CAMINO REAL MOBILE HOME PARK PARTNERSHIP V. WOLFE, 1995-NMSC-013, 119 N.M. 436, 891
P.2d 1190 (S. Ct. 1995)
CASE HISTORY ALERT: affected by
2013-NMSC-017
CAMINO REAL MOBILE HOME PARK
PARTNERSHIP, a Colorado
general partnership, Plaintiff-Appellant,
vs.
PATRICIA WOLFE, as personal representative of the Estate
of
RUEL M. McCARSON, Defendant-Appellee.
SUPREME COURT OF NEW MEXICO
1995-NMSC-013, 119 N.M. 436, 891 P.2d 1190
APPEAL FROM THE DISTRICT COURT OF DONA
ANA COUNTY Thomas G. Cornish, Jr., District Judge
Sager, Curran, Sturges & Tepper, P.C.
Sarah Curry Smith Las Cruces, NM for Appellant.
E. H. Williams Joseph M. Holmes Las
Cruces, NM for Appellee.
{*439} FRANCHINI,
Justice.
{1} This case concerns a
purchaser's action against a seller for breach of warranty as a result of the
sale and purchase of a mobile home park. The seller warranted that a sewage
treatment plant, which was part of the property and serviced the park, was in good
working condition. The purchaser had problems with the sewage treatment plant
and eventually had to replace the plant as part of a settlement with the
Environmental Improvement Division (EID). The purchaser sued the seller to
recover damages for replacing the sewage treatment plant and adding an
additional leach field, as well as for fines paid to the EID, lost profits, and
diminution in value of the property.
{2} The trial court ruled
that the purchaser had failed to prove that the corrective action taken was
reasonably necessary to cure or correct the breach of warranty; that it failed
to prove that the expenses incurred in the corrective action were fair and
reasonable in amount; and that actions taken by the purchaser shortly after
buying the property distorted and rendered speculative the damages claimed for
lost profits and diminution in value of the property. We reverse in part and
affirm in part. We hold that the court misapprehended the proof required to
show damages in a cause of action for breach of warranty.
{3} A. Facts. In 1984
Plaintiff-Appellant Camino Real Mobile Home Park Partnership (Camino Real)
purchased a 20.46 acre mobile home park located south of Las Cruces, New
Mexico, from Defendant-Appellee Estate of Ruel McCarson (the Estate). Shortly
after purchase of the mobile home park Camino Real sent notices to all tenants
raising their rent from $75.00 per month to $135.00 per month, requiring an
additional security deposit of $110.00 per month, and imposing a "pet fee,"
calculated on a per pet basis, which sums were immediately due and payable by
the tenants. Within six weeks of the notice approximately 80 of the 167 tenants
terminated their tenancy and vacated the park. Camino Real recognized that it
had made a poor business decision and eventually lowered the rent, and by 1986
the park began once again to show a profit.
{4} The purchase of the
mobile home park also presented other problems for Camino Real. The park
included a sewage treatment plant for treatment and disposal of the park's
{*440} wastewater. The contract of sale
between Camino Real and the Estate provided that the Estate, as seller,
warranted that the sewage system was in good working order and was in
compliance with all inspections and local ordinances.
{5} Three weeks after Camino
Real purchased the mobile home park a pool of sewage effluent surfaced in the
area of the park's liquid waste drainage field (leach field). The EID notified
the manager of the park that the surfacing effluent appeared to be causing a
public nuisance and a health hazard to the residents of the park and insisted
that steps be taken to remedy the problem. Ronald McCarson, the executor of the
Estate, was informed of the problem and apparently solicited bids on a new
effluent disposal system. Plans and specifications for an additional leach
field were submitted to the EID and approved in November 1984. In January 1985
the EID contacted Camino Real, threatening legal action if the proposed work
was not completed by February 17, 1985.
{6} On February 18, 1985, a
health program manager from the EID met with McCarson and the manager of the
mobile home park to inspect the sewage treatment plant. An unused leach field
was discovered during the inspection and connected to the existing system. It
appeared to the health program manager that the ponding of the effluent would
be remedied by use of the second leach field. Two months later, however, the
EID received a complaint of offensive odors and raw sewage on the grounds of
the park. A follow-up investigation by the EID confirmed that offensive odors
were emanating from the sewage treatment plant but did not locate any raw
sewage on the premises.
{7} In July 1985 Camino Real
contracted to have New Mexico State University students, under the supervision
of experts from the New Mexico State University Wastewater Treatment
Department, operate and maintain the sewage treatment plant. The contract was
terminated in July 1986 due to the University's inability to control odors from
the sewage treatment plant or the repeated flooding of the leach field by
effluent.
{8} In an effort to remedy
the inadequacy of the waste-water disposal system, Camino Real replaced the
leach field in January 1987, but problems with ponding effluent and strong
odors reappeared soon thereafter. In a letter dated July 2, 1987, the EID
agreed to temporarily refrain from filing legal action against Camino Real on
the condition that Camino Real submit an acceptable discharge plan, designed in
accordance with the Water Quality Control Commission Regulations. In October
1987 the EID approved a discharge plan that contemplated construction of a new
sewage treatment plant on the condition that the plant be operational by
December 14, 1987. Camino Real had not even begun construction of the plant by
this deadline and the EID initiated legal action. Camino Real and the EID
subsequently entered into a settlement agreement, in which Camino Real agreed
to complete the plant by January 1990 and pay a fine of $11,000 for past violations
of the Water Quality Act, NMSA 1978, Section
74-6-10(B) (Repl. Pamp. 1989), and
Water Quality Control Commission Regulations. The new sewage treatment plant
was installed in late 1989 at a cost of over $100,000.
{9} B. Proceedings. In April
1990 Camino Real filed a complaint against the Estate alleging breach of
contract and fraud. A bench trial was held in December 1992. Camino Real
claimed damages for the actual amounts spent in repairs and replacement of the
sewage treatment plant and leach field, as well as damages for fines paid to
the EID, loss of rents, and diminution of value of the mobile home park.
{10} At the close of Camino
Real's case-in-chief, the Estate moved for dismissal of the claim on the basis
that Camino Real had not proven its damages. The trial court found that Camino
Real had failed to prove that "the corrective action taken by Plaintiff to
cure the alleged breach of contract warranty by Defendant was reasonably
necessary to cure or correct the alleged warranty breach." The court also
found that Camino Real "failed to prove the costs and expenses incurred in
the corrective action were fair, reasonable or necessary to correct the alleged
breach of warranty." Finally, the court found that the raising of space
rental rates immediately following the purchase of the mobile home park
{*441} resulted in adverse financial
consequences that irredeemably distorted the lost profits and diminution in
value claims, causing those claims "to become purely speculative."
The court concluded that Camino Real had "failed to prove any damages with
reasonable certainty or by substantial evidence of fairness, reasonableness or
necessity" and dismissed the cause of action.
{11} Camino Real appeals the
order of dismissal, arguing that (1) the trial court erred in dismissing the
case on the ground that the damages incurred for repairing and replacing the
sewage treatment plant and paying the EID fine had not been shown to be
necessary and reasonable in cost; (2) the court erred in ruling that the claims
for lost profits and diminution of value of the property were so speculative as
to preclude recovery; and (3) the court erred in refusing to admit into
evidence, as hearsay, an appraisal of the property and an engineer's report
suggesting methods for remedying the recurring EID violations. We affirm in
part and reverse in part.
{12} A. Standard of Review.
We assume, because the trial court failed to specify the authority for its
ruling, that the court dismissed the cause of action under SCRA 1986, 1-041(B)
(Rule 41(B)), which provides in pertinent part:
After the plaintiff, in an action tried by the court without
a jury, has completed the presentation of evidence, the defendant, without
waiving the right to offer evidence in the event the motion is not granted, may
move for a dismissal on the ground that upon the facts and the law the
plaintiff has shown no right to relief. The court as trier of the facts may
then determine them and render judgment against the plaintiff or may decline to
render any judgment until the close of all the evidence.
{13} In ruling on a motion to
dismiss under Rule 41(B), the court, as factfinder, weighs the evidence and
passes judgment on whether the plaintiff has proved the necessary facts to
warrant the relief asked.
Panhandle Pipe & Steel, Inc. v. Jesko ,
80
N.M. 457, 460,
457 P.2d 705, 708 (1969). A Rule 41(B) dismissal thus is a
judgment on the merits.
Garcia v. American Furniture Co. ,
101 N.M. 785,
787,
689 P.2d 934, 936 (Ct. App.),
certs. denied , 101 N.M. 686, 687
P.2d 743
and 102 N.M. 7, 690 P.2d 450 (1984). The motion to dismiss may
be sustained even though plaintiff's evidence establishes a prima facie case
that would have precluded a directed verdict under SCRA 1986, 1-050(A), for
defendant in a jury trial.
See Panhandle Pipe , 80 N.M. at 460, 457 P.2d
at 708.
{14} We review the
involuntary dismissal of a plaintiff's case under Rule 41(B) for failure to
carry a burden of proof as we review any other judgment on the merits. The
judgment of the trial court will not be disturbed on appeal if the findings of
fact entered by the court are supported by substantial evidence, are not
clearly erroneous, and are sufficient to support the judgment.
See
Mascarenas v. Jaramillo ,
111 N.M. 410, 412,
806 P.2d 59, 61 (1991)
(stating that appellate court's duty is to interpret trial court's findings to
determine whether they are sufficient to support judgment);
Roybal v. Morris
,
100 N.M. 305, 311,
669 P.2d 1100, 1106 (Ct. App. 1983) (stating that
appellate court is "bound by the trial court's findings of fact unless
they are demonstrated to be clearly erroneous or not supported by substantial
evidence");
see also Moore v. City of San Jose , 615 F.2d 1265,
1273 (9th Cir. 1980) (discussing standard of review for trial court's findings
of fact under Fed. R. Civ. P. 41(b) (amended 1991)). Appellate courts may also
reverse a trial court's judgment when the judgment is based on an erroneous
conclusion of law.
Ledbetter v. Webb ,
103 N.M. 597, 602-03,
711 P.2d
874, 879-80 (1985).
{15} B. Actions for breach of
warranty. We first discuss the nature of Camino Real's cause of action for
breach of warranty. Camino Real contends that the Estate warranted that the
sewage treatment plant was in good working order at the time of sale of the mobile
home park. The claim concerns an alleged warranty of quality as it applies to
real property. The law of warranty for sales of goods is codified at NMSA 1978,
Sections
55-2-312 to -318 (Repl. Pamp. 1993) (Uniform
{*442}
Commercial Code); however, the special warranty provisions contained in the
Uniform Commercial Code are not applicable where realty is involved, and in
such cases--as in this case--we apply common law principles of warranty.
See
Dittman v. Nagel , 168 N.W.2d 190, 193 (Wis. 1969).
{16} "A 'warranty' is an
assurance by one party to a contract of the existence of a fact upon which the
other party may rely."
Steadman v. Turner ,
84 N.M. 738, 742,
507
P.2d 799, 803 ( Ct. App. 1973) (quoting 17A C.J.S.
Contracts § 342
(1963)). What is being promised "is indemnification against loss, in case
the facts turn out not to be as represented." 1 Arthur L. Corbin,
Corbin
on Contracts § 14 (1963);
see also Gulf Oil Corp. v. Federal Power
Comm'n , 568 F.2d 588, 599 (3d Cir. 1977) ("[A] warranty amounts to a
promise to indemnify the promisee for any loss if the fact warranted proves
untrue.").
{17} A warranty may be either
express or implied by law.
See 17A C.J.S. Contracts § 342, at 325-38.
Once a court determines a warranty exists, the seller's liability remains the
same whether the breach pertains to an express or an implied warranty. Robert
J. Nordstrom,
Handbook on the Law of Sales § 74 (1970). The United
States Supreme Court has defined "express warranty" as follows:
[A]ny affirmation of the quality or condition of the thing
sold, (not uttered as matter of opinion or belief,) made by the seller at the
time of sale, for the purpose of assuring the buyer of the truth of the fact
affirmed, and inducing him to make the purchase; if so received and relied on
by the purchaser, is an express warranty.
Shippen v. Bowen , 122 U.S. 575, 581 (1887) (quoting Osgood
v. Lewis , 2 H. & G. 495, 518 (Md. 1829)). An action for breach of an
express warranty of the quality or condition of real property sounds in contract,
insofar it arises out of the agreement of the parties and the plaintiff sues to
recover what he contracted to receive. See, e.g., National Ben Franklin Ins.
Co. v. Bakhaus Contractors, Inc. , 335 N.W.2d 70, 72 (Mich. Ct. App. 1983)
(stating that breach of warranty claims sound in contract); Huebner v.
Caldwell & Cook, Inc. , 526 N.Y.S.2d 356, 358 (Sup. Ct. 1988) (same); Barclay
v. Johnson , 686 S.W.2d 334, 337 (Tex. Ct. App. 1985) (same). But see
Fruehauf Trailer Div. v. Thornton , 366 N.E.2d 21, 27 (Ind. Ct. App. 1977)
(allegations of complaint determine whether warranty action is brought in
contract or tort); Ware v. Christenberry , 637 P.2d 452, 456-57 (Kan.
Ct. App. 1981) (facts proven during trial determine whether warranty action is
brought in contract or tort). See generally 2 Alphonse M. Squillante
& John R. Fonesca, Williston on Sales § 15-4 (4th ed. 1974)
(discussing historical development of action for breach of warranty).
{18} The plaintiff's burden
of proof in an action for breach of warranty thus is identical to the burden of
proof in any action for breach of contract. The party relying on the breach of
warranty must prove the existence of a warranty, the breach thereof, causation,
and damages.
Compare Anderson v. Thomas , 336 P.2d 821, 831 (Kan. 1959)
("The burden of proof is on the party relying upon a breach of warranty to
show the warranty, the breach thereof, and that his loss resulted from the
breach of such warranty.")
with Pillsbury v. Blumenthal ,
58 N.M.
422, 427,
272 P.2d 326, 329 (1954) (complaint alleging contract, defendant's
failure to complete work owed under contract, and damages resulting therefrom,
stated facts sufficient for
prima facie cause of action for breach of
contract).
{19} C. Damages for breach of
warranty. Once the plaintiff shows that the defendant has breached a warranty,
the inquiry turns to the damages that the plaintiff has suffered as the result
of the breach. The purpose of an award of damages is to make the injured person
whole.
Hood v. Fulkerson ,
102 N.M. 677, 680,
699 P.2d 608, 611 (1985);
see
also 5 Corbin,
supra , at § 992 (aim of award of damages for breach
of contract "is to put the injured party in as good a position as he would
have had if performance had been rendered as promised"). The underlying
principal is compensation.
Board of Educ. v. Jennings ,
102 N.M. 762,
765,
701 P.2d 361, 364 (1985);
see also Miller v. Robertson , 266 U.S.
243, 252 (1924) (noting
{*443} that
compensation is fundamental principal of damages). Thus damage awards should
provide full and just compensation for the injured party.
See Shaeffer v.
Kelton ,
95 N.M. 182, 187,
619 P.2d 1226, 1231 (1980);
Terrel v. Duke
City Lumber Co. ,
86 N.M. 405, 424,
524 P.2d 1021, 1040 (Ct. App. 1974),
aff'd
in part, rev'd in part on other grounds ,
88 N.M. 299,
540 P.2d 229 (1975).
{20} In an action for breach
of contract the party who fails to perform the agreement is justly responsible
for all damages flowing naturally from the breach.
Shaeffer , 95 N.M. at
187, 619 P.2d at 1231. The damages that arise naturally and necessarily as the
result of the breach are considered general damages, which are based on the
concept that "the plaintiff should be awarded the value of the very thing
promised so that his balance sheet will reflect capital assets he would have
had upon the defendant's full performance." 3 Dan B. Dobbs,
Dobbs Law
of Remedies § 12.2(3), at 40-41 (2d ed. 1993). A plaintiff may recover not
only for harm to his or her entitlement, that is, his general damages, but also
for consequential damages suffered as a result of the defendant's wrong.
See,
e.g., 1 id. § 3.3(4), at 304; Charles T. McCormick,
Handbook on the Law
of Damages § 176, at 673 (1935);
Newcum v. Lawson ,
100 N.M. 512,
513,
672 P.2d 1143, 1144 (Ct. App. 1983). "[C]onsequential or 'special'
damages are not based on the capital or present value of the promised
performance but upon benefits it can produce or losses that may be caused by
its absence." 3 Dobbs,
supra , § 12.2(3), at 41.
{21} Thus, in a case for
breach of warranty of the condition of real property, the defendant may be
liable in general damages for the harm to the plaintiff's entitlement and in
consequential damages for other losses suffered by the plaintiff as a
consequence of the breach. Camino Real's claim for recovery of damages for
replacing the sewage treatment plant and leach field are for general damages,
because they are for recovery of the value of the promised performance itself;
the claims for damages for recovery of the monies paid in fines to the EID,
loss of profits, and diminution in value of the property are for consequential
damages, because they are for recovery of value lost in consequence of the
breach.
{22} When compensation is
sought for breach of warranty as to the condition or quality of construction of
real property, the measure of damages is essentially the same as when
compensation is sought in tort for physical harm to real property or the
structures on it, or when compensation is sought for breach of a construction
contract. 1 Dobbs,
supra , § 5.2(1), at 713; 3
id. § 12.19(1), at
433;
see also Witty v. C. Casey Homes, Inc. , 430 N.E.2d 191, 196 (Ill.
Ct. App. 1981) (stating that measure of damages is same whether plaintiffs sue
for breach of building contract or breach of warranty);
Redbud Coop. Corp.
v. Clayton , 700 S.W.2d 551, 561 n.21 (Tenn. Ct. App. 1985) (damage to real
property caused by faulty construction of water drainage system; plaintiff is
entitled to same measure of damages whether the action was decided upon
negligence, breach of construction contract, or breach of warranty theory). The
objective is to place the plaintiffs in the same financial position, with
regard to the property, as they would have been had the property not been
damaged, or had been adequately constructed, or had been as warranted.
{23} We follow the measure of
damages as stated by Justice Cardozo in
Jacob & Youngs, Inc. v. Kent ,
129 N.E. 889, 891 (N.Y. 1921):
It is true that in most cases [of defective construction] the
cost of replacement is the measure. The owner is entitled to the money which
will permit him to complete, unless the cost of completion is grossly and
unfairly out of proportion to the good to be attained. When that is true, the measure
is the difference in value.
(Discussing damages for breach of construction contract), quoted
with approval in Montgomery v. Karavas , 45 N.M. 287, 296, 114 P.2d 776,
782 (1941); see also Harvey v. Bokum , 70 N.M. 444, 447, 374 P.2d. 500,
502 (1962) (stating that rule for measure of damages for destruction of
property capable of being replaced is cost of restoring or replacing {*444} such property); Mogollon Gold &
Copper Co. v. Stout, 14 N.M. 245, 261-62, 91 P. 724, 729 (1907) (stating
that damages for destruction of property may be proved by cost of repair or
replacement, or by showing depreciation in value of real estate). Thus the
measure of damages where the plaintiff seeks to enforce a warranty as to the
condition or quality of construction of real property is the cost of repairs
required to bring the property into compliance with the warranty or, if the
cost of repairs or replacement involves economic waste, the measure is the
difference between the reasonable market value of the subject property as
warranted and its reasonable market value in its actual condition. E.g.,
Sanford v. Kobey Bros. Constr. Corp., 689 P.2d 724, 726 (Colo. Ct. App.
1984); Northern Petrochemical Co. v. Thorson & Thorshor, Inc., 211
N.W.2d 159, 165 (Minn. 1973); Beik v. American Plaza Co., 572 P.2d 305,
310 (Or. 1977); see also 13 Am. Jur. 2dBuilding and Construction Contracts
§ 79, at 79 (1964) (discussing damages for breach of construction contract); 5
Corbin, supra, § 1089, at 485 (same); Restatement (First) of Contracts §
346(1) (1932) (same). Consequential (or special) damages,1 such as lost profits incurred during
the repair period, may also be recovered if they do not duplicate the recovery
under the standard stated above. 1 Dobbs, supra, § 3.3(7), at 314; see
also Allen v. Allen Title Co., 77 N.M. 796, 798, 427 P.2d 673, 675 (1967)
(stating that award of damages should restore to plaintiff what has been lost
by breach and "what he reasonably could have been expected to gain if
there had been no breach").
{24} Therefore, in order to
meet its burden of proof on its claim of breach of warranty, Camino Real had to
show the existence of a warranty, the breach thereof, causation, and the cost
of repairs required to bring the property into compliance with the warranty.
The trial court ruled from the bench that Camino Real had established that the
sewage treatment plant had been warranted to be in good working order and that
this warranty had been breached. The court, however, found that Camino Real's
proof was insufficient to establish damages, in that Camino Real failed to
demonstrate that it was reasonably necessary to replace the sewage treatment
plant and that the charges for that facility were reasonable in amount. We
disagree, and hold that the evidence presented by Camino Real did establish
damages as a matter of law absent refutation by the Estate, such as to render
the court's dismissal of the action clearly erroneous.
{25} It is true that, under
certain circumstances, parties seeking damages may submit as evidence receipts
for expenses incurred only if they can demonstrate that those expenses were
necessarily incurred as a result of another's wrongful act and that the
expenses were reasonable in amount. For example, employers have an obligation
under the Workers' Compensation Act to provide reasonable and necessary health
care services to employees. NMSA 1978, §
52-1-49 (Repl. Pamp. 1991). In
deciding whether to admit evidence of medical treatments for which payment is
sought under the Workers' Compensation Act, the trial court must determine if
the party introducing the evidence has proved that the costs incurred were
reasonably necessary as a result of the injury and reasonable in amount. The
language of the statute requires the court to make a finding of reasonableness
and necessity before bills may be submitted as evidence of damages. We do not
hold that as a general rule, however, the court must make specific findings on
the necessity and reasonableness of repairs before the plaintiff is entitled to
compensation for the cost of those repairs.
{26} The question for the
court was not whether the expenditures for replacing the sewage treatment plant
were necessary and reasonable, but rather, were there damages caused by the breach
and, if so, what was the amount of damages? The requirement of
"necessity" is better stated as a requirement that the plaintiff show
that the alleged damages were actually caused by the wrong of the defendant.
See
Stevens v. Mitchell ,
{*445} 51 N.M.
411, 414,
186 P.2d 386, 389 (1947) (stating that recovery of damages for breach
requires proof of actual loss and resultant damages);
Caldwell v. Kats ,
555 P.2d 190, 193 (Colo. Ct. App. 1976) (stating that recovery of damages for
breach of warranty requires proof that breach was actual cause of damages),
rev'd
on other grounds , 567 P.2d 371 (Colo. 1977) (en banc);
Jacobs v. Danny
Darby Real Estate, Inc. , 750 S.W.2d 174, 176 (Tex. 1988) (Kilgarlin &
Ray, J.J., concurring) (arguing that Texas Deceptive Trade Practices Act does
not require proof of reasonableness and necessity of expenditures; DTPA only
requires that defendant's conduct constitute a proving cause of actual
damages). In this case, the court stated that it was "undisputed that a
new plant was required to be put in, ultimately." The breach of warranty
thus was the producing cause of the damages resulting from the replacement of
the sewage treatment plant and the leach field.
See Board of Educ. v.
Plymouth Rubber Co. , 569 A.2d 1288, 1297 (Md. Ct. App.) (holding that
award of damages was supported by undisputed evidence that replacement of roof
was necessary to render property as warranted),
certs. denied , 578 A.2d
778 (Md. 1990).
{27} Furthermore, a
requirement, such as that implemented by the trial court, that costs of repair
or replacement be reasonable in amount goes to the scope of damages, not to the
existence of damages. Once a party has established a cause of action for breach
of contract by showing the existence of a contract, breach thereof, causation,
and actual damage, he or she may be awarded nominal damages and costs, even
when failing to establish the amount of compensatory damages.
Stevens ,
51 N.M. at 415, 186 P.2d at 389. Therefore, based on the court's findings that
a warranty had been made as to the condition of the sewage treatment plant and
that the warranty had been breached, Camino Real may have been entitled to at
least nominal damages and recovery of costs.
See Hooton v. Kenneth B. Mumaw
Plumbing & Heating Co. , 318 A.2d 514, 518 (Md. Ct. App. 1974);
see
also NMSA 1978, §
39-3-30 (Repl. Pamp. 1991) ("In all civil actions .
. . the party prevailing shall recover his costs"); SCRA 1986, 1-054(E)
("[C]osts shall be allowed as a matter of course to the prevailing
party").
{28} Camino Real, in this
case, did more. It put on sufficient evidence to support an award of
compensatory damages. The measure of damages in this case is the cost of
repairs required to bring the property into compliance with the warranty.
Camino Real introduced into evidence a list of expenditures, supported by
cancelled checks, and Camino Real's representative testified that those
expenses were incurred in replacing the sewage treatment plant and leach field.
The amount actually paid by a party for repairs is some evidence of the
reasonable cost of repairs and is sufficient to support an award in the absence
of contradictory evidence.
Malinson v. Black , 188 P.2d 788, 791 (Cal.
Ct. App. 1948). The United States Court of Appeals, District of Columbia
Circuit, has stated the rule as follows:
[S]ubmission of a paid bill, supported by testimony of the
claimant or claimant's agent that the expense was occasioned by defendant's
wrong, is sufficient prima facie evidence of the amount of damages. Once
a prima facie case of damages has been established by the claimant, the
burden of production shifts to the opponent to go forward with evidence tending
to mitigate or abate the damages or to undermine the credibility of the
claimant's case.
Eureka Inv. Corp., N.V. v. Chicago Title Ins. Co. ,
743 F.2d 932, 942 (D.C. Cir. 1984) (applying D.C. law) (footnotes omitted). Cf.
Davis v. Los Alamos Nat'l Lab. , 108 N.M. 587, 589, 775 P.2d 1304, 1306
(Ct. App.), certs. denied , 108 N.M. 433, 773 P.2d 1240 and 108
N.M. 433, 773 P.2d 1240 (1989) ("A bill for medical services is prima
facie proof of reasonableness and necessity."). Once Camino Real
introduced its list of expenses incurred in replacement of the sewage treatment
plant and leach field, the burden of proof shifted to the Estate to introduce
evidence that the expenses incurred were not causally related to the breach of
warranty, or that the repairs were excessive in cost. The trial court thus
erred in ruling that Camino Real's proof was insufficient to establish damages.
The evidence presented by Camino Real was sufficient {*446}
as a matter of law to establish damages, absent refutation by the Estate.
{29} We do note, however,
that "a party whose contract has been breached is not entitled to be
placed in a better position because of the breach than he would have been in
had the contract been performed."
Jennings , 102 N.M. at 765, 701
P.2d at 364 (quoting
Blair v. United States ex rel. Hogan , 150 F.2d
676, 678 (8th Cir. 1945)). If the sewage treatment plant was warranted to be in
good working condition, and if that warranty was breached, then Camino Real is
entitled to a sewage treatment plant in working condition that would service
the mobile home park as it existed at the date of purchase, and not one which
may be designed to exceed that standard.
See Hooton , 318 A.2d at 519;
Meyers
v. Antone , 227 A.2d 56, 59 (D.C. 1967) (holding that party who contracted
for properly functioning used oil heating system was not entitled to be put in
better position than had contract been fully performed).
2. Consequential damages.
{30} We turn now to the
question whether the trial court erred in ruling that Camino Real failed to
prove its damages for loss of profits, diminution of value of the property, and
fines paid to the EID. As stated above, these claims are for recovery of
consequential damages. In
Wall v. Pate ,
104 N.M. 1,
715 P.2d 449
(1986), we discussed recovery of consequential damages as follows:
[S]pecial damages may be allowed for items of loss more or
less peculiar to the plaintiff, which may not be expected to occur regularly to
other plaintiffs in similar circumstances, and are a likely loss within the
contemplation of the parties at the time of contracting. Stated another way,
special provable damages flow from the disappointment of a special purpose for
the subject matter of the contract or from unusual circumstances, either or
both of which were known to the parties when they contracted. In such a case,
the amount permitted under the general damage formula, alone, clearly will
either be inadequate or nonexistent.
Id. at 2, 715 P.2d at 450 (citation omitted).
{31} This is essentially the
rule expressed in the seminal case of
Hadley v. Baxendale , 9 Ex. 341, 156
Eng. Rep. 145, 151 (1854), that a party breaching a contract is liable only for
such consequential damages as were within "the contemplation of both
parties" at the time of contracting.
See 3 Dobbs,
supra , §
12.4(6), at 91 ("[T]he scope of liability is limited to the risks or types
of losses which the parties meant his performance to protect against.").
Though sometimes described as a rule requiring "foreseeability" of
harm for recovery of consequential damages,
see E & B Specialties Co. v.
Phillips ,
86 N.M. 331, 333,
523 P.2d 1357, 1359 (1974), we believe that
the foreseeability (or contemplation) of damages rule anticipates an explicit
or tacit agreement by the defendant "to respond in damages for the
particular damages understood to be likely in the event of a breach,"
Wall
, 104 N.M. at 2, 715 P.2d at 450.
See Globe Refining Co. v. Landa Cotton
Oil Co. , 190 U.S. 540, 543-44 (1903) (Holmes, J.);
see also 3
Dobbs,
supra , § 12.4(6), at 92 (consequential damages may be recovered
for specified risks or for risks reflected by parties' own negotiations and
purposes).
See generally Richard A. Epstein,
Beyond Foreseeability:
Consequential Damages in the Law of Contract , 18 J. Legal Stud. 105 (1989)
(advocating use of theory of tacit assumption of risk for determining
consequential damages); McCormick,
supra , § 141 (discussing requirement
of tacit agreement to assume the particular risk).
{32} In cases where profit is
an inducement to making a contract, loss of profits as a result of the breach
is generally considered to be within the contemplation of the parties and
recovery for lost profits will be allowed as damages if causation is proved
with reasonable certainty.
See Ranchers Exploration & Dev. Corp. v.
Miles ,
102 N.M. 387, 389,
696 P.2d 475, 477 (1985). The "reasonable
certainty" standard imposes on the plaintiff "the burden of proving
the fact of damage by a preponderance of the evidence."
Tull v.
Gundersons, Inc. , 709 P.2d 940, 943 (Colo. 1985);
see also Wirth v.
Commercial {*447} Resources, Inc. ,
96 N.M. 340, 344,
630 P.2d 292, 296 (Ct. App.) ("The lack of certainty
that will prevent a recovery is uncertainty as to the fact of damages, not as
to the amount."),
certs. denied ,
96 N.M. 543,
632 P.2d 1181
(1981). Even though the amount of damages need not be proven with mathematical
certainty, neither can it be based on surmise, conjecture, or speculation.
Mascarenas
, 111 N.M. at 415, 806 P.2d at 64.
{33} The trial court found
that certain acts of Camino Real taken within days after purchase of the mobile
home park, including almost doubling the rents and requiring a large damage
deposit from the tenants, resulted in adverse consequences that irredeemably
distorted Camino Real's claims for loss of profits and diminution of value of
the property and caused them to become purely speculative. Camino Real seems to
concede that it could not prove its consequential damages with reasonable
certainty for the period of time directly following purchase of the mobile home
park. It argues, however, that damages were sought only for the period
following replacement of the sewage treatment plant in 1989, long after the
effects of the 1984 rent increase had been ameliorated, and that its claimed
damages for lost profits and diminution of value of the property were suffered
as a consequence of the breach because it was forced to divert funds to replace
the sewage treatment plant and could no longer afford to maintain the mobile
home park properly.
{34} The question whether
Camino Real proved that these alleged losses were caused by the breach of
warranty is one of fact, and we hold that the trial court's ruling that Camino
Real failed to meet its burden was supported by substantial evidence and was
not clearly erroneous. Moreover, there is no evidence in the record that Camino
Real's precarious financial situation was made known to the Estate or that the
Estate agreed, explicitly or tacitly, to protect Camino Real in the event of
breach of warranty from losses resulting from Camino Real's financial inability
to maintain the premises of the mobile home park. As we stated in
E & B
Specialties Co. v. Phillips :
"Parties, when they enter into contracts, may well be
presumed to contemplate the ordinary and natural incidents and consequences of
performance or non-performance; but they are not supposed to know the
condition of each others affairs , nor to take into consideration any
existing or contemplated transactions, not communicated nor known, with other
persons. Few persons would enter into contracts of any considerable extent as
to subject matter or time if they should thereby incidentally assume the
responsibility of carrying out, or be held legally affected by, other
arrangements over which they have not control over and the existence of which
are [sic] unknown to them." Sutherland on Damages , 4th ed. vol. 1,
page 182, § 47.
86 N.M. at 334, 523 P.2d at 1360 (quoting Macchia v. Megow
, 50 A.2d 314, 316 (Pa. 1947)) (emphasis added) (alteration in original).
The fact that Camino Real was in precarious financial shape was a special
circumstance presenting the risk that it could not afford to maintain the
mobile home park in a condition to attract tenants or retain resale value if
forced to repair the sewage treatment plant. The Estate is not imputed with
knowledge of Camino Real's affairs so as to place this risk within the
contemplation of the parties; therefore "damages which resulted from those
special circumstances were recoverable only if they were communicated to or
known by both parties at the time they entered into the [contract]." Id.
No such showing was made, therefore Camino Real failed to meet its burden
of proof for its claims for consequential damages for lost profits and
diminution in value of the property.
{35} The risk that Camino
Real would be subject to penalties or fines such as those assessed by the EID,
however, was clearly within the contemplation of the parties. The Estate
warranted that the sewer system was in full compliance with all inspections and
local ordinances, which indicates that the parties considered the circumstance
that failure of the sewage treatment plant to pass inspections or comply with
legal requirements could result in harm to Camino Real. The court therefore
should consider an award of damages for fines paid by Camino
{*448}
Real to the EID as a consequence of the inadequate working condition of the
sewage treatment plant, subject to mitigation or rebuttal by the Estate.
{36} D. Exclusion of exhibits
on hearsay grounds. Finally, Camino Real appeals two rulings of the trial court
that excluded documents from admission into evidence as hearsay. The first
document is a report prepared by Southwest Engineering, Inc., which set out
five options available to Camino Real to correct the problems with the sewage
treatment plant. The second document is an appraisal of the mobile home park
prepared in 1988. Camino Real argues that the exhibits were not offered to
prove the truth of the matter asserted,
see SCRA 1986, 11-801(C), but we
disagree. The engineer's report was relevant only to prove causation, that is,
that the plant was defective and required repair or replacement; and the
appraisal was relevant only to prove damages, that is, that the value of the
mobile home park had diminished. The exhibits were offered as evidence of the
truth of the assertions that the plant required repair or replacement and that
the park had a certain value at a particular time, and therefore were hearsay.
{37} Hearsay statements are
generally considered to be unreliable because they are not given under oath and
cannot be tested by cross-examination to determine the truthfulness of the
declarant.
Chiordi v. Jernigan ,
46 N.M. 396, 402,
129 P.2d 640, 644
(1942);
State v. Taylor ,
103 N.M. 189, 197,
704 P.2d 443, 451 (Ct. App.
1985). In his treatise on evidence, Professor Wigmore describes the hearsay
rule as follows:
The theory of the hearsay rule is that, when a human
utterance is offered as evidence of the truth of the fact asserted in it, the
credit of the assertor becomes the basis of our inference, and therefore the
assertion can be received only when made upon the stand, subject to the test of
cross-examination.
6 John H. Wigmore, Evidence § 1766, at 250 (James H.
Chadbourn rev. 1976). The trial court thus ruled correctly that the exhibits
were inadmissible unless the experts who prepared the documents testified under
oath and were subject to cross-examination by the defendant. See Lahr v.
Lahr , 82 N.M. 223, 224, 478 P.2d 551, 552 (1970) (noting that appraiser's
written report on valuation of property was inadmissible unless appraiser had
been subjected to cross-examination as to value placed on property).
{38} We hold that the trial
court erred in ruling that Camino Real failed to prove by substantial evidence
its damages for replacement of the sewage treatment plant, replacement of the
leach field, and fines paid to the EID; however, we affirm the court's rulings
on the damages for lost profits and diminution in value of the property and on
the admissibility of the engineer's report and the appraisal. The judgment of
the court is reversed and this action is remanded for further proceedings
consistent with this opinion. On remand, the Estate should be afforded an
opportunity to present evidence as if the motion to dismiss had been denied by the
trial court.
See International Union United Auto., Aerospace & Agric.
Implement Workers of America, UAW v. Mack Trucks, Inc. , 917 F.2d 107,
110-11 (3d Cir. 1990) (discussing Fed. R. Civ. P. 41(b) (amended 1991)),
certs.
denied , 499 U.S. 921 (1991). Although Camino Real need not again offer the
evidence it has already introduced, it "should be allowed to supplement
the present record, in chief or by rebuttal, with any evidence that could
properly have been admitted at the first trial of these issues."
Riegel
Fiber Corp. v. Anderson Gin Co. , 512 F.2d 784, 793 (5th Cir. 1975)
(discussing Fed. R. Civ. P. 41(b)(amended 1991)).
1
Consequential damages are often referred to as special damages, and the terms
are used interchangeably in this opinion.