Compensatory Damages - Breach or Repudiation by Payor

Case: American Mechanical Corp. v. Union Machine Co. of Lynn, Inc. (1985, MA)
[pp. 897-901]

Facts: American (P) was in financial difficulty, and contracted with Union (D)
to sell its real estate and business equipment for $135,000. Union knew of
American's financial difficulty. Union then repudiated the contract. Since
American was in arrears on mortgage payments to Saugus Bank, the bank took
possession of American's property and ended up selling the equipment for $35,000
and the real estate property for $55,000, for a total of $90,000. American then
sued Union for breach of contract. The court decided that although there was a
breach of contract, only nominal damages were recoverable. That is, the difference
between the fair market value at the time of breach and the contract price. The
price that the property was actually sold for was not taken into consideration.
American appealed.

Issue: Can damages be awarded based upon actual losses instead of the general
formula of the difference btwn fair market value at time of K breach and the K
price? - Yes.

Holding: Damages of $46,000 was awarded, plus interest. The nominal damages
awarded from lower court was vacated.

Reasoning: The appellate court said that although the actual sale price of
property normally provides strong evidence of its market value, this doesn’t apply
in all cases, including this one. The aim of damages for breach of K is to place
the non-breaching party in as good a position as if there was no breach. American
sustained a loss of $45,000 from Union's breach (the difference btwn the K price
of $135,000 and the actual sell price of $90,000). The court also made a point
that Union knew of American's financial difficulty and that if that sale did not
go through the bank would take over the property and there would be a foreclosure,
resulting in loss for American.

Court also notes that American has a good faith obligation to sell the property at
a fair price, and damages for American are limited to where American would have
reasonably avoided the loss. Here, however, the facts showed that American could
not find another purchaser. The bank quickly took possession of the property, not
giving American enough time to find another buyer, and also the property was not
the type that sells that quickly. Also, the burden of proving that American could
have avoided the loss is on the breaching party, and Union had not shown that.