Kearsarge Computer, Inc. v. Acme Staple Co.
116 N.H. 705, 366 A.2d 467, 86 A.L.R. 3d 1081 (1976)
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Rule of Law:
When a client breaches a services contract, the service provider is entitled to recover the full contract price, less any significant costs the provider avoided because of the breach. Gains from new business obtained after the breach do not reduce the damages unless the provider would have been unable to perform both the breached contract and the new contracts simultaneously.
Facts:
- Kearsarge Computer, Inc. (Kearsarge) and Acme Staple Company, Inc. (Acme) entered into a one-year contract for electronic data processing services beginning June 11, 1971.
- The contract price was $25 per computer hour, with a minimum monthly charge of $2,000.
- On January 7, 1972, approximately seven months into the contract, Acme terminated the agreement, citing unsatisfactory performance by Kearsarge.
- Kearsarge's primary operating costs, including machine rentals and employee salaries, were substantially fixed and did not decrease after Acme's termination.
- After the termination, Kearsarge's employees voluntarily accepted pay cuts so the company could remain in business.
- Following the breach, Kearsarge increased its sales efforts and secured new clients.
- The contract explicitly stated that Kearsarge would be liable for its errors, and Acme incurred expenses of $837.75 correcting such errors.
Procedural Posture:
- Kearsarge sued Acme Staple in a trial court for breach of contract and payment for services.
- Acme filed a cross-action against Kearsarge, also for breach of contract.
- The cases were consolidated for a hearing before a Master.
- During pretrial discovery, in response to an interrogatory from Kearsarge, Acme listed eleven specific instances of alleged breach.
- At the hearing, the Master refused to permit Acme to introduce evidence of any breaches other than those listed in the interrogatory answer.
- The Master found in favor of Kearsarge on all issues and awarded Kearsarge damages of $12,315.22.
- A judge of the trial court approved the Master's report.
- Acme (defendant-appellant) appealed the trial court's judgment to the state's highest court.
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Issue:
When a client breaches a data processing services contract, is the service provider entitled to recover the full remaining contract price without deducting either minor operational costs saved or income earned from new clients obtained after the breach?
Opinions:
Majority - Kenison, C.J.
Yes. When a client breaches a services contract, the provider is entitled to recover the full contract price minus any significant expenses saved due to the breach, and this recovery is not reduced by income from new clients unless the provider could not have serviced both the breaching client and the new clients simultaneously. The court reasoned that the burden of proving savings rests on the defendant (the breaching party), Acme. Here, Kearsarge’s breach did not result in substantial savings; its overhead for labor and equipment rentals were fixed costs. Minor costs like paper and electricity were deemed negligible. Furthermore, the court treated Kearsarge as a 'lost volume' provider, akin to a manufacturer or construction company with expandable capacity. Such businesses are presumed to be able to accept a virtually unlimited amount of business. Therefore, income from new clients obtained after the breach does not mitigate damages because Kearsarge presumably could have serviced those clients even if Acme had not breached the contract. The court did, however, reduce the final award by the amount Acme spent correcting Kearsarge's errors, as provided for in the contract.
Analysis:
This case is significant for extending the 'lost volume seller' doctrine, typically applied to sales of goods, to a contract for services. It establishes that a service provider with high fixed costs and the capacity to take on additional clients is not required to deduct earnings from new business when calculating damages from a prior breach. The ruling places a clear burden on the breaching party to prove that the non-breaching party realized substantial savings. This precedent strengthens the position of service-based businesses in breach of contract disputes, allowing them to recover their expectation interest without being penalized for successfully mitigating their losses by finding new work.
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