B. Measure of Contract Damages

• Library: South Carolina Damages (SCBar) (2009 Ed.)

B. Measure of Contract Damages

1. Mitigation of Damages

The South Carolina Supreme Court has held that a party to a contract action has a duty to minimize his or her damages.³⁸ However, despite this general duty to mitigate, the circumstances surrounding a specific breach may fail to give rise to such a duty.³⁹

In the case of Rathborne, Hair & Ridgway Co. v. Williams,⁴⁰the District Court of South Carolina outlined the basic principles behind the application of the duty to mitigate in breach of contract cases. The court began by stating that "[i]t is true that no recovery may be had for losses which the person injured might have prevented by reasonable efforts and expenditures, but this duty to minimize damages is not arbitrarily impeded [sic] in all cases."⁴¹ The injured party need only act reasonably within the bounds of common sense and fair dealing under the circumstances to avoid the consequences of the wrongful act. "What is reasonably required depends on the extent of the threatened injury as compared with the expense of remedying the situation, and the practical certainty of success in preventive effort."⁴² In order to meet one's duty to mitigate damages, a party must do what an ordinarily prudent person would do under like circumstances, but he is not required to take imprudent or impractical action.

The burden for showing a failure to mitigate damages rests with the breaching party.⁴³ That party must prove that the damages could reasonably have been avoided or reduced. Where this burden is met and the plaintiff failed to act reasonably in minimizing his damages, any recovery will be accordingly reduced. For example, in Hutson v. Cummins Carolinas, Inc.,⁴⁴the plaintiff brought suit for defective repairs to a truck and the court refused to allow the plaintiff to recover damages for the loss of use of the truck for an extended period of three years because plaintiff was under a duty to mitigate his damages by having the motor repaired or replaced somewhere else.⁴⁵ Where a defendant fails to prove the reasonable efficacy of those actions which plaintiff could have taken to mitigate his losses, however, the plaintiff's damages will not be limited or reduced.⁴⁶

2. Lost Profits and New Business Rule

As with any special damage, lost profits may be recoverable in a breach of contract action if the lost profits were reasonably foreseeable at the time of contracting. In Drews Co. v. Ledwith-Wolfe Associates, Inc.⁴⁷the South Carolina Supreme Court described this principle:

[A] breaching party is liable for those damages, including lost profits, which may reasonably be supposed to have been within the contemplation of the parties at the time the contract was made as a probable result of the breach of it.⁴⁸

In addition to the prerequisite of foreseeability, South Carolina courts also require that the loss must "be established with reasonable certainty for recovery cannot be had for profits that are conjectural or speculative."⁴⁹ While the factual contexts in which lost profits cases arise will inevitably vary, the "reasonable certainty" requirement provides an inherent flexibility, facilitating the just assessments of profits lost to a new business due to contractual breach.

In general, a party must show that lost profits were reasonably within the contemplation of the parties, were the proximate and natural consequences of the breach, and were established with reasonable accuracy.⁵⁰ However, difficulty in ascertaining the precise amount of profits will not cause a breach of contract claim to fail as long as the evidence shows lost profits by reasonable inference.⁵¹

In a breach of contract for the sale of goods, the Uniform Commercial Code delineates the circumstances under which lost profits can be awarded. South Carolina courts have uniformly found that lost profits, when properly proven, may be recovered under S.C. Code Ann. § 36-2-715 as consequential damages.⁵² The UCC allows as damages "profit (including reasonable overhead) which the seller would have made from full performance by the buyer," together with incidental damages and costs, with credits for payments made and proceeds from resale.⁵³

Regardless of whether the issue arises under common law contract principles or the UCC, the most difficult and controversial issues arising in cases with claims for damages for loss of future profits are questions regarding the method and quantum of proof necessary to sustain an award for such damages. It is difficult to predict when an appellate court will affirm the award of lost profits or find that it must be overturned as too speculative or lacking in supporting data. As an initial matter, lost profits must be shown to have been the proximate and natural consequence of a breach and within the reasonable contemplation of the parties to be recoverable in a contract case.⁵⁴ While the law does not require absolute certainty of data upon which lost profits are to be estimated, damages for anticipated lost profits must not be based wholly on speculation or conjecture and must be capable of being estimated or ascertained with reasonable accuracy.⁵⁵

The South Carolina Supreme Court has cited numerous techniques for proving lost profits as a result of another's tort or breach of contract.⁵⁶ Proof of loss of future profits may be established through expert testimony, economic and financial data, market surveys and analyses, business records of similar enterprises, comparison with profit performance of businesses similar in size, nature and location, comparison with profit history of plaintiff's successor, comparison of similar businesses owned by plaintiff himself, and use of economic and financial data and expert testimony.⁵⁷ Lost profits, however, are not proved merely by testimony of unverifiable expectations of profits.⁵⁸

One particular application of the law regarding lost profits, the "new business rule," has troubled practitioners in this state for many years. In 1908, the South Carolina Supreme Court held that lost profits related to a new business were not recoverable because the anticipated profits of the new business were too remote, contingent, and speculative.⁵⁹ As stated by the court, "[w]hen a business is in contemplation, but not established, or not in actual operation, profit merely hoped for is too uncertain and conjectural to be considered."⁶⁰ However, this long-standing rule was overturned in the case of Drews Co. v. Ledwith-Wolfe Associates, Inc.⁶¹In Drews, the court held that "South Carolina should now unequivocally join those jurisdictions applying the new business rule as a rule of evidentiary sufficiency and not as an automatic preclusion to recovery of lost profits by a new business or enterprise."⁶² The court went on to emphasize that the same standards that govern lost profits awards for ongoing businesses should be applied to new businesses as well.⁶³ Subsequent decisions have reaffirmed this principle.⁶⁴

3. Liquidated Damages

Under both South Carolina common law and the South Carolina Commercial Code, drafters of contracts may attempt to prospectively set an amount of damages for breach through the inclusion of a liquidated damages provision.⁶⁵ However, this right is not unlimited. The South Carolina Commercial Code provides that a liquidated damages provision is enforceable as long as it is set at "an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy."⁶⁶ Similarly, the court recognized that where the stipulated sum is clearly disproportionate to any probable damage, the provision is unenforceable as a penalty provision.⁶⁷

As an initial matter, the party seeking to recover liquidated damages will bear the burden of proving that the opposing party has actually breached a contractual provision giving rise to a claim for liquidated damages.⁶⁸ Once this has been established, the primary consideration of the court will be the reasonableness of the amount of damages. If the sum is reasonably intended to be a predetermined measure of compensation for actual damages that might be sustained, the provision is an enforceable liquidated damages provision.⁶⁹ If the sum is not based on actual damages in the contemplation of the parties, the provision will be an unenforceable penalty.⁷⁰

In making its analysis of reasonableness, the language used by the parties to the contract is relevant, but it is not conclusive as to the reasonableness of the amount.⁷¹ Rather, the analysis depends on the nature of the contract in light of the circumstances and the attitude of the parties at the time of contracting.⁷² The court will attempt to determine whether the provision was included to deter a breach through penalty or to specify a sum which represents the damages which would ensue from a breach.⁷³ Depending on the facts of the case, this question may either be a matter of law for the court or a matter of fact for the jury. A party intending to dispute a liquidated damages provision on a theory of penalty must plead such a theory as an affirmative defense, and his failure to do so will result in a waiver of the defense.⁷⁴

If the court determines that the conditions have been met and the liquidated damages provision is reasonable, then recovery may be had of the liquidated amount.⁷⁵ This finding will not only entitle the injured party to recover the liquidated sum but also permit an award of prejudgment interest as well.⁷⁶ If the court determines that the conditions of the liquidated damages provision have not been met or that the provision is an unenforceable penalty, the injured party must seek to recover general and special damages as allowed by South Carolina law.⁷⁷

Finally, it should be noted that the presence of a liquidated damages clause does not, by itself, limit the remedies available to an injured party. Even when a court finds that a...