1. The Behan case was followed in Holt v. United Security Life Ins. & Trust Co., 76 N.J.L. 585, 72 A. 301 (1909). The facts in the Holt case were these. One Chapman had requested a loan from the Insurance Company in order to buy a plot of land in Atlantic City and erect a new building on it. The Company agreed to loan the money if Chapman and Holt (Chapman's bookkeeper) would each secure the loan with an insurance policy on his own life. The policies in question were twenty-year endowment contracts. Under the terms of the loan agreement, premiums were to be paid on the insurance policies but the principal amount of the loans were not due until the death of Holt or Chapman or the expiration of the twenty-year endowment period, whichever came first. After Chapman and Holt had taken all of the necessary steps· to obtain the loan, the Insurance Company reneged on its agreement (but not before Chapman had already allowed an existing structure on the property to be removed and made several contracts for the construction of a new building). In the course of his opinion Chancellor Pitney had this to say:3
The fundamental and cardinal principle that underlies all rules for the admeasurement of damages is that the injured party shall have compensation for that which he has directly lost by reason of the act of the other party, so far as such loss was or ought to have been in the contemplation of the parties, This includes the loss of anticipated profits where these are capable of legal ascertainment. But, where the profits are not capable of ascertainment, or are remote and speculative, and therefore not proper to be adopted as a legal measure of damage, it does not follow that the injured party is remediless.
In the present case the plaintiff appears to have made no effort to prove the value of the contract nor the profits that he lost by reason of its repudiation. The reason is obvious. The contract was a very special one, not to say unusual. By its terms Chapman was not only to have from the defendant the $32,500 to reimburse him for the cost of his new building, but was to be under no obligation to repay it saving from the proceeds of the endowment policies upon the lives of himself and Holt, which might mature shortly, and, at the latest, at the end of 20 years; Chapman in the meantime paying the stipulated premiums. No rule is suggested, nor are we aware of any, by which the value of such a contract may be estimated or the profits to arise from it be ascertained. And so, whether Chapman's property, when completed as proposed, would have been worth more or less than it would have cost him through performance of such an agreement, was, of course, unascertained, and probably unascertainable.
But the suggestion that he ought to have been limited to nominal damages because he might have elsewhere procured the money wherewith to complete the building, and presumably at no greater cost than under the agreement with the defendant, is, we think, entirely inadmissible, among other reasons, because there was nothing in the evidence to show, nor can we without evidence presume, the existence of a market in which money may be procured upon like terms at any rate of interest or premiums, and, besides, the existence of the mortgages in the hands of the defendant and undischarged upon record presumptively constituted a practical obstacle in the way of Chapman procuring the money elsewhere on any terms. Losses directly incurred, as well as gains prevented, may furnish a legitimate basis for compensation to the injured party. And, among such immediate losses, expenditures fairly incurred in preparation for performance or in part performance of the agreement, where such expenditures are not otherwise reimbursed, form a proper subject for consideration where the party injured, while relying upon his contract, makes such expenditures in anticipation of the advantage that will come to him from completed performance. Where the profits that have been lost are shown with such certainty as to entitle the plaintiff to damages under this head, we do not mean to say that he may have recovery for his preliminary outlay in addition; for this would seem to involve a double recovery. But where one party repudiates, and thus prevents the other from gaining the contemplated profit, it is not, we think, to be presumed in favor of the wrongdoer (in the absence of evidence) that complete performance of the agreement would not have resulted in at least reimbursing the injured party for his outlay fairly made in part performance of it. Ordinarily, the performance of agreements results in advantage to both parties over and above that with which they part in the course of its performance; otherwise there would soon be an end of contracting. And it seems to us, upon general principles of justice, that, if he who, by repudiation, has prevented performance, asserts that the other party would not even have regained his outlay, the wrongdoer ought at least to be put upon his proof.
76 N.J.L. at 595-597, 72 A. at 305-306.5
2. In his opinion in Behan, Justice Bradley suggests that the normal rule for measuring the plaintiff's damages in cases of this sort is costs incurred ("what he has already expended towards performance"), less "the value of materials on hand," plus the profits that would have been made if the contract had been completed. In New Era Homes Corporation v. Forster, 299 N.Y. 303, 86 N.E.2d 757 (1949), the court suggested that the proper rule in such a case is "the contract price, less payments made and less the cost of completion."6
By way of testing the two formulae, assume the following situation (for simplicity's sake assume that the "value of materials on hand" under Justice Bradley's formula is zero and that no progress payments have been made, which would have to be deducted under the New York formula):7
Contract Price: 10
Costs incurred to date of stoppage: 6
Estimated costs to complete the contract: 2
Anticipated profit if contract had been completed: 2
What answer do you come up with under the Behan formula? Under the formula of the New Era case? What do you make of Chancellor Pitney's remark in the Holt case that where lost profits "are shown with such certainty as to entitle the plaintiff to damages under this head, we do not mean to say that he may have recovery for his preliminary outlay in addition"? Is this the double-counting problem that Holmes was concerned about in Globe Refining? Does the problem arise under either the Behan or New Era formula?
June 02, 2014
Kessler, Gilmore & Kronman
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