Sunnyland Farms, Inc. v. Cent. New Mexico Elec. Coop., Inc.

• Decision Date: 18 April 2013
• Docket Number: No. 32,968.,32,968.
• Citation: 301 P.3d 387
• Parties: SUNNYLAND FARMS, INC., Plaintiff–Petitioner, v. CENTRAL NEW MEXICO ELECTRIC COOPERATIVE, INC., Defendant–Respondent.
• Court: New Mexico Supreme Court

301 P.3d 387

SUNNYLAND FARMS, INC., Plaintiff–Petitioner,
v.
CENTRAL NEW MEXICO ELECTRIC COOPERATIVE, INC., Defendant–Respondent.

No. 32,968.

Supreme Court of New Mexico.

April 18, 2013.

[301 P.3d 390]

Freedman Boyd Hollander & Goldberg, P.A., Joseph Goldberg, Michael Lee Goldberg, The Walter K. Martinez Law Office, Kevin Martinez, Albuquerque, NM, Walter Kenneth Martinez, Jr., Grants, NM, for Petitioner.

Sparks, Willson, Borges, Brandt & Johnson, P.C., Gregory V. Pelton, Colorado Springs, CO, Montgomery & Andrews, P.A., Stephen S. Hamilton, Jaime R. Kennedy, Santa Fe, NM, for Respondent.

OPINION
CHÁVEZ, Justice.

{1} This case comes before us because of a fire that destroyed a hydroponic tomato facility belonging to a new business, Sunnyland Farms, Inc. (Sunnyland). The day before the fire, Sunnyland's electricity had been shut off by its local utility, the Central New Mexico Electrical Cooperative (CNMEC), for nonpayment. Sunnyland's water pumps were powered by electricity, and without power, Sunnyland's facility had no water. 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.

{2} After a bench trial, the trial court found CNMEC liable for negligence and breach of contract. The trial court awarded damages, including lost profits, of over $21 million in contract and tort, but reduced the tort damages by 80% for Sunnyland's comparative fault. It also awarded $100,000 in

[301 P.3d 391]

punitive damages. The parties cross-appealed to the Court of Appeals, which (1) reversed the contract judgment, (2) vacated the punitive damages, (3) held that the lost profit damages were not supported by sufficient evidence, (4) affirmed the trial court's offset of damages based on CNMEC's purchase of a subrogation lien, and (5) affirmed the trial court's rulings on pre- and post-judgment interest. Sunnyland Farms, Inc. v. Cent. N.M. Elec. Coop., Inc., 2011–NMCA–049, ¶¶ 2, 101, 119, 149 N.M. 746, 255 P.3d 324.

{3} Sunnyland appealed, and we granted certiorari. Sunnyland Farms v. Cent. N.M., 2011–NMCERT–005, 150 N.M. 667, 265 P.3d 718. We affirm the Court of Appeals regarding the contract judgment, punitive damages, and interest, and reverse on the lost profit damages and the offset. We also take this opportunity to re-examine the standard for consequential contract damages in New Mexico.

BACKGROUND

{4} Sunnyland purchased its electricity from CNMEC. On September 8, 2003, CNMEC shut off electrical service to Sunnyland. Prior to disconnecting electricity for nonpayment, CNMEC ordinarily gives its customers notice that they have fifteen days to pay their overdue bills before service is suspended. It did not give Sunnyland this fifteen-day notice. The trial court record indicates a confusing array of possible billing irregularities, but it is not necessary to address them here because CNMEC does not contest the trial court's findings that it was negligent and that it breached its duty to Sunnyland.

{5} On the morning of September 9, 2003, before electrical service was restored, several Sunnyland employees engaged in arc welding near flammable materials, including cardboard boxes. In doing so, they started a fire that ultimately consumed Sunnyland Farms' packhouse and operations building. When Sunnyland's employees initially discovered the fire, they attempted to put it out using ordinary hoses, but without electricity, the Sunnyland facility had no running water, and the fire grew. Sunnyland does not contest that its employees were negligent both in starting the fire and in reacting to it, for example, by failing to use a fire extinguisher.

{6} Someone living on Sunnyland's property called the fire department. Fire trucks arrived, but they were unable to access well water for firefighting because there was no electricity to power the pumps. Sunnyland had also failed to make alternative arrangements for emergency water in the event that power failed. Firefighters attempted to contact CNMEC to restore electricity to the water sources, but CNMEC employees expressed reservations to the emergency dispatcher, and the firefighters interpreted their statements as a threat that the fire department would have to assume liability. Firefighters attempted to use reservoir water and to preserve water by using foam and smaller hoses, but the buildings were nonetheless destroyed.

{7} Sunnyland sued CNMEC in contract and tort, among other causes of action, for damages resulting from the fire, alleging that if CNMEC had taken adequate care prior to disconnecting Sunnyland's electrical service, firefighters and Sunnyland employees would have had access to water and the fire could have been contained. The trial court found CNMEC liable both in contract and in tort. It calculated total consequential damages of over $21 million, of which $13.7 million was the net value of lost crops that the facility would have been able to grow in the absence of the fire. The trial court reduced the damages in tort by 80% to account for Sunnyland's comparative fault; however, in contract, the trial court awarded the entire almost $21.4 million. The trial court allowed plaintiffs to elect a remedy in contract or tort after the resolution of their appeals.

{8} The trial court also awarded $100,000 in punitive damages based on CNMEC's failure to restore energy when requested to do so by firefighters. The trial court granted CNMEC an offset of approximately $3.2 million for subrogation rights that it had obtained in a settlement with Sunnyland's insurer. Finally, the trial court awarded post-judgment interest on the contract damages at a rate of 8.75%, awarded post-judgment interest on damages awarded under tort at

[301 P.3d 392]

15%, and declined to award any prejudgment interest.

{9} CNMEC and Sunnyland cross-appealed to the Court of Appeals, which affirmed on all issues raised by Sunnyland and reversed on several issues raised by CNMEC. See Sunnyland Farms, 2011–NMCA–049, ¶ 119, 149 N.M. 746, 255 P.3d 324. The Court of Appeals held that in New Mexico, awards of consequential damages in contract are governed by a “tacit agreement” test, which the trial court had failed to apply. Id. ¶¶ 28, 54–55, 60, 66. It therefore reversed the award of damages in contract. Id. ¶ 66. It vacated the trial court's calculation of future lost profits, finding that the trial court's calculations of crop yields lacked sufficient evidence and did not rise to the level of “reasonable certainty,” id. ¶ 99, and then substituted a calculation that it found more reasonable. Id. ¶ 100. The Court of Appeals vacated the award of punitive damages due to the trial court's failure to find the facts necessary to establish corporate liability. Id. ¶ 84. Finally, it affirmed the trial court's rulings on pre- and post-judgment interest and on CNMEC's offset of the damages. Id. ¶¶ 107, 110, 118.

{10} Sunnyland appealed all of the Court of Appeals' holdings to this Court. We address each issue in turn.

DISCUSSIONA. CONTRACT DAMAGES
1. Hadley v. Baxendale and Restatement (Second) of Contracts state the proper test for consequential damages in New Mexico

{11} This Court has previously stated that in an action for breach of contract, the breaching party “is justly responsible for all damages flowing naturally from the breach.” Camino Real Mobile Home Park P'ship v. Wolfe, 119 N.M. 436, 443, 891 P.2d 1190, 1197 (1995). Damages “that arise naturally and necessarily as the result of the breach” are “general damages,” which give the plaintiff whatever value he or she would have obtained from the breached contract. Id. In some circumstances, the plaintiff can also recover for “consequential damages” or “special damages,” which “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.” Id. (quoting 3 Dan B. Dobbs, Dobbs Law of Remedies § 12.2(3), at 41 (2d ed. 1993)) (internal quotation marks omitted).

{12} The classic test for whether a plaintiff may recover consequential damages comes from Hadley v. Baxendale, 156 Eng. Rep. 145, 9 Ex. 341 (1854). In that case, a mill was temporarily shut down due to a broken crankshaft. Id. at 147, 9 Ex. at 344. The defendants were common carriers who were supposed to ship the broken crankshaft to an engineering company to have a new one built, but the defendants “wholly neglected and refused so to do for the space of seven days,” and the mill was shut down for five days longer than should have been necessary. Id. at 146, 9 Ex. at 342–43. The jury awarded the mill damages for the profits it lost due to the delay. Id. at 147, 9 Ex. at 344–45. The appellate court reversed, holding that in an action for breach of contract, recovery was permitted for consequential damages only “such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.” Id. at 151, 9 Ex. at 354.

{13} 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. Restatement (Second) of Contracts § 351 cmt. a (1981); see also id. Illustr. 1 (illustrating that the Restatement standard comes from Hadley). 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. Hadley, 156 Eng. Rep. at 151, 9 Ex. at 354; Restatement (Second) of Contracts § 351(1), § 351 cmt. a. The Restatement asks whether there were “special circumstances, beyond the ordinary course of events, that the party in breach had reason to know.” Id.§ 351(2)(b); see alsoU.C.C. §...