Rockingham Cty. v. Luten Bridge Co.
35 F.2d 301 (4th Cir. 1929)
Parker, Circuit J.
This was an action at law instituted in the court below by the Luten Bridge Company, as plaintiff, to recover of Rockingham county, North Carolina, an amount alleged to be due under a contract for the construction of a bridge. The county admits the execution and breach of the contract, but contends that notice of cancellation was given the bridge company before the erection of the bridge was commenced, and that it is liable only for the damages which the company would have sustained, if it had abandoned construction at that time. The judge below . . . instructed a verdict for plaintiff for the full amount of its claim. From the judgment on this verdict the county has appealed.
The facts out of which the case arises, as shown by the affidavits and offers of proof appearing in the record, are as follows: On January 7, 1924, the board of commissioners of Rockingham county voted to award to plaintiff a contract for the construction of the bridge in controversy.
. . .
[At a meeting a little over a month later,] a resolution was unanimously adopted declaring that the contract for the building of the bridge was not legal and valid, and directing the clerk of the board to notify plaintiff that it refused to recognize same as a valid contract, and that plaintiff should proceed no further thereunder. This resolution also rescinded action of the board theretofore taken looking to the construction of a hard-surfaced road, in which the bridge was to be a mere connecting link. The clerk duly sent a certified copy of this resolution to plaintiff.
. . . At the time of the passage of the first resolution, very little work toward the construction of the bridge had been done, it being estimated that the total cost of labor done and material on the ground was around $1,900; but, notwithstanding the repudiation of the contract by the county, the bridge company continued with the work of construction.
On November 24, 1924, plaintiff instituted this action against Rockingham county . . .
As the county now admits the execution and validity of the contract, and the breach on its part, the ultimate question in the case is one as to the measure of plaintiff’s recovery . . .
As to the measure of plaintiff’s recovery — we do not think that, after the county had given notice, while the contract was still executory, that it did not desire the bridge built and would not pay for it, plaintiff could proceed to build it and recover the contract price. It is true that the county had no right to rescind the contract, and the notice given plaintiff amounted to a breach on its part; but, after plaintiff had received notice of the breach, it was its duty to do nothing to increase the damages flowing therefrom. If A enters into a binding contract to build a house for B, B, of course, has no right to rescind the contract without A’s consent. But if, before the house is built, he decides that he does not want it, and notifies A to that effect, A has no right to proceed with the building and thus pile up damages
Question
Is it really true that, in all cases, A would have “no right to proceed with the building”? Consider this variant of the court’s house building example. A is building a house for B on land A owns. A and B have agreed that B shall purchase both the land and the house once the house has been completed. When construction of the house is half-complete, B informs A that he no longer wants the house and the land and will not pay for either. A continues construction of the house because A decides, after B’s announcement, to live in the house himself. It is A’s house and land, so A has the right to complete the house.
(a) True
Correct. A does not commit any legal wrong when he builds a house for himself on land he owns. So what exactly does the court mean when it says, “If A enters into a binding contract to build a house for B, B, of course, has no right to rescind the contract without A’s consent. But if, before the house is built, he decides that he does not want it, and notifies A to that effect, A has no right to proceed with the building and thus pile up damages”? The point must be that there is no right “to pile up damages.”
Consider as you read the sense in which there is no such right.
(b) False
Incorrect. A does not commit any legal wrong when he builds a house for himself on land he owns. So what exactly does the court mean when it says, “If A enters into a binding contract to build a house for B, B, of course, has no right to rescind the contract without A’s consent. But if, before the house is built, he decides that he does not want it, and notifies A to that effect, A has no right to proceed with the building and thus pile up damages”? The point must be that there is no right “to pile up damages.”
Consider as you read the sense in which there is no such right.
His remedy is to treat the contract as broken when he receives the notice, and sue for the recovery of such damages, as he may have sustained from the breach, including any profit which he would have realized upon performance, as well as any other losses which may have resulted to him. In the case at bar, the county decided not to build the road of which the bridge was to be a part, and did not build it. The bridge, built in the midst of the forest, is of no value to the county because of this change of circumstances. When, therefore, the county gave notice to the plaintiff that it would not proceed with the project, plaintiff should have desisted from further work. It had no right thus to pile up damages by proceeding with the erection of a useless bridge.
. . . The American rule and the reasons supporting it are well stated by Prof. Williston as follows:
“There is a line of cases running back to 1845 which holds that, after an absolute repudiation or refusal to perform by one party to a contract, the other party cannot continue to perform and recover damages based on full performance. This rule is only a particular application of the general rule of damages that a plaintiff cannot hold a defendant liable for damages which need not have been incurred; or, as it is often stated, the plaintiff must, so far as he can without loss to himself, mitigate the damages caused by the defendant’s wrongful act. The application of this rule to the matter in question is obvious. If a man engages to have work done, and afterwards repudiates his contract before the work has been begun or when it had been only partially done, it is inflicting damage on the defendant without benefit to the plaintiff to allow the latter to insist on proceeding with the contract. The work may be useless to the defendant, and yet he would be forced to pay the full contract price. On the other hand, the plaintiff is interested only in the profit he will make out of the contract. If he receives this it is equally advantageous for him to use his time otherwise.”
. . .
It follows that there was error in directing a verdict for plaintiff for the full amount of its claim. The measure of plaintiff’s damage, upon its appearing that notice was duly given not to build the bridge, is an amount sufficient to compensate plaintiff for labor and materials expended and expense incurred in the part performance of the contract, prior to its repudiation, plus the profit which would have been realized if it had been carried out in accordance with its terms. . . .
Question
Prior to the County’s breach, Luten Bridge had spent $1,900 in partially constructing the bridge. Suppose that the contract price for construction of the bridge was $20,000 and that, after the County’s breach, Luten Bridge spent an additional $12,100 constructing the bridge. In this case, the court would award Luten bridge only $1,900 plus its profit of $7,000.
(a) True
Correct. Luten Bridge does not receive any compensation for the $12,100 it spent after it learned of the County’s breach. Thus, there is one clear sense in which Luten Bridge has no “right” to continue to build the bridge once it learns of the county’s breach: namely, it is liable for the costs it incurs in continuing to build.
In general: After a breach, the non-breaching party bears those costs it could have avoided with reasonable care.
(b) False
Incorrect. Luten Bridge does not receive any compensation for the $12,100 it spent after it learned of the County’s breach. Thus, there is one clear sense in which Luten Bridge has no “right” to continue to build the bridge once it learns of the county’s breach: namely, it is liable for the costs it incurs in continuing to build.
In general: After a breach, the non-breaching party bears those costs it could have avoided with reasonable care.
The judgment below will accordingly be reversed, and the case remanded for a new trial.
Reversed.
Notes and Questions
(1) The injured party only recovers those damages that it could not avoid by taking reasonable steps after the breach to reduce the losses caused by the breach. This is called the duty to mitigate damages, or, the doctrine of avoidability. One who takes all reasonable steps to reduce damages is said to properly mitigate damages, or to be a proper mitigator.
(2)
Question
The fundamental goal of awarding damages for breach of contract is to put the injured party in as good a position as he or she would have been in if the contract had been performed as promised. Awarding Luten Bridge only the costs it incurred before the county announced that it would not pay for the bridge
(a) puts Luten Bridge in as good a position as they would have been in the contract had been performed as promised.
(b) puts Luten Bridge in as good a position as they would have been in the contract had been performed as promised–assuming the bridge company had taken all reasonable steps to reduce the damages after the breach.
Answer A
Incorrect. There is a better answer. The problem with this answer is that it fails to take account of the fact that the court does not compensate Luten Bridge for the expenses it incurred after the breach.
The better answer is that puts Luten Bridge in as good a position as they would have been in the contract had been performed as promised–assuming the bridge company had taken all reasonable steps to reduce the damages after the breach. A calculation of the expectation damages shows why this is true.
Consider the first two steps of the three-part procedure.
First, the contract-performed position: Luten Bridge has the net profit from the construction project.
Second, the result-of-the-breach position: Luten Bridge has incurred the full costs of construction as follows:
$1,900 before the breach;
the rest after the breach.
Since it would have been proper mitigation to stop construction immediately after the breach, Luten Bridge cannot recover in contract damages the costs it incurred after the breach. Thus, the second step becomes:
Second, the result-of-the-breach-proper-mitigation position: Luten Bridge has incurred costs of $1,900; thus, it is minus $1,900.
In applying expectation damages, courts always treat the injured party as if that party properly mitigated damages whether or not the party actually did. Thus, they always calculate the result-of-the-breach-proper-mitigation position.
The third step then is:
Third, the award: award the difference in value between the contract-performed-position and the result-of-the-breach-proper-mitigation position. This difference is the net profit Luten Bridge would have made plus $1,900 (net profit minus (minus $1,900) = net profit pus $1,900).
This award puts puts Luten Bridge in as good a position as they would have been in the contract had been performed as promised–assuming the bridge company had taken all reasonable steps to reduce the damages after the breach.
Answer B
Correct. A calculation of the expectation damages shows why this is true. Consider the first two steps of the three-part procedure.
First, the contract-performed position: Luten Bridge has the net profit from the construction project.
Second, the result-of-the-breach position: Luten Bridge has incurred the full costs of construction as follows:
$1,900 before the breach;
the rest after the breach.
Since it would have been proper mitigation to stop construction immediately after the breach, Luten Bridge cannot recover in contract damages the costs it incurred after the breach. Thus, the second step becomes:
Second, the result-of-the-breach-proper-mitigation position: Luten Bridge has incurred costs of $1,900; thus, it is minus $1,900.
In applying expectation damages, courts always treat the injured party as if that party properly mitigated damages whether or not the party actually did. Thus, they always calculate the result-of-the-breach-proper-mitigation position.
The third step then is:
Third, the award: award the difference in value between the contract-performed-position and the result-of-the-breach-proper-mitigation position. This difference is the net profit Luten Bridge would have made plus $1,900 (net profit minus (minus $1,900) = net profit pus $1,900).
This award puts puts Luten Bridge in as good a position as they would have been in the contract had been performed as promised–assuming the bridge company had taken all reasonable steps to reduce the damages after the breach.
(b) puts Luten Bridge in as good a position as they would have been in the contract had been performed as promised–assuming the bridge company had taken all reasonable steps to reduce the damages after the breach.
(3)
Question
Suppose Luten Bridge did stop construction after the county announced that it would not pay for the bridge. Suppose it had construction materials for which it no longer had any use and could sell for $1,000. Selling the materials would
(a) be a reasonable step to reduce the damages after the breach.
(b) would not be a reasonable step to reduce damages after the breach.
Would be reasonable
Correct. The goal is to reduce the damages after a breach. It certainly helps achieve that goal to sell the construction materials instead of letting the go to waste.
Where selling the materials is proper mitigation, the calculation of expectation damages looks like this:
First, the contract-performed position: Luten Bridge has the net profit from the construction project.
Second, the result-of-the-breach-proper-mitigation position: Luten Bridge is minus $1,900 (costs incurred) plus $1,000 (sale of materials) = minus $900.
Third, the award: net profit minus (minus $900) = net profit plus $900.
Would not be reasonable
Incorrect. The goal is to reduce the damages after a breach. It certainly helps achieve that goal to sell the construction materials instead of letting the go to waste.
Where selling the materials is proper mitigation, the calculation of expectation damages looks like this:
First, the contract-performed position: Luten Bridge has the net profit from the construction project.
Second, the result-of-the-breach-proper-mitigation position: Luten Bridge is minus $1,900 (costs incurred) plus $1,000 (sale of materials) = minus $900.
Third, the award: net profit minus (minus $900) = net profit plus $900.
(4)
Question
Suppose Luten Bridge did stop construction after the county announced that it would not pay for the bridge. It had construction materials for which it no longer had any use. The company had good reason to think that it can sell the materials to another bridge company if it transported the materials to that company’s construction site. They spent $100 transporting the materials, but, when they arrived, the other company decided not to buy them.
Which policy would be most consistent with the purpose of providing non-breachers with an incentive to take reasonable steps to reduce damages after a breach?
(a) Awarding Luten Bridge the $100 expense even though it did not in fact sell the materials.
(b) Not awarding Luten Bridge the $100.
Awarding
Correct. The point of the duty to mitigate is to provide the injured party an incentive to reduce the damages after a breach–in short, an incentive to save money. To save money, one sometimes has to spend money–the $100 in transportation costs are an example. Often, one spends the money when one has good reason to think, but is not certain, that it will save money. It is good policy to provide the injured party with an incentive to spend money in these cases. Overall–but not in every case–the result is to save money. The law provides this incentive by compensating the injured party for expenses when a reasonable step to save money does not actually work.
Where it is proper mitigation to spend the $100 transporting that materials even though the other company does not buy them, the expectation measure damage calculation looks like this.
First, the contract-performed position: Luten Bridge has the net profit from the construction project.
Second, the result-of-the-breach-proper-mitigation position: Luten Bridge is minus $1,900 (costs incurred) and minus $100 (transportation costs) for a total of minus $2,000.
Third, the award: net profit minus (minus $2000) = net profit plus $2000.
Not awarding
Incorrect. The point of the duty to mitigate is to provide the injured party an incentive to reduce the damages after a breach–in short, an incentive to save money. To save money, one sometimes has to spend money–the $100 in transportation costs are an example. Often, one spends the money when one has good reason to think, but is not certain, that it will save money. It is good policy to provide the injured party with an incentive to spend money in these cases. Overall–but not in every case–the result is to save money. The law provides this incentive by compensating the injured party for expenses when a reasonable step to save money does not actually work.
Where it is proper mitigation to spend the $100 transporting that materials even though the other company does not buy them, the expectation measure damage calculation looks like this.
First, the contract-performed position: Luten Bridge has the net profit from the construction project.
Second, the result-of-the-breach-proper-mitigation position: Luten Bridge is minus $1,900 (costs incurred) and minus $100 (transportation costs) for a total of minus $2,000.
Third, the award: net profit minus (minus $2000) = net profit plus $2000.