Law School Case Brief
Sunnyland Farms v. Cent. N.M. Elec. Coop., Inc. - 2013-NMSC-017, 301 P.3d 387
The Hadley v. Baxendale standard has been interpreted as an objective foreseeability test: A defendant is liable for losses that were foreseeable at the time of contracting, regardless of whether the defendant actually contemplated or foresaw the loss. Restatement (Second) of Contracts § 351 cmt. a (1981). This foreseeability standard is more stringent than "proximate cause" in tort law; the loss must have been foreseeable as the probable result of breach, not merely as a possibility. The Restatement asks whether there were "special circumstances, beyond the ordinary course of events, that the party in breach had reason to know." In the absence of such circumstances, the breaching party is liable only for general damages. Restatement (Second) of Contracts § 351 cmt. b (1981).
A fire destroyed a hydroponic tomato facility belonging to plaintiff-petitioner Sunnyland Farms. The day before the fire, Sunnyland's electricity had been shut off by its local utility, defendant-respondent Central New Mexico Electrical Cooperative (CNMEC), due to nonpayment. Sunnyland sued CNMEC, alleging both that CNMEC had wrongfully suspended service, and if its electrical service had been in place, firefighters and Sunnyland employees would have been able to stop the fire from consuming the facility. The trial court found the utility liable for negligence and breach of contract. The trial court awarded damages but reduced them for Sunnyland's comparative fault. It also awarded $100,000 in punitive damages. The appellate court reversed the contract judgment, vacated the punitive damages, held that the lost profit damages were not supported by sufficient evidence, affirmed the trial court's offset of damages based on CNMEC's purchase of a subrogation lien, and affirmed the rulings on pre- and post-judgment interest. Sunnyland appealed.
Did the appellate court err in reversing the trial court's award of contract/consequential damages to plaintiff farm business, which had sued defendant utility after it shut off the electricity before a fire destroyed a building and its hydroponic crop.
The Supreme Court of New Mexico affirmed the appellate court's judgment regarding the contract judgment, punitive damages, and interest, and reversed on the lost profit damages and the offset. The Court viewed this as an opportunity to re-examine the standard for consequential contract damages in New Mexico. After considering case law, the Court decided to abandon the "tacit agreement" test previously applied in the Camino Real case. The Court ruled that Hadley v. Baxendale and Restatement (Second) of Contracts state the proper test for consequential damages in New Mexico. The Hadley standard has been interpreted as an objective foreseeability test: A defendant is liable for losses that were foreseeable at the time of contracting, regardless of whether the defendant actually contemplated or foresaw the loss. In a contract action, a defendant is liable only for those consequential damages that were objectively foreseeable as a probable result of his or her breach when the contract was made. Here, upon de novo review, the Court found that there were no special circumstances warranting an award of consequential damages to plaintiff Sunnyland. It did not appear that the trial court actually applied the foreseeability standard correctly. To support the conclusion that Sunnyland's damages were foreseeable to defendant CNMEC at the time of contracting, the trial court should have found "special circumstances, beyond the ordinary course of events." For example, there were no findings that CNMEC should have known that Sunnyland was likely to start fires or was depending on electricity in order to fight any fires that occurred. CNMEC cannot have been expected to anticipate Sunnyland's negligence. Accordingly, the appellate court's reversal of the award of contract damages to Sunnyland was proper because there were no findings that CNMEC should have known of a particular vulnerability to fire on Sunnyland's part, or that Sunnyland had no backup source of power or water.
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