Wartzman v. Hightower Productions, Ltd.
456 A.2d 82 (1983)
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Rule of Law:
When a defendant's breach of contract prevents a new business from proceeding and makes proving lost profits too speculative, the injured party can recover costs spent in reliance on the contract. The defendant then bears the burden of proving with reasonable certainty that the plaintiff's venture would have resulted in a net loss to reduce these damages.
Facts:
- In 1974, the principals of Hightower Productions LTD. (Hightower) conceived a promotional venture where a performer would sit on a flagpole for nine months to set a new world record.
- Hightower hired the law firm of Wartzman, Rombro, Rudd and Omansky, P.A. (Wartzman) for the specific purpose of incorporating the venture.
- Hightower informed Wartzman that the venture required raising $250,000 through the public sale of stock.
- Relying on the legal work performed by Wartzman, Hightower was incorporated, began operations, hired a performer, constructed a mobile flagpole perch, and started selling stock, raising $43,000.
- Approximately two weeks after the performer ascended the pole, Wartzman informed Hightower that it could not legally sell any more stock because the corporate structure was improper under Maryland securities laws.
- Wartzman advised that fixing the error would require hiring a securities specialist for $10,000-$15,000 and would halt operations for six to eight weeks.
- The law firm refused Hightower's request that it pay for the specialist needed to correct the legal error.
- Unable to raise further capital due to the legal restrictions, Hightower's shareholders voted to discontinue the project entirely.
Procedural Posture:
- Hightower Productions LTD. filed suit against the law firm Wartzman, Rombro, Rudd and Omansky, P.A. in the Superior Court of Baltimore City (a trial court), alleging breach of contract and negligence.
- Following a trial, the jury returned a verdict in favor of Hightower in the amount of $170,508.43.
- Wartzman, as the appellant, appealed the judgment to the Court of Special Appeals of Maryland (the intermediate appellate court).
- Hightower, as the appellee, filed a cross-appeal, challenging the trial court's refusal to instruct the jury on prejudgment interest.
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Issue:
Does a party whose new, speculative business venture fails due to a breach of contract have a right to recover as damages the expenditures made in reliance on the contract when anticipated profits are too speculative to be determined?
Opinions:
Majority - Getty, J.
Yes, a party may recover expenditures made in reliance on a contract when a breach makes anticipated profits too speculative to prove. The ordinary measure of damages in a breach of contract case is lost profits, but for a new and speculative venture, this is often impossible to calculate. In such cases, the law allows the injured party to recover monies spent in preparation for or in performance of the contract. This right is limited, however, as the breaching party has the opportunity to reduce the damages by proving with reasonable certainty that the injured party's venture would have resulted in a net loss even if the contract had been fully performed. Here, the law firm's failure to properly incorporate the business was the direct cause of its collapse, as the 'very life blood of the project depended on the corporation's ability to sell stock.' Because the law firm could not prove that the flagpole venture was doomed to fail, Hightower was entitled to recover its reliance damages.
Analysis:
This case solidifies the principle that reliance damages are a viable and primary remedy for new businesses that fail due to a foundational breach of contract. The court's most significant contribution is its allocation of the burden of proof regarding the venture's potential success. By placing the onus on the breaching party to prove the venture would have been a losing one, the decision protects entrepreneurs from the nearly impossible task of proving hypothetical profits for a business that never had a chance to operate. This precedent holds professionals, particularly lawyers creating business entities, accountable for errors that prematurely destroy speculative but potentially viable enterprises.
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