American Mechanical Corp. v. Union Machine Co.

Massachusetts Appeals Court · Contracts

ContractsDamagesReal estate sale contractsChapter 93Abreach of contractseller's damagesreal estate purchase agreementforeseeable loss

Facts

American agreed to sell its Saugus real estate, machinery, and equipment to Union for $135,000, and Union gave a $5,000 deposit check to be held in escrow until closing. Union knew American was under pressure from its mortgagee bank and that failure of the sale would likely lead to the bank's enforcement of its rights, but Union stopped payment on the deposit check two days after the agreement without informing American and later announced it would not proceed. American then notified the bank, which quickly took possession; American was unable to secure another purchaser, and the bank later sold the machinery for $35,000 and acquired the real estate at foreclosure for $55,000. American sued for breach of contract and under G. L. c. 93A.

Issue

When a buyer breaches an agreement to purchase real estate and related business assets, is the seller limited to the traditional measure of damages based on contract price minus market value at the date of breach, or may the seller recover greater actual foreseeable losses caused by the breach? Also, may a c. 93A claim proceed under § 11 without a demand letter when the complaint alleges the necessary elements and seeks relief under that section?

Rule

The aim of contract damages is to place the injured party in as good a position as if the contract had been performed. Although the usual measure for a buyer's breach of a real estate purchase agreement is the difference between the contract price and the market value on the date of breach, that formula is only an application of general contract principles and does not bar recovery of greater actual losses that were reasonably foreseeable or within the parties' contemplation when the contract was made. A breaching party may reduce damages by proving the injured party could reasonably have avoided the loss, and the burden of proving avoidable consequences rests on the party in breach. Recovery under G. L. c. 93A, § 11 is not conditioned on sending a demand letter.

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In Toledo, Nora Vale agreed to sell a small warehouse and attached fabrication equipment to Lakefront Tooling, Inc. for $800,000. During negotiations, Nora told Lakefront that her mortgage lender would likely foreclose if the deal failed, and Lakefront knew she was already in default. Lakefront breached before closing, the lender promptly foreclosed, and the lender's sale of the warehouse and equipment brought in $620,000.

If Nora sues for breach, which measure of damages is most consistent with the governing rule?

Explanation. The usual real-estate formula is not exclusive. Contract damages aim to put the injured party in as good a position as performance would have done, and a seller may recover greater actual losses if they were reasonably foreseeable or within the parties' contemplation when the contract was made. Here, the foreclosure-related shortfall was a concrete actual loss that Lakefront knew was likely if it breached. (Derived from American Mechanical Corp. v. Union Machine Co. (n.d.).)