Most parties to contracts understand that they must be careful that contract terms accurately reflect the proposed transaction and are in their interest. One might also assume that if there is a breach of contract, then the non-breaching party is not under any further obligation and will be entitled to the full measure of damages. Such an assumption would be wrong.
In contract disputes, the period immediately after a contract breach is a time when decisions must be made that will affect the ability of the non-breaching party to recover damages. For instance, the law imposes an obligation on non-breaching parties to make reasonable efforts to mitigate damages caused by the contract breach.
The duty to mitigate damages is illustrated in the recent Indiana Supreme Court case of Fischer v. Heymann. In that case, the Heymanns agreed to buy a condominium from Fischer for $315,000. As in most purchase agreements, there was a clause that allowed the Heymanns to terminate the agreement if an inspection found a major defect. The inspection revealed that electricity was not flowing to three power outlets. The Heymanns demanded that Fischer resolve this issue. Fischer did not respond by the Heymanns’ deadline. Consequently, the Heymanns terminated the agreement, even though Fischer did fix the problem at a cost of $117 within a few days after the Heymanns’ deadline. The problem was repaired by pushing the reset switch on the three outlets and changing a light bulb.
About one year after the purchase agreement between Fischer and the Heymanns, Fischer received an offer for the condo for $240,000. Fischer made a counteroffer that was well above the condo’s appraised value, which was rejected. Fischer ended up selling the condo four years later for only $180,000. Fischer sued the Heymanns for more than $300,000, which was the difference between the Heymanns’ $315,000 offer and the eventual sale price, plus the cost of maintaining the condo until it sold.
The courts determined that the Heymanns breached the purchase agreement by unreasonably demanding that Fischer repair the problems with the electrical outlets. Those problems were not major defects. As for how much Fischer could recover, the Heymanns argued that they should only pay $117 because Fischer could have limited her damages to that amount by making the required repairs.
The courts ruled that Fischer did have a duty to mitigate her damages, as do all non-breaching parties. Because it was the Heymanns’ unreasonable demand to fix the electrical outlets that caused the breach, however, Fischer was not required to surrender to that demand to satisfy her obligation to mitigate damages. Nonetheless, the courts determined that Fischer was unreasonable in rejecting the $240,000 offer. Accordingly, Fischer could only recover the difference between the $315,000 offer from the Heymanns and the $180,000 sale price, plus the cost of maintaining the property during that one year period.
This case highlights the caution that must be taken when a contract is breached. The non-breaching party has a right to recover the loss actually suffered as a result of the breach, but not to be placed in a better position than the party would have been in if the contract had not been broken. Additionally, non-breaching parties must make reasonable efforts to decrease the damages caused by the breach.
In many transactions, the ultimate impact of the breach is unclear at the time of the breach, as is the best way to mitigate damages. Indeed, Fischer could not have known with certainty how the value of her condo might change over time. But she did know the appraised value was well below her counteroffer to the $240,000 offer. Under the circumstances, Fischer’s course of conduct was unreasonable. In contract breach cases, all of the relevant facts must be considered. Even though the other party caused the deal to fall through, non-breaching parties are still obliged to act reasonably at every step after the breach.
For more information, please contact KDDK attorney Steve Hoar at (812) 423-3183 or SHoar@KDDK.com, or contact any member of the KDDK Business Law practice team.
About the Author
Steve Hoar, a partner at Kahn, Dees, Donovan & Kahn, LLP, in Evansville, Indiana, is a litigator focusing on business disputes. He handles contract, construction, corporate, and real estate disputes through state and federal courts, and arbitration. Steve is committed to exploring cost-effective alternative dispute resolution opportunities, such as mediation, while also aggressively building a case for trial. Steve also has extensive experience enforcing creditors’ rights through liens, replevins, receiverships, garnishments, and other enforcement techniques. Steve is a member of KDDK’s Litigation and Trial Services; Bankruptcy, Collection and Creditors’ Rights; Construction Law and Real Estate Law practice teams.