FSM 6 Intrm. 502-508

The trial court has wide discretion in determining the amount of damages in a contract case. In a breach of contract case the non-breaching party is entitled to damages that will put the party in the position he or she would have been in if not for the breach. The plaintiff may be compensated for the injuries flowing from the breach either by awarding compensation for lost profits, or by awarding compensation for the expenditures made in reliance on the contract. Kihara Real Estate, Inc. v. Estate of Nanpei (III), 6 FSM Intrm. 502, 505 (Pon. 1994).

The right to recover expenditures made in reliance on the contract has limitations. If the plaintiff would have suffered the same losses even if the defendant had performed under the contract, then the plaintiff cannot recover them, since recovery would put the plaintiff in a better position than he would have been in had the defendant performed. Kihara Real Estate, Inc. v. Estate of Nanpei (III), 6 FSM Intrm. 502, 505 (Pon. 1994).

In order to be recoverable, contract damages must be a proximate consequence of the defendant's breach. A proximate consequence is one that flows from the act complained of, unbroken by any independent cause. Thus, where the loss would have occurred even if the defendant had not breached the contract reliance damages are not recoverable. Kihara Real Estate, Inc. v. Estate of Nanpei (III), 6 FSM Intrm. 502, 506 (Pon. 1994).

The purpose of the remedy of restitution is not to compensate the non-breaching party for reliance expenditures, but rather to prevent unjust enrichment of the breaching parties by forcing them to give up what they have received under the contract. Therefore defendants who breached an enforceable option agreement must return the $12,500.00 consideration, not because it is a loss attributable to the breach, but because the defendants would be unjustly enriched if they were allowed to keep the consideration after failing to live up to their end of the option agreement. Kihara Real Estate, Inc. v. Estate of Nanpei (III), 6 FSM Intrm. 502, 507 (Pon. 1994).

On May 26, 1994, a hearing was held on the damages to be awarded to the plaintiff based on the defendants' breach of a lease option agreement that was executed as part of a development project. The plaintiff asked for $54,405.96 in damages. That amount represented not only the $12,500.00 that the plaintiff paid to the defendants as consideration for the lease option agreement, but also various expenditures made by the plaintiff in an effort to advance the development project. For the reasons discussed below, the Court concludes that the plaintiff is entitled to the return of the $12,500.00 paid to the defendants as consideration for the lease option agreement, but not to compensation for the other expenditures claimed.

The plaintiff is a developer who was exploring the possibility of leasing certain lands owned by the defendants in Pohnpei in order to build a resort, condominiums, and golf courses. In December of 1990, the parties executed an "option agreement and right of first refusal" which provided that for a 180-day period from December 8, 1990, to June 6, 1991, the defendants would not "lease, sell, transfer or otherwise dispose of or grant use rights in any of the [properties covered by the agreement] to any legal or natural person other than Developer during the term of this agreement without the express written consent of Developer." Agreement § 2.1. The agreement stated that, by June 6, 1991, the defendants would provide the plaintiff with a final list of possible properties to be leased.

The lease option agreement also discussed certain terms relating to the actual leases. One such condition stated that the closing date for the leases would be 30 days after the developer received "[a] copy of duly enacted legislation wherein the State of Pohnpei provides by law for an increased term of permissible lease of land from the present twenty-five years to a permissible term of not less than seventy-five years." Agreement § 6.3.2.1 The agreement also had another section stating that the parties had not agreed about the duration of the leases, but that the parties agreed to "resolve this issue at the next negotiation session . . . in January 1991." Agreement § 9.2. Under the agreement, the plaintiff paid the defendants $12,500.00 in consideration at the time the agreement was executed.

The defendants never provided the final list of properties, and during the option period the defendants leased at least two of the areas of land covered by the option agreement to someone other than the plaintiff, without first giving the plaintiff notice or right of first refusal. On May 3, 1993, the Court found that the defendants' actions were in breach of the option agreement.

The plaintiff has requested a total of $54,405.96 in damages. See Pl.'s Ex. 9. Of that amount $12,500.00 is restitution of the consideration paid by the plaintiff, $17,500.00 is for expenditures on a project to survey and map the various areas covered by the agreement, $9,260.25 is for attorney's fees to carry the agreement forward, and the rest is travel expenses. The travel expenses cover four trips made to Pohnpei by Kihara Real Estate officials, including one undertaken before the contract was entered into and one made after the plaintiffs were on notice that the deal had fallen through. In addition, the travel expenses for one of the trips included the cost of bringing the plaintiff's potential business partners to Pohnpei.

The defendants have raised a number of objections to the damages sought by the plaintiff. The defendants argue that the plaintiff has not shown that any of the losses were the result of the defendants' breach since the agreement contained conditions that were outside the control of the parties, and these conditions would have "prevented the plaintiff from recovering his expenditures . . . even if the defendants did not limit or repudiate the Option Agreement." In addition to this general objection, the defendants argue that certain specific losses were not sufficiently related to the contract. They note that one of the trips to Pohnpei for which the plaintiff seeks compensation was undertaken before the lease option agreement was even entered into, and that another of the trips was taken after the plaintiff was on notice of the breach. See Gruber v. S-M News Co., 126 F. Supp. 442, 447 (S.D.N.Y. 1954) (amounts spent prior to the contract period are generally not recoverable); 25 C.J.S. Damages § 46b (1966) (non-breaching party entitled to recover reliance expenditures, but not expenditures made before the contract was entered into); see also Miller v. United States, 140 F. Supp. 789, 795 (Ct. Cl. 1956) (denying recovery of amounts spent after the non-breaching party was on notice of the breach). Similarly, the defendants state that the survey project for which the plaintiff seeks compensation was initiated on December 4, 1990 ) prior to the December 8th execution of the option contract. The defendants also argue that the costs that the plaintiff spent to bring potential business partners to Pohnpei was "strange to the contract" and not within the contemplation of the parties. See Dr. Franklin Perkins School v. Freeman, 741 F.2d

The parties' submissions, and the Court's own research, did not reveal any FSM cases or provisions that stated substantive principles of contract damages relevant to this case. Common law decisions of the United States are an appropriate source of guidance for this Court for contract issues unresolved by statutes, decisions of constitutional courts here, or custom and tradition within the Federated States of Micronesia. Semens v. Continental Air Lines, Inc. (I), 2 FSM Intrm. 131, 142 (Pon. 1985).

A number of general principles are well-settled in the United States cases. The trial court has wide discretion in determining the amount of damages in a contract case. Breaux v. Schlumberger Offshore Servs., 817 F.2d 1226, 1232 (5th Cir. 1987); Arkansas Rice Growers Co-op. Ass'n v. Alchemy Indus., Inc., 797 F.2d 565, 571 (8th Cir. 1986); United States ex rel. Morgan & Son Earthmoving, Inc. v. Timberland Paving & Constr. Co., 745 F.2d 595, 599 (9th Cir. 1984). In a breach of contract case the non-breaching party is entitled to damages that will put the party in the position he or she would have been in if not for the breach. See, e.g., Chicago Painters' & Decorators' Trust Funds v. Karr Bros., 755 F.2d 1285, 1290 (7th Cir. 1985); Dr. Franklin Perkins School v. Freeman, 741 F.2d at 1519; United Indus. Syndicate v. Western Auto Supply Co., 686 F.2d 1312, 1316 (8th Cir. 1982); Plantation Key Developers v. Colonial Mortgage Co. of Indiana, 589 F.2d 164, 169 (5th Cir. 1979); 22 Am. Jur. 2d Damages § 26 (1988). The plaintiff may be compensated for the injuries flowing from the breach either by awarding compensation for lost profits, or by awarding compensation for the expenditures made in reliance on the contract. Wartzman v. Hightower Prod. Ltd., 40 A.L.R.4th 523, 528 (Md. Spec. App. 1983); United Indus. Syndicate, 686 F.2d at 1316; Plantation Key Developers, 589 F.2d at 169.

The plaintiff has the burden of proving the damages, 25A C.J.S. Damages § 144, at 11 (1966), but once a prima facie showing of damages has been made it is the defendant's burden to prove that the injuries did not result from his omission. Id. § 158, at 64. Therefore, the right to recover expenditures made in reliance on the contract is not without limitation. If it can be shown that the plaintiff would have suffered the same losses even if the defendant had performed under the contract, then the plaintiff cannot recover them, since recovery would put the plaintiff in a better position than he would have been in had the defendant performed. Wartzman, 40 A.L.R.4th at 529; L. Albert & Son v. Armstrong Rubber Co., 178 F.2d 182, 189 (2d Cir. 1949); 22 Am. Jur. 2d Damages § 27, at 55-56; see also Dr. Franklin Perkins School, 741 F.2d at 1519 ("A party cannot be awarded damages that would put him in a better position than if the contract had been completely carried out.") If the plaintiff could recover his reliance expenditures from the defendant, even if those expenditures would have been lost had the defendant fully performed, then the defendant would essentially be made the "insurer" of the plaintiff's venture. L. Albert & Son, 178 F.2d at 189; see also Wartzman, 40 A.L.R.4th at 529 ("If it can be shown that full performance would have resulted in a net loss, the plaintiff cannot escape the consequences of a bad bargain by falling back on his reliance interest.")

Based on the evidence submitted, the Court finds that it is very likely that the expenditures claimed by the plaintiff would have been lost even if the defendants had provided the final list of properties and refrained from renting any parcels as they agreed to do under the option agreement. The reason is that the option agreement provides that the closing date for actual leases would be 30 days after the developer received "[a] copy of duly enacted legislation wherein the State of Pohnpei provides by law for an increased term of permissible lease of land from the present twenty-

five years to a permissible term of not less than seventy-five years." Agreement § 6.3.2. The plaintiff itself has conceded that the development project would have been defeated, and the Agreement to Lease and Ground Lease Agreement made impossible to carry out, if Pohnpei State did not enact legislation increasing the maximum permissible lease term from 25 years to 75 years. See Pl.'s Opp'n To Motions To Vacate Judgment, For Relief From Judgment and For Enlargement Of Time at 4; Pl.'s Memorandum on Damages at 13 (un-numbered). No such legislation making the development possible was enacted and, indeed, the plaintiff has not claimed that such legislation was even introduced.

Obviously, even if the defendants had performed under the option agreement the plaintiff would not have recouped its expenditures unless the development project had gone forward. Therefore, the plaintiff's expenditures would have been rendered valueless even if the defendants had performed, and the defendants' failure to perform is not a proximate cause of the plaintiff's injury. Another way of stating the same thing is that the expenditures were not really made in reliance on the option agreement, but in reliance on the agreement that actual leases would be entered into if certain conditions, enactment of legislation extending the lease term, were met.

In its brief the plaintiff cites a number of cases in support of the proposition that it should recover expenses it incurred in pursuing this developmental deal. See, e.g., Saddler v. United States, 287 F.2d 411, 415 (Ct. Cl. 1961); Burstein v. United States, 232 F.2d 19, 22 (8th Cir. 1956); A.R.A. Mfg. Co. v. Pierce, 341 P.2d 928, 932 (Ariz. 1959); Gordon v. Curtis Bros., 248 P. 158, 162 (Or. 1926). However, the most any of those cases say is that the non-breaching party in a breach of contract case may recover losses from the breach as measured by actual outlay and expenditures. None of the cases state that the plaintiff may recover such outlays if they would have been losses to the plaintiff even if the defendant had performed. Indeed, Gordon expressly states that in order to be recoverable the damages must be one of "the proximate . . . consequences of the breach by defendant." Gordon, 248 P. at 162. A proximate consequence is flowing from the act complained of "unbroken by any independent cause." Black's Law Dictionary 1103 (5th ed. 1979); see also id. (definition of "Proximate Cause": "That which, in a natural and continuous sequence, unbroken by an efficient intervening cause, produces injury, and without which the result would not have occurred.") Here the loss is not a proximate consequence of the breach, since indications are that the loss would have occurred for other reasons even if the contract had been performed.

In A.R.A. Manufacturing, also relied on by the plaintiff, the court awarded damages only after finding that there was "ample evidence" of the existence of a "causal connection" between the loss claimed and the breach of contract. 341 P.2d at 931-32. Here that causal connection does not exist since the lease-term legislation necessary to recouping the expenditures was never enacted and therefore the loss would have occurred even without the defendant's breach.2

fact that the lease-term legislation was an issue relating not to the breached option agreement, but to the separate matter of agreements regarding actual leases. First, it is worth noting that the requirement regarding the lease-term legislation was stated as a provision in the option agreement itself, not in some separate agreement. Secondly, this argument does not address the fact that by requiring the defendants to compensate the plaintiff for expenditures that would have been lost anyway, the Court would be putting the plaintiff in a far better position than it would be in if the defendants had performed. The plaintiff is correct to the extent that it is saying that enactment of the lease-term legislation is not a condition to enforceability of the option agreement. However, that is not the issue here. The Court has already ruled that the option agreement was enforceable and that it was breached. The issue is what damage award will put the plaintiff in the position it would have been in if not for the defendant's breach and, as discussed above, it is reasonably certain that the plaintiff's expenditures would have been losses even if the breach had not occurred.

The plaintiff also argues that the State Legislature might have passed the required lease-term law if the deal had gone forward, and that the Court should not "speculate" that such legislation would not have been enacted. However, what the plaintiff is asking the Court to do is speculate in favor of the much more unlikely proposition that such legislation would have been enacted. Either way the Court sees that some speculation is necessary. It seems by far the more likely conclusion, given what is before the Court, that such legislation would not have been passed. The fact is that no such legislation was enacted even after the plaintiff had been working on this development project for some time. There is no evidence that the plaintiff had succeeded in getting any committee in the legislature to approve, or even consider such legislation. Indeed, the plaintiff does not claim that such a measure had the support of even a single legislator, or that any legislator was intending to introduce such a measure. In addition, the plaintiff has not claimed that the legislature has ever granted an exception to Pohnpei's 25-year limit on leases.

Whatever likelihood there is that a causal connection exists between the harm and the defendants' breach is undermined further by the fact that the option agreement is very vague with respect to the terms of the leases contemplated. This is not a case where the parties agreed that the right to lease certain parcels under specified conditions and at a specified price would be left open for a period of time. This option agreement does not state a lease price for a single one of the parcels. This makes it even more difficult for the plaintiff to claim that it was the defendants' breach that accounted for the expenditures on the developmental project to become valueless.

For these reasons, the plaintiff's damage award will be limited to restitution of the $12,500.00 given to the defendants as consideration under the option agreement. The purpose of the remedy of restitution is not to compensate the non-breaching party for reliance expenditures, but rather to prevent unjust enrichment of the breaching parties by forcing them to give up what they have received under the contract. See 22 Am. Jur. 2d Damages §§ 54, 55 (1988). In this case, the return of the $12,500.00 consideration is not based on it being a loss attributable to the breach, but on the theory that the defendants would be unjustly enriched if they were allowed to keep the consideration after failing to live up to their end of the option agreement.

This decision should not be interpreted as ruling out the possibility that reliance expenditures will be recoverable in cases involving the breach of an option agreement. However, because of the nature of the particular option agreement involved here, the Court has concluded that the losses sought by the plaintiff were not caused from the defendants' breach, and therefore are not recoverable.

2. Similarly the plaintiff relies on 25 C.J.S. Damages § 71 (1966), for the proposition that he should get reliance damages, but that section states that "the law will not put the injured party in a better position than he would be in had the wrong not been done." Id. at 837. That is exactly what the plaintiff is asking the Court to do when it requests that the defendant be directed to reimburse its expenditures, even though those expenditures would not have been recouped if the defendants had performed under the contract.