The following abstract explains Nevada law on contract damages, and explains how our courts view, determine, and award damages.
EXPECTATION/COMPENSATORY DAMAGES
Expectation/Compensation Damages as the General Goal of Contract Damages.
The general goal of contract damages is to provide compensation for the injured party based on the injured party’s expectation interest. 3 D. Dobbs, Law of Remedies § 12.2(1), at 22 (2d ed. 1993); Restatement (Second) of Contracts § 347cmt. a (2008). Although there are other remedies available for an injured party in a breach of contract situation, the general and traditional goals of awarding damages in a breach of contract case are aligned with the expectation/compensation remedy. Dobbs, § 12.2(1), at 22.
More specifically, “[c]ontract damages . . . are intended to give [the nonbreaching party] the benefit of his bargain by awarding him a sum of money that will, to the extent possible, put him in as good a position as he would have been in had the contract been performed,” and no better. Restatement (Second) of Contracts § 347 cmt. a; Dobbs, supra, § 12.2(1), at 23; Colorado Env’t, Inc. v. Valley Grading Corp., 105 Nev. 464, 470, 779 P.2d 80, 84 (1989) (“It is fundamental that contract damages are prospective in nature and intended to place the nonbreaching party in as good a position as if the contract had been performed.”); Dalton Properties, Inc. v. Jones, 100 Nev. 422, 424, 683 P.2d 30, 31 (1984) (stating that placing the nonbreaching party in as good a position as if the contract had been performed is the “object of compensatory damages”). Although there are other remedies available for an injured party in a breach of contract situation, the general and traditional goals of awarding damages in a breach of contract case are aligned with the expectation/compensation remedy. Dobbs, § 12.2(1), at 22.
The General Measure of Expectation/Compensatory Damages
The Nevada Supreme Court has adopted the Restatement (Second) of Contracts § 347 for determining the proper method of calculating general expectancy damages. See Colorado Env’t, 105 Nev. at 470-71, 779 P.2d at 84. The Restatement (Second) of Contracts § 347 states:
Subject to the limitations stated in §§ 350-53, the injured party has a right to damages based on his expectation interest as measured by (a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, (b) any other loss, including incidental or consequential loss, caused by the breach, less (c) any cost or other loss that he has avoided not by having to perform.
Restatement (Second) of Contracts § 347. The Restatement’s measure of expectation damages is very broad in nature, and fails to include or explain various nuances and exceptions. These nuances include the different methods of measurement (market value vs. cost expectancy), the type of damages (general vs. special/consequential), and what limitations and caveats are involved in awarding and calculating damages (mitigation, foreseeability, economic waste, windfall, certainty, and any agreements by the parties). These nuances and caveats are discussed in detail below. Although there are other remedies available for an injured party in a breach of contract situation, the general and traditional goals of awarding damages in a breach of contract case are aligned with the expectation/compensation remedy. Dobbs, § 12.2(1), at 22.
Subject to Agreement by the Parties
The expectation/consequential measure of damages is at default measure, and may be supplemented by any agreement by the parties. Dobbs, supra, § 12.2(1), at 25-26; Restatement (Second) of Contracts § 347 (“The [expectancy] measure of damages . . . is subject to the agreement of the parties, as where they provide for liquidated damages or exclude liability for consequential damages.”). To the extent they have a valid contract, parties can agree to their own measure of damages.
Liquidated Damages
Parties can agree to liquidated damages in the event of breach; moreover, the terms of a valid liquidated damages clause supersede any default award of expectancy/compensatory damages. “Liquidated damages have been defined as the sum which a party to a contract agrees to pay if he/she breaks some promise and which, having been arrived at by a good faith effort to estimate the actual damages that will probably ensue from breach, is recoverable as agreed-upon damages if breach occurs.” Joseph F. Sanson Inv. Co. v. 268 Ltd., 106 Nev. 429, 435, 795 P.2d 493, 496-97 (1990).
Enforcing liquidated damages clauses is not always straightforward, however. A liquidated damages clause may be unenforceable if the provision amounts to a penalty. Joseph F. Sanson Inv. Co., 106 Nev. at 435, 795 P.2d at 497. To prove that liquidated damages amount to a penalty, a party must show that the liquidated damages are disproportionate to the injured party’s actual damages. Joseph F. Sanson Inv. Co., 106 Nev. at 435, 795 P.2d at 497. Further, liquidated damages clauses will only preclude the default damages that the provision was intended to cover. Spinella v. B-Neva, Inc., 94 Nev. 373, 376, 580 P.2d 945, 947 (1978).
In Joseph F. Sanson Inv. Co., the Nevada Supreme Court held that attorney fees should not be awarded as liquated damages where the fees under the liquidated damages stipulation were fifteen times greater than the actual fees billed. F. Sanson Inv. Co., 106 Nev. at 435, 795 P.2d at 497. The Court stated that, unless the fees were altered to a more reasonable amount, awarding attorney fees based on the liquidated damages clause would amount to a penalty. Id.
In Spinella, the parties entered into a contract which provided that Spinella would pave and install drainage improvements on a parking lot owned by B-Neva. Spinella, 94 Nev. at 374, 580 P.2d at 946. The agreement contained a liquidated damages clause in the form of late payments if the project was not completed on time. Id. B-Neva sued for breach of contract when Spinella failed to complete the project on time and for Spinella’s defective workmanship. Id. The court held that the liquidated damages clause was intended to compensate only for delays in performance, and did not preclude B-Neva from also seeking damages for Spinella’s defective work. Id. at 376, 580 P.2d at 947.
Terminable at Will Contracts
Parties can agree terminate a contract at will. A terminable at will contract contains no guarantee as to its duration or benefits. See Dalton Prop., Inc., 100 Nev. at 424, 683 P.2d at 31. In Dalton, a general contractor reserved the absolute right to terminate the agreement with a subcontractor. Id. at 423, 683 P.2d at 30. Three months into the agreement, the general wrongfully accused the subcontractor of stealing, and the subcontractor was ordered off the job. Id. However, the subcontractor resumed work five months later after a hearing before the State Contractors’ Board and later brought action against the general contractor seeking monetary damages for the loss of income for the five months the subcontractor did not work as a result of the termination. Id. at 423-24, 683 P.2d at 30-31. The Supreme Court of Nevada, recognizing the validity of at-will contracts, ultimately held in favor of the general contractor stating “[w]here a contract provides that either party may terminate the agreement at will, the party so terminated may not recover damages for those profits that he purportedly could have gained over the maximum life of the contract.” Id. The Dalton court stated that awarding damages for future lost profits to a party subject to a terminable at-will contract would actually put the terminated party in a better position than what they agreed to in the contract. Dalton, 100 Nev. at 424, 683 P.2d at 31.
Avoiding Windfall and Economic Waste
Courts seek to avoid undercompensating the injured party by awarding compensatory damages. Dobbs, supra, § 12.2(1), at 22. Further, courts generally seek “an award that compensates without windfall or [economic] waste.” Dobbs, supra, § 12.19(1), at 437; Restatement (Second) of Contracts § 348(2)(b). In Nevada, issues of economic waste and windfall usually arise in the construction context, and usually involve aesthetic defects. Both Dobbs and the Restatement discuss windfall and economic waste in the construction context. See generally Dobbs, supra, § 12.2(1), at 35; Restatement (Second) of Contracts § 348(2)(b)cmt. c.
Windfall
The Nevada Supreme Court holds that awards of windfall damages are improper. See generally Colorado Env’t, Inc., 105 Nev. at 472, 779 P.2d at 84-85; see also Cheyenne Constr., Inc. v. Hozz, 102 Nev. 308, 720 P.2d 1224 (stating that an injured party “is not entitled to be placed in a better position because of the breach than he would have enjoyed” had there been performance). In Colorado Env’t, Inc., the defendant agreed to have plaintiff make improvements on a proposed subdivision that defendant was preparing to develop. Id. at 465-66, 779 P.2d at 80-81. After changes to the contract, extensions of the commencement date, other delays, and a demand by defendant that plaintiff lower its contract price, plaintiff brought an action for breach of contract. Id. at 466, 779 P.2d at 81. The amendment and delays were due to issues defendant was having with the local government. Colorado Env’t, 105 Nev. at 466, 779 P.2d at 81. Plaintiff sought damages for lost profits, equipment leasing costs, and equipment standby costs. Id. at 469-70, 779 P.2d at 83. The Nevada Supreme Court held that by awarding “lost profits and unavoidable costs, i.e., equipment leasing costs, [plaintiff] is placed in the position it would have occupied had it performed the contract.” Id. at 471-72, 779 P.2d at 84. However, the court held that “[a]n award of standby damages . . . would permit a double recover and give [plaintiff an improper] windfall . . . .” Id. at 472, 779 P.2d at 84-85. The Court reasoned that plaintiff anticipated the leased equipment would be in use under their contract with defendant during the period in which plaintiff was asserting standby damages. Id. at 471, 779 P.2d at 84. Therefore, having been awarded lost profits for that period, any further award for standby damages (lost opportunities) would essentially be a double recovery. Id.
Economic Waste
The Nevada Supreme Court holds that the theory of economic waste may support an award of damages based on diminution of value. See generally Mort Wallin of Lake Tahoe, Inc. v. Commercial Cabinet Co., Inc., 105 Nev. 855, 784 P.2d 954 (1989). With its holding in Wallin, the Court seems to align with the Restatement (Second) of Contracts which states that, in circumstances involving incomplete or defective performance, damages based on the cost to remedy a defect will not be awarded where those costs are “clearly disproportionate to the probable loss in value to the injured party.” Restatement (Second) of Contracts § 348. This situation usually warrants the court awarding damages based on the diminution of value (market price) of the property due to the defects. See generally Restatement (Second) of Contracts § 348cmt. c; Dobbs, supra, § 12.19(1), at 36-38; Mort Wallin, 105 Nev. at 856, 784 P.2d at 955. Dobbs explains that awarding the diminution of value in these circumstances is not always appropriate, stating that the cost of repair may still be awarded even if it is greatly disproportionate to the diminution of value so long as it does not give the injured party more than they bargained for. See Dobbs, supra, § 12.19(1), at 36-38.
In Wallin, Mort Wallin of Lake Tahoe, Inc. (hereinafter “MW”) contracted with Commercial Cabinet Co., Inc. (hereinafter “CC”) to have CC rebuild mahogany cabinets in MW’s store in the MGM Grand in Las Vegas (the old cabinets were destroyed in a fire), and, further to build a “western store” in the MGM. Commercial Cabinet Co., Inc. v. Mort Wallin of Lake Tahoe, Inc., 103 Nev. 238, 239, 737 P.2d 515, 516 (1987). After the reconstruction, MW complained that CC’s work was partially defective, refusing to pay CC until it was repaired. Id. CC then sued seeking the balance due for its work; MW filed claims seeking $350,000 compensatory and punitive damages for the defective work. Id. The Nevada Supreme Court upheld the trial court’s holding that, where the diminution of value of the property amounts to $100,000 and the cost or repair/replacement amounts to $350,000, “the appropriate measure of damages is the diminution in the value of the property caused by the breach.” Mort Wallin, 105 Nev. at 856, 784 P.2d at 955. The court ultimately ruled that MW failed to establish a sufficient evidentiary foundation for the $100,000 diminution of value, however, and vacated the trial court’s $100,000 award for diminution of value of the MW property.
Foreseeability/Contemplation by the Parties
It is a generally held principle of contract law that damages are not recoverable unless they were foreseeable as fairly and reasonably arising naturally out of breach, or as reasonably contemplated by both parties as a probable result of the breach at the time the contract was entered into. See Restatement (Second) of Contracts § 351(1) (2008); Connor v. S. Nev. Paving, Inc., 103 Nev. 353, 356, 741 P.2d 800, 801 (1987). Although Nevada law has been more general in defining what is foreseeable under contract law, the high Court aligns with the Restatement (Second) of Contracts which states:
Loss may be foreseeable as a probable result of a breach because it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances, beyond the ordinary course of events, that the party in breach had reason to know. Restatement (Second) of Contracts § 351(2)(a)-(b).
In Connor, the Nevada Supreme Court cites to the well held Hadley v. Baxendale, 156 Eng. Rep. 145 (Ex. 1854) for the proposition that foreseeability is required in contract cases: Damages from a breach of contract should be such as may fairly and reasonably be considered as arising naturally, or where reasonably contemplated by both parties at the time they made the contract. Connor, 103 Nev. 353, 356, 741 P.2d 800, 801. Southern Nevada Paving, Inc. (hereinafter “SNP”) contracted with Ebcon to pave an apartment complex. Id. at 354, 741 P.2d at 800. SNP agreed to reimburse for any late penalties, costs over the contract price, and liquidated damages from a third party attributable to SNP. Id. SNP was terminated for its partial performance and extensive delays resulting from its failure to maintain adequate personnel. Id. SNP then sued to recover labor and materials costs. Id. Ebcon counterclaimed, alleging that it incurred costs of $154, 000 over the contract price and had to pay an additional $134,000 in interest on the construction loan. Id. at 355, 741 P.2d at 801. The court held that the additional $100,000 interest on the construction loan was neither contemplated nor foreseeable as a result of SNP’s breach at the time the parties entered into the contract, and, that SNP was not liable for the additional interest. Id.
Certainty
Another commonly-held principle of contract law is that “[d]amages are not recoverable for loss beyond an amount that the evidence permits to be established with reasonable certainty.” Restatement (Second) of Contracts § 352 (2008); See Dobbs, supra, § 12.4(3), at 69. It is generally accepted that most issues concerning the uncertainty of contract damages involve measuring special or consequential damages, as general damages are usually based on market values. See Dobbs, supra, § 12.4(3), at 69. The Nevada Supreme Court holds that (1) “[t]he party seeking damages has the burden of proving both the fact of damages and the amount thereof,” and (2) although damages do not need to be proven “with mathematical exactude [sic],” there “must be an evidentiary basis for determining a reasonably accurate amount of damages.” Mort Wallin, 105 Nev. at 857, 784 P.2d at 955. In Wallin, the court held that, although “once the fact of damage has been established, some uncertainty in the amount is allowed,” damages should not be awarded in the “absence of any competent evidence to allow the trier of fact to arrive at any sustainable amount [of damages].” Id. MW failed to meet its burden of establishing diminution in value, and therefore vacated the trial court’s award of $100,00 for diminution of value. Id. at 858, 784 P.2d at 956.
MARKET VALUE & COST EXPECTANCY MEASURES
Our discussion of expectation/compensatory damages addresses certain limitations and variables that effect if and how expectation/compensatory damages should be measured. Two competing principles help determine the method of measuring expectation/compensatory damages: the market value measure and the cost expectancy (cost-of-substitute-performance) measure. See Dobbs, supra, § 12.1(2), at 28. Choosing between these two methods of measurement is sometimes left to the plaintiff, but courts are usually left to choose the method “that seems best to provide expectancy recovery while avoiding [economic] waste and windfall.” See Dobbs, supra, § 12.2(2), at 28. It has been suggested, however, that the cost measure is not always available to the injured party; they must justify using the cost measure on the grounds that it is less than the market value measure. See Dobbs, supra, § 12.1(2), at 35. The court’s decision on which method of measurement to apply will depend largely on the facts of the case and the policy involved. Id. Further, either measure may be supplemented with special/consequential damages. Id.
Market Value Measure
Generally, the market value measure “allows the breach victim to recover the market value of the very performance he should have had, less the contract price.” Dobbs, supra, § 12.2(2), at 29; see also Turner Lumber Co. v. Tonopah Lumber Co., 38 Nev. 338, 338, 153 P. 254, 254-55 (1915) (“[T]he measure of damage is the difference between the contract price and the market price of the goods at the time and place when the contract should have been performed.”). As discussed below, the Supreme Court of Nevada has applied the market value measure to contracts involving the sale of real estate and the sale of goods. In addition to Nevada common law, the sale of goods is likely subject to the UCC.
Example of the Market Value Measure: Sale of Goods
In Nevada, the market value measure is appropriate in determining damages for a breach of contract involving the sale of goods/personal property. See generally Turner Lumber Co., 38 Nev. at 338, 153 P. at 254-55. Tonopah contracted to deliver 700,000 feet of lumber to Turner for a price of $18.00 per 1,000 feet. Id. at 338, 153 P. at 254-56. Tonopah milled approximately 565, 913 feet of lumber pursuant to the agreement, but Turner refused to take the lumber. Id. The court held that proper measure of damages for goods and personal property is the market value measure, defined as “the difference between the contract price and the market price of the goods at the time and the place when the contract should have been performed.” Id. at 338, 153 P. 254-55. The court found that the market price was $14.50 per 1000 feet, and awarded Tonopah damages of $3.50 per 1000 feet (the contract price, $18.00 per 1000 feet, less the market value/price of $14.50 per 1000 feet), with total damages of $1,980.69 ($3.50 per 1000 feet multiplied by the 565, 913 feet Tonopah milled pursuant to the contract). Id. at 338, 153 P. at 256.
Examples of the Market Value Measure: Real Estate Transactions
In addition to the sale of goods, the Nevada Supreme Court has clearly established that the market value measure is the proper method of measuring damages in real estate transactions. J.J. Indus., LLC v. Bennett, 119 Nev. 269, 278, 71 P.3d 1264, 1269 (2003) (“[T]he measure of damages in an action for breach of contract to sell real estate is ‘the difference between the contract price and the market value of the land on the date of the breach.’”) (citing Harris v. Shell Dev. Corp., 95 Nev. 348, 352, 594 P.2d 731, 734 (1979); See also Regent Intern. v. Lear, 103 Nev. 33, 34, 732 P.2d 861, 862 (1987); Harris, 95 Nev. at 352, 594 P.2d at 734. It should be noted that estimates as to the market value must not be based purely on speculation.
J.J. Industries (hereinafter “JJ”) contracted with Norman Kaye to buy a parcel of land. J.J. Indus., LLC, 119 Nev. at 272-73, 71 P.3d at 1266-67. After various escrow company changes and extensions, Kaye refused to sign the ultimate escrow agreement, and contracted with a third party for the sale the same parcel. Id. After Kaye sold the land to the third party, JJ sued Kaye for breach of contract and specific performance. Id. The Supreme Court of Nevada upheld the trial court’s dismissal of Kaye’s specific performance claim, and held Kaye liable for breach of contact, awarding JJ monetary damages. Id. at 276-77, 71 P.3d at 1269-70. The court first stated that the appropriate measure of damages in a breach of contract action associated with the sale of real estate is “the difference between the contract price and the market value of the land on the date of the breach.” Id. at 276, 71 P.3d at 1269 (citing Harris, 95 Nev. at 352, 594 P.2d at 734). However, the court in J.J. Indus. determined that the damages award should be based on the contract price as opposed to the market price because there was a lack of evidence as to what the market value of the land was at the time of the breach. Id. The trial court awarded JJ damages based on speculation as to what the market price was at the time of the breach. J.J. Indus., 119 Nev. at 276, 71 P.3d at 1269. The Supreme Court rejected the trial court’s award, stating that a verdict may not be based on speculation. Id.
In Regent Intern., Regent International entered into a contract to purchase a large tract of real property for $24,000,000 from Lear. Regent Intern., 103 Nev. at 34, 732 P.2d at 861. Regent paid Lear $250,000 as a deposit and as a base for liquidated damages should Regent breach. Id. The Supreme Court of Nevada held that the liquidated damages clause was invalid according to Nevada statute which mandated a resale of the land. Id. However, the trial court held that resale of the entire tract could not be reasonably accomplished, and calculated damages based on fair market value. Id. The trial court concluded that the fair market value of the land at the time of breach was approximately $9,000,000, and, therefore, awarded the seller/plaintiff damages of $15,000,000 (the contract price, $24,000,000 less the market value, $9,000,000). Id. On appeal, the Nevada Supreme court stated the general proposition that, “if a resale is not effectuated within a reasonable time despite diligent efforts, the court may award damages based on the market value of the property at the time of the breach.” Id. at 34, 732 P.2d at 862. The Supreme Court ultimately held that because the seller agreed to take the $250,000 deposit as satisfaction of the defendant’s default, no damages based on market value are necessary. Id. at 35, 732 P.2d at 862.
Cost Expectancy Measure
Generally, the cost expectancy measure allows an injured party to recover damages constituting the costs of obtaining reasonable substitute performance. See Dobbs, supra, § 12.2(2), at 30. The cost expectancy measure will usually be permitted only if it yields an amount less than the market value measure. The “[c]ost of substitute performance must be justified on the ground that it is less than the market measure, or that it is likely to provide an accurate measure of the expectancy . . . .” Dobbs, supra, §12.2(2), at 35. The Nevada cases in which the expectancy/cost-of-substitute-performance measure has been applied involve construction services contracts. Further, courts will probably not allow the cost expectancy measure on the grounds that it is likely to provide an accurate measure of expectancy interest if those damages are disproportionate to the market value measure. Dobbs, supra, §12.2(2), at 30.
There are essentially two general situations where the cost expectancy measure is applied under Nevada law: (1) where the performing/servicing party is prevented from completing its performance; and (2) and where the performing/servicing party fails to complete its performance. Compare Fuller v. United Elec. Co., 70 Nev. 448, 451-52, 273 P.2d 136, 137 (1954) (discussing the situation where a party is prevented from performing their its of the contract due to no fault of its own); with Kirkpatrick v. Temme, 98 Nev. 523, 654 P.2d 1011 (1982) (discussing the situation where the performing/servicing party fails to complete performance); see also Cheyenne Constr., Inc. v. Hozz, 102 Nev. 308, 312-13, 720 P.2d 1224, 1227 (1986) (simultaneously awarding damages to both a contractor who was prevented from performing and a property owner for the cost of completion where that same contractor failed to complete the performance).
Application of the Cost Expectancy Measure where the Servicing/Performing Party is Prevented from Completing Performance
The Nevada Supreme Court established that if the breach consists in preventing the performance of the contract without fault of the other party, who is willing and able to perform, the damage of the latter consists in two distinct items, namely: First, what he has already expended toward performance (less materials in hand); and, second, the profits that he would realize by performing the whole contract. Fuller, 70 Nev. at 451, 273 P.2d at 137 (citing Bradley v. Nev.-Ca.-Or. Ry., 42 Nev. 411, 420, 178 P. 906, 908 (1919)).
The court further stated “a contractor who is not in default should recover the total price promised less the cost of performing, in case no work has been done, or of completing performance of work, where there has been partial performance.” Id. (citing 4 Williston on Contracts, 3824, § 1363). However, even where the breaching contractor is at fault, it may still recover “the total price promised less the cost of completing performance and other consequential damages.” Cheyenne Constr., Inc., 102 Nev. at 312, 720 P.2d at 1227.
In Fuller, Fuller contracted to have United Electric (hereinafter “UE”) to install electric wiring in a home. Fuller, 70 Nev. at 449, 273 P.2d at 136. The contract stipulated that 80% of the contract price was payable on completion and successful inspection of the rough-in with the balance payable upon completion of the project. Id. UE successfully completed the rough-in and inspection, but Fuller refused to allow UE complete the contract. Id. UE sued seeking payment of 80% of the contract price, the extras furnished, and the lost profits it would have realized had full performance under the contract been permitted. Id. The trial court awarded UE damages based only on the 80% of the contract completed. Id. at 450, 273 P.2d at 136. The Supreme Court then held that the UE is entitled to damages based on the whole contract, not just the 80% completed, and remands the case for a judgment based on the whole, complete contract. Id. at 453-54, 273 P.2d at 138.
In Cheyenne, Hozz, a mobile home park owner, contracted with Cheyenne Construction, Inc. to provide paving work for the park. Cheyenne Constr., Inc., 102 Nev. at 310, 720 P.2d at 1225-26. Hozz sued for breach of contract due to Cheyenne’s failure to comply with contractual specifications. Id. The trial court found that Cheyenne breached the contract in three respects: (1) by failing applying the prime and seal coats, thereby not finishing performance; (2) by failing to use a certain type of gravel specified in the contract; and (3) by failing to achieve “adequate compaction.” Id. The trial court awarded Hozz the cost to repair and awarded Cheyenne the price of the contract less the cost to finish performance (application of the seal and prime coats). Id. Evidence suggested that these failures resulted in a paving job with only half the life as the one that Cheyenne had promised. Cheyenne Constr., Inc., 102 Nev. at 310, 720 P.2d 1225-26. Further, an expert witness (engineer) suggested that to remedy the situation (to have a paving job equivalent to the one promised to Hozz), an “overlay” was necessary. Id.
Cheyenne appealed, arguing that awarding Hozz the cost of repair and reducing Cheyenne’s damages by the cost to apply the prime and seal coats, the trial court had given Hozz a windfall (double recovery for application of the prime and seal coats). Id. at 312, 720 P.2d at 1227. The Supreme Court of Nevada established two separate but related rules: (1) “where there has been partial performance, a contractor is entitled to recover the total price promise less the cost of completing performance and other consequential damages;” and (2) “[t]he measure of the owner’s damages is the sum that will put him in as good a position if the contact had been fully performed,” and not in a better one. Id. Ultimately, the court agreed with Cheyenne’s argument that Hozz had received a windfall, and remanded the case to determine the appropriate amount of damages. Id. at 313, 720 P.2d at 1227.
Application of the Cost Expectancy Measure where the Servicing/Performing Party Fails to Complete Performance
The Supreme Court of Nevada has adopted the “actual cost” approach in measuring cost expectancy damages where the servicing/performing party fails to complete performance. See Kirkpatrick, 98 Nev. at 526, 654 P.2d at 1013. In Kirkpatrick, the Supreme Court of Nevada was confronted with choosing between two methods of calculating expectancy costs: the “reasonable cost” of completion or the actual costs of completion. See generally Kirkpatrick, 98 Nev. at 525, 654 P.2d at 1013. Specifically, the rule states that where an owner seeks recover for incomplete performance by a defaulting contractor, “the owner may recover the difference between the contract price and the actual cost [of completion].” Id. 525, 654 P.2d at 1013; see also Cheyenne Constr., Inc., 102 Nev. at 312, 720 P.2d 1227 (“The measure of the owner’s damages is the sum that will put him in as good a position as if the contract had been fully performed . . . ,” but no better).
In Kirkpatrick, Kirkpatrick contracted to construct a new home on vacant land. Kirkpatrick, 98 Nev. at 524, 654 P.2d at 1012. The contract called for a specific price to complete the project, but Kirkpatrick eventually requested more funding to finish the construction. Id. The owner refused, terminated Kirkpatrick, and hired a third party contractor to finish the work. Id. The trial court held that Kirkpatrick’s lack of diligence and preparation was the cause the increased construction costs and delays, and awarded the owner the “actual cost” of completion (the actual cost incurred by hiring the third party contractor). Id. The sole issue on appeal was whether the “actual cost” method should be used as opposed to the “reasonable cost” method, which was the generally held rule at the time. Id. at 525, 654 P.2d at 1012. The Supreme Court of Nevada upheld and adopted the trial court’s use of the “actual cost” method. Id. 525, 654 P.2d at 1013.
Moreover, the Nevada Supreme Court held in Cheyenne that where a mobile home owner received both partial and defective performance from a contractor, the injured owner is entitled to damages for the cost of fixing the defects and the cost of finishing the project. Cheyenne Constr., Inc., 102 Nev. at 312, 720 P.2d at 1227. The court also held, however, that should these costs overlap, the damages must be adjusted so that the owner is not provided any kind of windfall or double recovery. Id. at 313, 720 P.2d at 1227.
GENERAL & SPECIAL DAMAGES
This section discusses the two major types of expectancy/compensatory damages – general damages and special/consequential damages. Although general and special/consequential damages are distinguishable, both can be recovered in a single case so long as no double recovery results for the injured party. See Dobbs, supra, § 12.2(3), at 38-39. Note that both general and consequential damages are subject to the limitations discussed above; however, these limitations will most often be associated with special/consequential damages.
General Damages
General damages have been described as the “present value of the thing promised,” or the “value of the very performance contracted for.” See Dobbs, supra, § 12.2(3), at 39. Some courts, including Nevada’s, have formulated a very general definition of general damages, stating that “general damages are those which generally (or naturally or ordinarily) flow from the breach.” See Dobbs, supra, § 12.2(3), at 40; see also Bradley v. Nev.-Ca.-Or. Ry., 42 Nev. 411, 411, 179 P. 906, 909 (1919) (holding that lost profits are general damages where the loss is “a direct and natural result which the law will presume to follow from the breach of contract.”). Unfortunately, no Nevada case explicitly makes the distinction between general and special damages, nor does any case give a clear definition of general damages.
In Bradley, the Nevada Supreme Court held that one may plead “lost profits” as general damages, as they may be the natural result of a breach. Bradley, 42 Nev. at 411, 179 P. at 909. Authorities suggest that “lost profits” are usually associated with special or consequential damages. See Dobbs, supra, § 12.2(3), p. 42. However, in many of the Nevada cases dealing with “lost profits,” those profits are considered general damages. Indeed, even Dobbs admits that “lost profits” may be considered general damages under some circumstances. See Dobbs, supra, § 12.2(3), p. 42-43.
Bradley contracted to construct more than 40 miles of fencing along a railway with a six month completion time. Id. at 411, 179 P. at 906. At the end of the six month period stipulated in the contract, the railroad refused to allow Bradley to continue working on the unfinished portion of the fencing. Id. Bradley sued, claiming it should be allowed to finish the length of fence specified in the contract. The trial court ruled in favor of the railroad. Id. Bradley appealed, arguing that it was entitled to lost profits for the work remaining to be performed. Id. at 411, 179 P. at 908. The Supreme Court of Nevada held that one may plead loss of profits as a general damage because the profits (price of the contract less the price of the work) were the “inducement and real consideration which caused the contractor to enter into the contract.” Id. at 411, 179 P. at 909. Although not discussed, it appears that seeking lost profits in a breach of contract case required loss profits to be “specially pleaded,” and that loss of profits could not be sought as the sole damages. Bradley, 42 Nev. at 411, 179 P. at 909. Further, the Court reasoned that the loss of profits, which were to be a direct result of the work done at the contract price, would be a direct and natural result following a breach of that contract. Id.
In Eaton v. J.H. Inc., 94 Nev. 446, 581 P.2d 14 (1978), the Nevada Supreme Court held that lost profits are generally an appropriate measure of damages where a party is prevented from performing according to the full terms of the contract. Id. at 450, 581 P.2d at 17. The suppliers of gaming equipment loaned money to remodel a restaurant in return for the restaurants agreement to give the supplier exclusive rights to place its games in the establishment, for certain proceeds of the machines, and that the agreement be binding on successors. Id. at 447-48, 581 P.2d at 15. The supplier sued for breach when the defendant’s business was sold and the new owner refused to abide by the agreement. Id. The supplier demanded and the trial court awarded repayment of the balance of the loan and for the lost profits the gaming devices would have generated during the remainder of the contract. Id. at 450, 581 P.2d at 16.
Actually, the plaintiff initially sought liquidated damages in the form of lost profits at a pre-set rate, but the trial court, in agreement with the parties, awarded actual as opposed to liquidated damages for lost profits. Eaton v. J.H. Inc., 94 Nev. at 450, 581 P.2d 16, n. 1. The Supreme Court reasoned that “when plaintiff, as here, is prevented from performing the balance of the term of his contract, lost profits are generally an appropriate measure of damages . . . .” Id. at 450, 581 P.2d at 17 (emphasis added). The Court ultimately held that lost profits were due for the remaining term of the contract, but reversed the trial court’s ruling due to discrepancies regarding the calculation of damages. Id. at 451-52, 581 P.2d 17-18. The court also concluded that the trial court’s calculation of lost profits was correctly founded on substantial evidence. Eaton v. J.H. Inc., 94 Nev. at 451, 581 P.2d 17.
Other Nevada cases also contain examples of the Nevada Supreme Court awarding general damages for breach of contract. See generally Cheyenne Constr., Inc., 102 Nev. at 310, 720 P.2d at 1225-27 (awarding a mobile home park owner was awarded the cost of repairing a defective paving job and the cost of completing the project with substitute performance); Turner Lumber Co., 38 Nev. at 338, 153 P. at 254-55 (awarding damages for the difference between the market price and contract price of milled lumber refused by the purchaser).
Special Damages
Unlike general damages, special or consequential damages are not based on the value of the promised performance, but on the “benefits [the performance] can produce or the losses that may be caused by [the performance’s] absence.” See Dobbs, supra, § 12.2(3), at 40. Where special/consequential damages are more speculative in nature, one may have a more difficult time overcoming the limitations of expectation/compensatory damages. Moreover, attorney fees are not properly considered special damages in Nevada. See Rowland v. Lepire, 99 Nev. 308, 316, 662 P.2d 1332, 1337 (1983).
In Central Bit Supply, Inc. v. Waldrop Drilling & Pump, 102 Nev. 139, 717 P.2d 35 (1986), the Nevada Supreme Court held that in a breach of warranty case, consequential damages could be recovered in addition to general damages where “those damages result ‘from general or particular requirements and needs [of buyer] of which the seller at the time of contracting had reason to know and which could not be prevented by cover or otherwise.’” Id. at 141, 717 P.2d at 37. Waldrop purchased a drill bit from Central for the purpose of drilling and widening certain wells. Id. at 141, 717 P.2d at 37. While Waldrop was drilling, the drill bit broke resulting in Waldrop’s loss of productivity and cost related to repair. Id. The Supreme Court of Nevada upheld Waldrop’s right to consequential damages for the same. Id. at 142, 717 P.2d at 38.
In Harris v. Shell Dev. Corp. Nevada, Inc., 95 Nev. 348, 594 P.2d 731 (1979), the Nevada Supreme Court held that “out-of-pocket” expenses associated with the sale of real estate are recoverable as consequential damages, even if no general damages are awarded. Harris, 95 Nev. at 352, 594 P.2d at 733-34. Shell contracted to sell an apartment complex. Id. at 350, 594 P.2d at 732. The buyer, however, refused to follow through with the sale and Shell sued for breach of contract. Id. The Supreme Court of Nevada held that, although no general damages were awarded in this case, the consequential damages arising from Shell’s preparation for the sale, including the costs of the appraisal and other items, were still recoverable. Id. at 352, 594 P.2d at 734. There were no general damages awarded because the fair market value of the property at the time of breach exceeded the market value at the time of sale, thereby putting the injured party (seller Shell) in a better position. Harris, 95 Nev. at 352, 594 P.2d at 733.
In Knier v. Azores Constr. Co., 78 Nev. 20, 368 P.2d 673 (1962), The Nevada Supreme Court held that although the future lost profits of a business are generally recoverable as consequential damages, the future lost profits of a new motel business was too uncertain to award consequential damages. Knier v. Azores Constr. Co., 78 Nev. 20, 24 368 P.2d 673, 675 (1962).
RELIANCE LOSS
It is generally established that where there is a breach of a valid contract, the injured party may seek reliance expenses or losses as an alternative to expectancy damages. See Dobbs, supra, § 12.3(1), at 50; Restatement (Second) of Contracts § 349. Reliance loss or interest includes “expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.” Restatement (Second) of Contracts § 349. However, recovery under reliance loss theory may not exceed the full contract price. Id. cmt. a. Further, reliance damages may not exceed what would be awarded as expectancy/compensatory damages. See Dobbs, supra, § 12.3(2), at 56. The same limitations placed on expectation/consequential damages are applicable to measuring reliance loss (e.g., foreseeability, uncertainty, etc.). See Dobbs, supra, § 12.3(1), at 50. Moreover, recovery for reliance loss is based on net reliance loss; therefore, any benefit the injured party gains in reliance is credited to the defendant’s liability. Id.
Although Nevada law on reliance loss is limited, Perry v. Jordan, 111 Nev. 943, 900 P.2d 335 (1995), provides some insight. Perry, sold her clothing store to Jordan and entered into a management contract whereby Perry agreed to continue managing the clothing store for one year, and train her replacement, for which she would receive a salary of $5,000 per month. Perry, 111 Nev. at 946, 900 P.2d at 337. After six months, Perry abandoned the store, leaving Jordan to operate at a loss and eventually close the store. Id. Jordan sued, and the trial court awarded Jordan damages based on Perry’s breach of the management contract. Id. The Nevada Supreme Court ultimately affirmed the trial court’s judgment, and held that the $5,000 per month Jordan had paid Perry constituted reliance damages recoverable upon Perry’s breach. Id. at 948, 900 P.2d at 338.
OPPORTUNITY LOSS
Opportunity costs are often associated with reliance loss because the usual scenario is that the injured party forgoes one opportunity by entering into and relying on a contract with the breaching party. See Dobbs, supra, § 12.3(1), at 54. Lost opportunities are at times better characterized as special damages. See Dobbs, supra, § 12.3(1), at 50 (“Unless the lost opportunity was merely an opportunity to deal in an established market, the opportunity will be special damages . . . .”).
EMOTIONAL DISTRESS
The general rule according to the Restatement (Second) of Contracts is that “[r]ecovery for emotional disturbance will be excluded unless the breach also caused bodily harm or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.” Restatement (Second) of Contracts § 353; See also Dobbs, supra, § 12.5(1), at 108. Although there is no recovery for emotional distress based on breach of contract alone, there are two circumstances where damages arising from emotional distress are merited. First, if the breach of contract claim is attached to a tort, recovery for emotional distress will be permitted. Second, damages related to emotional distress are recoverable if those damages were contemplated by both parties. Both circumstances are discussed below.
Recovery Where the Breach Accompanies a Tort
“Emotional distress damages may be recovered if the plaintiff can show that the defendant breached the contract by conduct that also amounts to a tort.” See Dobbs, supra, § 12.5(1), at 109. This can occur in two ways: (1) the tort was independent of the contract relationship, and (2) the tort was dependant on the contract (e.g., a landlord breaching their warranty of habitability). See Dobbs, supra, § 12.5(1), p. 109. For example, in Nevada, a breach of the duty of good faith and fair dealing that accompanies a contract gives rise to tort liability where there is a “special relationship” between the parties. State, Univ. and Cmty. Coll. Sys. v. Sutton, 120 Nev. 972, 989, 103 P.3d 8, 19 (2004). Further, where a breach of the duty of good faith and fair dealing gives rise to tort liability, the injured party is “entitled to compensation for all the natural and probable consequences of the wrong, including injury to the feelings from humiliation, indignity and disgrace to the person.” Id.
The University of Nevada, Las Vegas (UNLV) filed an administrative complaint against one of its professors for unsatisfactory performance, and set a hearing for his termination. Sutton, 120 Nev. at 977, 103 P.3d at 11. Prior to the hearing, however, UNLV. And the professor entered into a settlement contract whereby UNLV. would accept a termination letter from the professor (hereinafter “Sutton”) in exchange for UNLV. canceling the hearing and offering Sutton a non-tenured teaching contract. Id. UNLV. drafted a settlement agreement and gave it to Sutton, who made certain changes, signed it, and sent it back to UNLV. Id. at 977, 103 P.3d at 12. UNLV, then unilaterally altered the agreement by removing all but Sutton’s signature page, attaching Sutton’s signature to the altered agreement. Id. UNLV. offered Sutton an employment contract that did not abide by the terms in the settlement agreement Sutton had signed (but abided by the unilaterally altered agreement), and Sutton sued for breach of contract. Id.
The trial court ordered UNLV. to tender a new settlement agreement containing the changes that Sutton made, and a new employment contract in accordance with the settlement agreement. Id. The new settlement agreement stipulated that the unsatisfactory marks leading to the initial administrative complaint could not be considered as a basis for terminating Sutton. Id. at 978, 103 P.3d at 12-13. After that ruling, UNLV. eventually terminated Sutton’s employment, and Sutton successfully brought suit based on breach of contract and breach of the duty of good faith and fair dealing, alleging that UNLV. breached by using his previous unsatisfactory marks as a basis for his termination. The Nevada Supreme Court held that Sutton was “not required to present expert testimony regarding his subjective emotional distress . . . .” Id.
Additionally, in Farmers Home Mut. Ins. Co. v. Fiscus, 102 Nev. 371, 725 P.2d 234 (1986), the Nevada Supreme Court upheld a trial court’s decision to award emotional distress damages arising out of the breach of an insurance company’s implied covenant of good faith and fair dealing. Fiscus, 102 Nev. at 373, 725 P.2d at 234. The trial court held that Farmers, in continually denying coverage, breached its implied covenant of good faith and fair dealing, and awarded damages for emotional distress. Id. at 374, 725 P.2d at 236. After a three month vacation, the Fiscus family came home to find their home flooded with water coming from a disconnected water supply pipe. Fiscus, 102 Nev. at 373, 725 P.2d at 234. Farmers denied the insurance claim, stating that their insurance coverage did not include damage from water seepage. Id. Farmers appealed claiming, among other things, that there was insufficient evidence to prove emotional distress. Id. The Supreme Court held that the trial court properly awarded compensatory damages for emotional distress, stating that the court could have reasonably concluded the plaintiffs had suffered distress. Id. at 374-75, 725 P.2d at 236. The Covenant of Good Faith and Fair Dealing in Nevada, 1 Nevada Law Review 68 (Spring 1998).
Recovery Where Contemplated by the Parties
Damages for emotional distress arising from a breach of contract may be recoverable if “the plaintiff can show that the emotional distress damages were contemplated by the parties in the particular case . . . .” See Dobbs, supra, § 12.5(1), at 108. The Nevada Supreme Court allows “damages for mental anguish where it is clearly within the terms of the contract or transaction . . . .” Burrus v. Nev.-Ca.-Or. Ry., 750, 145 P. 926 (1915).
Burrus had to charter a special train for a round trip from Reno to Doyle, Nevada in exchange for $125. Burrus, 145 P. at 927. Burrus required the special train because his son, in Doyle, was fatally ill and needed immediate transportation to Reno. Id. After reaching Doyle, the operator told Burrus that it was necessary to go another 20 miles further in order to refuel for the round trip, and did so. Id. Further, the train stopped on the way back to Reno to attach a cattle car. Id. Burrus later discovered that the extra trip was not to refuel, but was to pick up more passengers to take them to Reno. Id. The total delay was approximately three hours, and Burrus sued for breach of contract, seeking recovery for mental anguish as a result of the delay. Id. The Supreme Court of Nevada held that the operator should be “required to pay the damages incurred by the flagrant and intentional breach of the plain terms of its contract . . . ,” including those for emotional distress. Id. at 929.
In Barnes v. W. Union Tel. Co., 76 P. 931 (1904), the Nevada Supreme Court held that claims for emotional distress arising out of a breach of contract should be awarded where those damages were contemplated by the parties to a contract. Barnes, 76 P. at 933-34. While the plaintiff was traveling by train to Ogden, Utah, he contacted with Western Union to send a telegraph ahead to the plaintiff’s brother, so that the plaintiff’s brother could wire him a ticket for the remainder of the plaintiff’s travels. Id. at 931. Western Union never sent the telegraph and plaintiff never received his ticket. Id. Consequently, plaintiff was forced to spend the night in a railroad depot, clandestinely board trains, walk more than twenty miles, and suffer from cold and hunger to finish his trip to Ogden. Id. The plaintiff sued Western Union for breach of contract, and the trial court awarded damages for emotional distress. Id. at 931. The Nevada Supreme Court affirmed the trial court’s award of emotional damages, holding that the defendant contracted with the plaintiff to deliver the telegram to his brother, and that the plaintiff’s suffering was within the contemplation of the parties when they entered into the contract. Id. at 934.
AVOIDABLE CONSEQUENCES DOCTRINE
“As a general rule, a party cannot recover damages for loss that he could have avoided by reasonable efforts.” Connor v. S. Nevada Paving, Inc., 103 Nev. 353, 356, 741 P.2d 800, 801 (1987); see also Interstate Commercial Bldg. Serv., Inc. v. Bank of Am. Nat’l Trust and Sav. Ass’n, 23 F. Supp. 2d 1166, 1176 (1998) (stating that the parties have the “duty” to mitigate or minimize their losses flowing from a breach of contract). The duty to mitigate begins when the breach is discovered. Connor, at 355, 741 P.2d at 801. Further, the breaching party has the burden of proving that the aggrieved party failed to mitigate damages. Id.; see also Cobb v. Osman, 83 Nev. 415,422, 433 P.2d 259, 263 (1967).
The Restatement (Second) of Contracts has a similar rule, but because the rule in Nevada has been documented sufficiently, it was not necessary to cite to it in the general memorandum. The Restatement (Second) of Contracts states:
(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden, or humiliation. (2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Restatement (Second) of Contracts § 350.
In Connor, the Nevada Supreme Court held that although the injured party has the duty to mitigate damages once it discovers a breach, the burden of proving that the breaching party failed to mitigate is on the non-breaching party. Connor, 103 Nev. at 355, 741 P.2d at 801.
In Sheehan & Sheehan v. Nelson Malley and Co., 121 Nev. 481, 117 P.3d 219 (2005), the sellers of an accounting practice sued the buyers for breach of contract. Id. at 484-85, 117 P.3d at 222. The Nevada Supreme Court held that a party is “only required to make reasonable mitigation attempts,” and held that “the duty to reasonably mitigate damages did not obligate [a defendant] to ask [a plaintiff] to correct their own errors.” Id. Moreover, In Hanneman v. Downer, 110 Nev. 167, 871 P.2d 279 (1994), the Nevada Supreme Court restated the general rule that “a party cannot recover damages for losses that a reasonable effort could have avoided.” Id. at 173, 871 P.2d at 283.
See elements for other claims at the Nevada Law Library
