidated damages clause; it was an attempt by the non-breaching party to justify the liquidated damages clause itself. The non-breaching party, Lake River Corp., urged the court to uphold the clause as valid, arguing that, because it was required by general contract principles to mitigate its damages in the event of a breach, the "formula" would never result in the foreseen excessive amount. Lake River was, in effect, attempting to minimize the windfall which it knew it was getting by virtue of its damages formula.

On the issue, and directly following the excerpt upon which the Majority relies, the court commented:

"It would seem therefore that the clause in this case should be read to eliminate any duty of mitigation, that what Lake River is doing is attempting to rewrite the clause to make it more reasonable, and that since actually the clause is designed to give Lake River the full damages it would incur from breach (and more) even if it made no effort to find a substitute use for the equipment that it bought to perform the contract, this is just one more piece of evidence that it is a penalty clause rather than a liquidated clause."

Lake River, 769 F.2d at 1291. Thus, the Lake River court was not, as the Majority posits, rejecting mitigation as a factor to be considered when determining whether such a clause is valid. It is evident, moreover, that the Lake River court employed the retrospective view in its analysis.