Lawrence v. Will Darrah & Associates, Inc.

• Decision Date: 19 April 1994
• Docket Number: No. 4,Docket No. 94885,4
• Citation: 516 N.W.2d 43,445 Mich. 1
• Parties: Benjamin P. LAWRENCE, Plaintiff-Appellant, v. WILL DARRAH & ASSOCIATES, INC., Lucy Jane Barker, Representative Underwriter of All Underwriters Subscribing the Policy, Defendants/Appellees. Calendar
• Court: Michigan Supreme Court

Page 43

516 N.W.2d 43

445 Mich. 1

Benjamin P. LAWRENCE, Plaintiff-Appellant, v. WILL DARRAH & ASSOCIATES, INC., Lucy Jane Barker Representative Underwriter of All Underwriters Subscribing the Policy, Defendants/Appellees.

Docket No. 94885.

Calendar No. 4.

Supreme Court of Michigan.

Argued Nov. 2, 1993.

Decided April 19, 1994.

Timothy A. O'Rourke, Hay & O'Rourke, P.C., Lansing, for plaintiff/appellant.

Plunkett & Cooney, P.C., by Ernest R. Bazzana, Detroit, for defendants-appellees.

BOYLE, Justice.

The present action involves a suit by plaintiff, Benjamin P. Lawrence, filed against defendants, Will Darrah & Associates, Inc., and Lucy Jane Barker, to collect monies recoverable under an insurance policy and for consequential damages in the form of lost profits caused by defendants' failure to timely pay plaintiff's claim. The plaintiff obtained a $70,800 judgment in the trial court and the defendants appealed. The Court of Appeals reversed in part, ¹ holding that the trial court erred in denying the defendants' motion for a directed verdict because there was insufficient evidence "to create a factual issue regarding whether lost profits were foreseeable when the policy was issued." 194 Mich.App. 635, 487 N.W.2d 820 (1992). The plaintiff appealed. We granted leave to decide "whether the Court of Appeals erred in reversing the jury award for lost profits." 442 Mich. 938, 505 N.W.2d 576 (1993). Under the circumstances of this case the trial court did not err in denying the defendants' motion for a directed verdict. We reverse the decision of the Court of Appeals and remand the case to the circuit court for a recalculation of the interest due.

I

In November, 1981, the plaintiff purchased an over-the-road tractor-trailer. At the time of purchase, he obtained an insurance policy covering theft through Fawcett & Associates, Inc., with Will Darrah & Associates, Inc., the managing general agent for Lloyd's of London, as the insurers. The policy notes on its front page that the vehicle will be used for commercial purposes and that the plaintiff's occupation is hauling dry freight. The policy covered only one truck, and the plaintiff personally was named as the insured. The plaintiff used the tractor to haul freight from November, 1981, until January, 1982, when it was stolen. The plaintiff reported the theft to the police and called Fawcett & Associates, Inc., who promptly reported the theft to the defendants.

For reasons that remain largely unknown, the defendants delayed in settling under the policy. ² When the defendants' adjuster finally offered the plaintiff a settlement, it was only under the condition that the plaintiff waive all future claims. ³ Consequently, the plaintiff did not receive recompense until a settlement was reached on the eve of trial. ⁴ Defense counsel conceded during oral argument that defendants do not here challenge the jury's determination that the contract was breached or the amount of lost profits that the plaintiff claimed. Thus, the narrow issue before the Court is whether the trial court erred when it denied defendants' request for a directed verdict.

II

The defendants' argument in essence, is that the commercial nature of this transaction was not in itself sufficient to put the parties on notice that the plaintiff would suffer lost profits. Defendants contend that the measure of damages for breach of a contract to pay money is the contract price plus interest, absent evidence that the parties contemplated other damages at the time they entered into the contract. From this premise, defendants conclude that plaintiff's failure to introduce testimony that he was unable to replace the vehicle when the defendants breached the contract defeats his prima facie case. It is with this final assertion that we disagree.

A

The controlling case in this area is Kewin v. Massachusetts Mutual Life Ins. Co., 409 Mich. 401, 295 N.W.2d 50 (1980). Kewin involved a breach of contract suit. The plaintiff sought damages arising out of the nonpayment of benefits under a disability income protection policy. The alleged damages included mental anguish and exemplary (punitive) damages. After reviewing Michigan law on the matter, we held that neither the mental distress ⁵ nor exemplary damages ⁶ were recoverable under the circumstances presented.

We acknowledged the rule of Hadley v. Baxendale, 9 Exch. 341, 156 Eng.Rep. 145 (1854), and its usual application to the commercial contract setting:

[T]he damages recoverable for breach of contract are those that arise naturally from the breach or those that were in contemplation of the parties at the time the contract was made. 5 Corbin, Contracts, § 1007. Application of this principle in the commercial contract situation generally results in a limitation of damages to the monetary value of the contract had the breaching party fully performed under it. [409 Mich. at 414-415, 295 N.W.2d 50.]

However, we also noted that the general rule limiting damages for breach of a commercial contract had been held inapplicable where there wasevidence that the parties contemplated the damages. ⁷

Miholevich v. Mid-West Mutual Auto. Ins. Co., 261 Mich. 495, 246 N.W. 202 (1933), was such a case. This Court began by reaffirming the general rule stated in Clark v. Craig, 29 Mich. 397, 402 (1874), that "[f]or any mere delay in payment, interest is in law regarded as a sufficient compensation." The Court noted, however, that this rule is not absolute:

The damages claimed by plaintiff are for a breach of defendant's contract to pay the judgment. In Frederick v Hillebrand, 199 Mich 333, 341 [165 N.W. 810 (1917) ], in which damages were claimed for a breach of contract, it was said:

"The damage which a party ought to receive in respect to such breach of contract may be said to be such as may fairly and reasonably be considered either as arising naturally--that is, according to the usual course of things--from such breach of contract itself, or 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 a breach of it."

The rule thus stated is in accord with that laid down in the English case of Hadley v. Baxendale, 9 Exch 341 (156 Eng Repr 145; 23 LJ Exch 179; 18 Jur 358; 5 Eng Rul Cas 502), and has been followed quite generally by all the courts in this country. (See citations in footnote in 8 RCL, p 455 et seq.) Let us apply it to the facts in this case. The plaintiff was a man without means. He owned an automobile, and was aware of the fact that a judgment might at some time be recovered against him for his negligence in driving it. It must be presumed that he knew that, if he did not paysuch judgment, a body execution might issue against him. To protect himself from this liability he sought and secured the policy in question. The defendant must also be presumed to have known that, in case of plaintiff's default in payment, his arrest might follow. Must it not then be reasonably supposed that the liability to arrest to which plaintiff was exposed was in the contemplation of these parties at the time the contract was entered into? While there are many cases in which this rule of law has been so applied, we find none involving the question here presented.

The wilful neglect of the defendant to pay the judgment was not due to an oversight on its part. It resulted in the imprisonment of plaintiff, with the shame and mortification as well as loss of time incident thereto. A reasonable interpretation of the contract and the application of the law thereto justified the award of damages by the trial court. [261 Mich. at 498-499, 246 N.W. 202.]

The Miholevich analysis illustrates how in a given case an application of Hadley can allow for more than interest damages. ⁸

Alderton v. Williams, 139 Mich. 296, 300, 102 N.W. 753 (1905), a case relied upon by the defendants and referred to in Miholevich, also found the general limitation on damages recoverable for a failure to pay inappropriate under the facts of a given case. In that case, the defendant argued

[t]hat the measure of damages where one fails to advance money as agreed is the excess in interest which the borrower is compelled to pay to procure the money elsewhere.... In such cases the law presumes that the borrower can obtain money elsewhere, and the increased rate of interest therefore furnishes full compensation for his damages. [Alderton, supra at 300, 102 N.W. 753.]

The Alderton Court noted that this general limitation on damages only applies "where the defaulting party failed to advance money which he had promised to loan." Id. at 300, 102 N.W. 753 (emphasis in original). The Alderton Court went on to hold:

Those cases [limiting interest to damages] and the principle underlying them have no application to the case at bar. Here plaintiff defaulted, not in making an agreed loan, but in contributing to a joint adventure. Even if defendants had the right to do so, it cannot be presumed that they could have obtained such a contribution from some other source. [Id. at 300-301, 102 N.W. 753.]

Alderton is valuable not because it limits commercial contract damages to cases involving "loans." Kewin does not so limit its holding. Rather, Alderton indicates that the rule limiting damages to interest in cases involving commercial contracts is not an inflexible bar to consequential damages. Instead, the rule is to be sensibly applied where the justifications for application, namely, that the parties did not contemplate the additional damages, are present. The federal courts, interpreting Michigan law, have recognized this approach.

In Salamey v. Aetna Casualty & Surety Co., 741 F.2d 874 (CA 6, 1984), a diversity action, the United States Court of Appeals ⁹ recognized that under the circumstances of a given case, lost profits are recoverable under Michigan law for breach of an insurance contract:

[The defendant] argues that the...