Cates v. Morgan Portable Bldg. Corp.

• Decision Date: 23 December 1985
• Docket Number: 85-1228,Nos. 85-1144,s. 85-1144
• Citation: 780 F.2d 683
• Parties: 42 UCC Rep.Serv. 451 Dewey CATES and Barbara Cates, partners doing business as U.S. 40 Motel, Plaintiffs-Appellees, Cross-Appellants, v. MORGAN PORTABLE BUILDING CORP., a Texas corporation, Defendant-Appellant, Cross-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 683

780 F.2d 683

42 UCC Rep.Serv. 451

Dewey CATES and Barbara Cates, partners doing business as U.S. 40 Motel, Plaintiffs-Appellees, Cross-Appellants, v. MORGAN PORTABLE BUILDING CORP., a Texas corporation Defendant-Appellant, Cross-Appellee.

Nos. 85-1144, 85-1228.

United States Court of Appeals, Seventh Circuit.

Argued Oct. 21, 1985.

Decided Dec. 23, 1985.

David M. Harris, Greensfelder, Hemker, Wiese, Gale & Chappelow, St. Louis, Mo., for defendant-appellant, cross-appellee.

Terrance L. Farris, Ruppert & Benjamin, Clayton, Mo., for plaintiffs-appellees, cross-appellants.

Before POSNER, FLAUM and EASTERBROOK, Circuit Judges.

POSNER, Circuit Judge.

This diversity breach of contract suit is not the longest contract lawsuit in history, but it is one of the longest relative to the stakes, which are modest (under $60,000). The case is in its fifteenth year, and this is the third appeal to this court. (May its third coming be the last.) The present lawyers for the opposing parties were debate partners in high school at a time when the lawsuit was already well under way; and 12 years ago the plaintiffs were complaining about delay in the disposition of the case. See "Waiting for Court Date: Justice Eludes Motel Operator," Metro-East J., Aug. 27, 1973. They have since learned patience.

The plaintiffs, Mr. and Mrs. Cates, owned a motel. The defendant, Morgan, a Texas corporation, manufactures portable building units. In June 1970 the Cateses made a contract with Morgan to buy for about $26,000 portable buildings that would add 10 rooms to the motel's 12. The buildings were delivered in September, in defective condition. Morgan promised to repair them, and its men did some desultory work at the site on and off for several months. In April 1971, after the men had not been back for more than a month, the Cateses wrote Morgan to say that they considered Morgan to have broken the contract. Morgan did not reply, and the suit was filed in August. Morgan counterclaimed for the unpaid balance of the purchase price, some $3,000.

Trial (a bench trial) began in February 1973 but was adjourned on the basis of a tentative settlement agreement. Negotiations to make the agreement final were protracted but in September 1973 the parties finally stipulated, in an order signed by the district judge, that Morgan would resume the repairs it had discontinued back in March 1971. The Cateses had done no repair work in the meantime either on their own or by hiring a contractor. The work continued on and off for some months, but not to the Cateses' satisfaction. The parties then agreed to submit all issues of liability and damages arising out of Morgan's alleged breach of contract, except the issue of consequential damages, to binding arbitration. In October 1974 the arbitrator ruled that there had been a breach and fixed the Cateses' damages (the cost of making the buildings habitable) at some $3,500, against which Morgan was entitled to set off the amount of the contract price that the Cateses hadn't paid. As the setoff was almost equal to the damages, the Cateses ended up with a net award of only $218.05.

The issue of consequential damages, however, was unresolved. Trial therefore resumed in the district court in May 1975. The Cateses claimed some $56,000 in lost profits from not being able to rent the 10 rooms because of the defective condition in which the portable buildings housing the rooms had been delivered. In October the judge ruled that the Cateses were entitled to consequential damages but of less than $5,000. The Cateses appealed. For reasons no longer clear it was not till the end of 1978 that the appeal was presented to a panel of this court, which reversed, 591 F.2d 17 (7th Cir.1979), on the ground that the district judge had set too stringent a standard for proving lost profits. A new trial was held and a judgment for the Cateses rendered in 1982 awarding them the full $56,000 that they had sought. Morgan appealed and again we reversed (this time in an unpublished order, 735 F.2d 1366), on the ground that the district judge had failed to consider Morgan's defense that the Cateses had failed to mitigate their damages.

When the case came back to the district judge the parties agreed to let him decide the issue of mitigation on the basis of the record of the previous trial, but the judge later vacated the stipulation and a new trial was held last year. This time the judge awarded the Cateses $33,532.14 in consequential damages, representing their lost profits for two periods: September 1, 1970, to September 30, 1971, and September 11, 1973, to April 30, 1975. Regarding the intervening period--October 1, 1971, to September 10, 1973--the judge held that the Cateses had failed to mitigate their damages:

Although the defendant stopped working on March 29, 1971, the Court finds that the plaintiffs had no reason to believe that the defendant was finished with repairing the units. Having no reason to believe that the defendant would not finish, the plaintiffs were under no obligation to mitigate their damages as of March 29, 1971. However, this does not mean that the plaintiffs' duty to mitigate was forever relieved. After a period of time the plaintiffs should have realized that the defendant would not come back to repair the units. The Court feels that after six months, the plaintiffs should have made this realization. Therefore the Court finds that after the passage of six months the plaintiffs' duty to mitigate arose.

The judge also awarded the Cateses $2,500 for what it would have cost them to repair the buildings back in 1971 when their duty to mitigate arose.

The parties have cross-appealed. The main issues concern mitigation of damages, on which see Farnsworth, Contracts Secs. 12.12-.13 (1982). Morgan argues that the duty to mitigate arose before October 1, 1971, and that the judge's finding that the Cateses failed to mitigate damages for a period beginning then (but the precise beginning date doesn't matter) logically precludes any award of consequential damages for a later period. The Cateses argue that the judge improperly placed the burden of proving mitigation on them, that Morgan had an equal opportunity to mitigate and is therefore barred from raising the defense of failure to mitigate damages, and that in fact there never was a period in which they failed to mitigate their damages.

The contract was broken in September 1970 when the buildings were delivered in defective condition, and ordinarily the duty to mitigate damages would have arisen at that time and the Cateses would have been required to set about with reasonable dispatch to put the units into rentable shape. But if a seller of defective goods tells the buyer, don't bother to get the goods repaired--I'll do it--the duty to mitigate is suspended; to put this differently, the seller may not insist on mitigation when by its words or deeds it has led the buyer to believe that it has assumed what would otherwise be the buyer's burden of mitigation. See, e.g., Shearson Hayden Stone, Inc. v. Leach, 583 F.2d 367, 371 (7th Cir.1978). The district judge found, and its finding is not clearly erroneous, that by promising to repair the defects and sending its men to the motel to do the work Morgan lulled the Cateses into thinking that they didn't have to do anything themselves to repair the defects, because Morgan would take care of it.

But if at some point the seller makes clear to the buyer that it has ceased trying to correct the breach, the suspension of the buyer's duty to mitigate damages ends, and he must arrange for the repairs himself. See, e.g., Hutson v. Cummins Carolinas, Inc., 280 S.C. 552, 560, 314 S.E.2d 19, 24 (Ct.App.1984). This happened sometime after March 29, when Morgan's men disappeared from the site. It is a nice question, however, just when the Cateses should have awakened to the fact that Morgan's men were not coming back. If you invite someone to dinner, and hours after he was due he still hasn't arrived, you had better infer that he isn't coming, and start eating. You can't let yourself and your other guests starve merely because there is a slight chance that he will show up days later.

The Cateses' lawyer wrote Morgan on April 23 that they would not pay the balance of the contract price, because Morgan had broken the contract; and we do not think that by waiting less than a month after Morgan's men stopped work to give their side of the dispute the Cateses waited too long. But when Morgan did not promptly reply with further promises of repair, the Cateses had to assume that the breach was irrevocable, that Morgan's crew was not coming back, and that they had better make their own arrangements for the repairs. How long they could wait after April 23 for some form of reply, how much longer after the expiration of a reasonable waiting period it would have taken them to make the repairs themselves or hire a contractor to make them, and when finally the units could have been made habitable are difficult questions since, in fact, the Cateses did nothing. The judge said six months was all they were entitled to. This was a guess; but in the nature of things no more than a guess was possible; and it was an informed and sensible guess, which we cannot deem clearly erroneous (Morgan conceded at argument that it was not an unreasonably long period)--unless perhaps the Cateses are right that Morgan has the burden of proving failure to mitigate damages, rather than their having to prove mitigation.

Our previous opinion held that the law applicable to the substantive issues in this diversity case is the Uniform Commercial Code as adopted in Illinois (Morgan's portable building units were "goods" within the meaning of the Code, see Sec. 2-105). 591 F.2d at 20. As an original matter there would be some doubt whether under Illinois conflict of laws rules, which of course govern in a diversity suit tried in Illinois, Illinois contract...