Contracts II, Pages 1104–1119

Kenford Co. v. County of Erie (1)

Supreme Court of New York, Appellate Division, 1985

Facts:

Defendant obtained legislation allowing it to build a sports stadium. Plaintiff donated $2.6 million of land to defendant in exchange for allowing it to manage the stadium and develop the peripheral properties. Plaintiff built many such peripheral properties. Defendant sought bids on the stadium, but were over budget and thus abandoned the project. Plaintiff sued for specific performance or alternatively $90 million in damages.

Procedural History:

Plaintiffs were granted summary judgment on liability and a trial was ordered on the issue of damages. After nine months, jury entered a verdict for $49.5 million of plaintiff's alleged $495 million.

Issue:

What damages can plaintiff recover for defendant's breach?

Rules:

  • LexisNexis IconWestLaw LogoGoogle Scholar LogoPage 1110, Top

    [L]ost profits in a new venture are not ordinarily recoverable, but . . . lost profits may be awarded if plaintiff establishes three elements:

    • that the lost profits are the direct and proximate result of the breach;
    • that profits were contemplated by the parties; and
    • that there is a rational basis on which to calculate the lost profits

Reasoning:

  1. Lost Profits on the Peripheral Development
    • It was foreseeable to the defendant that plaintiff would have lost profits on the peripheral developments by its breach.
    • Yet it cannot be known with any certainty how much money plaintiff would have made and whether the developments would have been profitable.
  2. Loss of Appreciation in Peripheral Land Values
    • It was foreseeable that the peripheral developments would lose value. This was even explicitly mentioned in the contract.
    • It was certain that the peripheral land would lose value.
    • Nevertheless, the damages was based on speculative assessments however. Plaintiff should have produced appraisal testimony as to what the land would have been worth as raw acreage immediately following construction of the stadium. Discussion of what value the theme park adds is too speculative. This amount must then be determined on remand.
  3. Lost Profits on the Management Contract
    • While some jurisdictions embrace the rule that a new business's lost profits are per se nonrecoverable, New York follows the rule of evidence rule from Perma.
    • The first two elements of the Perma test are clearly met, but plaintiff has not shown a rational basis on which to calculate the lost profits. While plaintiff had an expert calculate his opinion of projected profits, New York has only allowed such estimations for cases involving royalty payments where it was certain that a profit would be made. Here there are too many variables to make a prediction.
  4. Out-of-Pocket Expenses
    • Since recovering profits means one cannot recover the expense of performing, plaintiff cannot recover its expenses from before defendant breached the contract. Only its expenses made afterwards are as mitigation expenses.
    • Expenses incurred as preparatory to the aborted management agreement are recoverable as there are no recoverable lost profits for this.

Holding:

Plaintiff can recover the loss in value and its out-of-pocket expenses incurred after the breach. Affirmed as modified and remitted for a new trial.

Dissenting Opinion:

Hancock: The land appreciation values are also too speculative to recover, like all expectancy losses, regardless of the evidence. Instead of asking whether defendant could have reasonably foreseen that plaintiffs' benefits would not be realized if the dome was not built, it must be asked whether it was reasonably foreseeable that the dome would not be built if defendant did not build it. This was not reasonably foreseeable, as it was not discussed when the contract was made. The fact that plaintiffs tried to find funding after defendant decided not to proceed shows that they did not think it was the only way it would be built beforehand.

Defendant would not have entered into the contract if it foresaw that it would be liable to plaintiffs if it did not build the dome. This shows that it was disproportionate and unfair to assume that defendant assumed the risk of paying for plaintiffs' expectancy losses. The contract was made informally, and thus this was assumedly not considered and would not have been accepted had it been.

Plaintiffs' recovery would outweigh the value of any benefits defendant might have received. Its extra tax revenue cannot be considered because this was not part of the consideration of the contract. The profits from the dome cannot be because it might not have made a profit. Even if it did make a profit, it would be less than if the county invested the money elsewhere.

Even if expectancy losses could be recovered, plaintiffs could not provide any evidence of them that would not be incurably speculative. A retrial is then unwarranted.

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