The "loss of chance" doctrine of damages for breach of contract.
In Taylor v. Bradley, 39 N.Y. 129 (1868), the court was faced with a contract breached by a landowner who reneged on a promise to allow a farmer to use the land. The judge asked and answered, "[if a plaintiff] is deprived of his adventure, what was this opportunity which the contract had apparently secured him to worth? [His] damages are what he lost by being deprived of his chance of profit. (4) The doctrine of "loss of chance" or "loss of a chance" was thereby introduced into America's common law.
Decades later, a British court echoed the doctrine in Chaplin v. Hicks, 2 K.B. 786 (1911). In Chaplin the plaintiff was a semifinalist in a beauty contest. The promoter of the event breached the contract by failing to notify the plaintiff of the time and place of the competition. The jury awarded damages in the amount of one fourth of the lowest prize. The court indicated the chance of winning had value which could be assessed by the law of averages.
In 1931 the U. S. Supreme Court held in Story Parchment Co. v. Paterson Parchment Paper Company, 282 U.S. 555,563 (1931), that when the plaintiff's inability to calculate damages to a reasonable certainty is a result of the defendant's wrongdoing, "the risk of uncertainty should be thrown upon the wrongdoer instead of upon the injured party." (5) The U. S. Supreme Court's decision in Story Parchment crosses paths with the loss of chance doctrine by citing and quoting Taylor with approval.
In Story Parchment, the Supreme Court held that to deny an injured party the right to recover damages that clearly arise from the breach because it is of a kind that cannot be measured with certainty would allow wrongful acts to be profitable. (6) The Court further explained that no part of the loss should be left upon the injured party simply because the defendant's wrongful act prevented the precise amount from being fixed. (7)
In Bangor Punta Operations, Inc. v. Universal Marine Co., Inc., 543 F.2d 1107 (5th Cir. 1976), the 11th Circuit Court of Appeals (then the Fifth Circuit) confirmed and restated its prior holdings that
[i]n a case such as this, where the wrong is of such a nature as to preclude exact ascertainment of the amount of damages, plaintiff may recover upon a showing of the extent of the damages as a matter of just and reasonable inference, although the result may be only an approximation. The wrongdoer may not complain of the inexactness where his actions preclude precise computation of the extent of the injury. (8)
Although clearly defined damages are preferable, when the injured party can come before the factfinder and introduce evidence tending to show damages, a probable estimate of the amount in controversy will be allowed by inferential proof. (9) When considering the reliability of an expert's opinion regarding damages, "[i]t is well settled that the evidentiary basis for a court's ruling on damages need only be 'sufficient to enable a court ... to make a fair and reasonable approximation." (10)
Following Taylor and Chaplin, the loss of chance doctrine subtly moved forward with approval through American treatises (11) and case law (12) over the decades. The doctrine appears to have landed most firmly in the Restatement (Second) of Contracts, [section] 348 (3) (1981), which states, "If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover damages based on the value of the conditional right at the time of the breach."
The comment to this portion of the Restatement explains,
d. Fortuitous event as condition. In the case of a promise conditioned on a fortuitous event, a breach that occurs before the happening of the fortuitous event may make it impossible to determine whether the event would have occurred had there been no breach. It would be unfair to the party in breach to award damages on the assumption that the event would have occurred, but equally unfair to the injured party to deny recovery of damages on the ground of uncertainty. The injured party has, in any case, the remedy of restitution. Under the rule stated in Subsection (3) he also has the alternative remedy of damages based on the value of his conditional contract right at the time of breach, or what may be described as the value of his "chance of winning." The value of that right must itself be proved with reasonable certainty, as it may be if there is a market for such rights or if there is a suitable basis for determining the probability of the occurrence of the event.
A fortuitous event is further described in the comment to [section] 379 of the Restatement Second of Contracts as a provision of a contract "in which at least one party is under a duty that is conditional on the occurrence of an event that, so far as the parties to the contract are aware, is dependent on chance."
This is the point at which Story Parchment dovetails with the Restatement (Second) of Contracts. Although the principle in each took a different route, they return to their origin in Taylor:
How, then, can the value of the contract be proved? If it cannot be proved, then the plaintiff can only recover nominal damages. [This court] thinks the plaintiff is not without a better rule. The administration of justice frequently proceeds with the reasonable certainty of accomplishing what is right, or as nearly right as human efforts may attain ... and it does so by making the experience of mankind, or, rather, the judgment which is founded upon such experience, the guide. (13)
The loss of chance doctrine can, therefore, be viewed as a reciprocal concept to an "impossibility of performance" defense. If a defendant asserts damages are too speculative and so inappropriate altogether, a plaintiff can assert--as an avoidance or otherwise--that the "impossibility of certainty" caused by the defendant is not a bar to damages based on the value of the lost contractual or economic opportunity.
The issue is whether a plaintiff can overcome the burden of proving contractual damages to a reasonable certainty when the defendant's wrongdoing makes it impossible to do so. Just as Taylor and Chaplin have--for the most part--passed under the radar of America's common law, so has Miller v. Allstate Ins. Co., 573 So. 2d 24 (Fla. 3d DCA 1990), eluded further treatment of the contractual loss of chance doctrine in Florida's common law.
In Miller, Allstate broke a contractual promise to return a wrecked vehicle Ms. Miller intended to use as evidence in a products liability action against the manufacturer. Rather than preserve the vehicle, Allstate sold it to a salvage yard, where it was disassembled and demolished. The Third District Court of Appeal fashioned a remedy for Ms. Miller based on the loss of her opportunity to use the vehicle as evidence. Aside from a relatively esoteric case from California, (14) the court relied primarily on treatises and law review articles, thereby implicitly acknowledging the issue's nature of first impression in Florida. The holdings, however, remain precedent.
The Third District first relied on McCormick's treatise on contracts (15) for application of doctrines modifying the certainty requirement for proving contract damages. (16) The "modifying doctrines," which enable courts to avoid "harsh results" are:
(a) If the fact of damage is proved with certainty, the extent or amount may be left to reasonable inference.
(b) Where the defendant's wrong has caused the difficulty of proof of damage, he cannot complain of the resulting uncertainty.
(c) Mere difficulty in ascertaining the amount of damage is not fatal.
(d) Mathematical precision in fixing the exact amount is not required.
(e) If the best evidence of damage of which the situation admits is furnished, this is sufficient.
(f) The plaintiff may recover the value of his contract, and this may be measured by the value of the expected profits.
Following Chaplin and the "English lead," the Miller court held that damages need not be based on the value of the contract, but may instead be "the value of the plaintiff's opportunity or chance of success at the time of the breach...." (17)
Miller is not merely unique in its adoption of subsection 348(3) of the Restatement (Second) of Contracts, it is extraordinary by its extension of the Restatement beyond the wording and intent of its authors. Comment (d) to subsection 348(3) continues from the quote above regarding "fortuitous event as a condition" to explain, "The rule stated in this subsection is limited to aleatory promises and does not apply if the promise is conditioned on some event, such as return performance by the injured party, that is not fortuitous" (emphasis added). Miller, however, holds the loss of chance doctrine is not limited to aleatory promises. (18)
The Miller opinion is the only one to use the word "aleatory" in Florida's reported common law. Although the court defined the word as it is used generically in Black's Law Dictionary, (19) the Comment to [section] 379 of the Restatement (Second) of Contracts defines it more applicably:
An aleatory contract is one in which at least one party is under a duty that is conditional on the occurrence of an event that, so far as the parties to the contract are aware, is dependent on chance. Its occurrence may be within the control of third persons or beyond the control of any person. The event may have already occurred, as long as that fact is unknown to the parties. It may be the failure of something to happen as well as its happening. Common examples are contracts of insurance and suretyship, as well as gambling contracts.... (20)
Following the reasoning of commentators such as McCormick, Calimari, and Perillo, the court held the contractual loss of chance doctrine should allow a plaintiff "to sue on the alternative theory of the value of the lost opportunity," regardless of whether the promised occurrence is fortuituous or the promise itself is aleatory. (21) Quoting the treatise of Professor McCormick, the court concluded,
Where the value of the chance is not outweighed by a countervailing risk of actual loss, and where it is fairly measurable by calculable odds, or by evidence bearing specifically on the probabilities, or by expert opinion, and where the amount of the expected gain is itself fixed or approximately ascertainable, the [factfinder] should be allowed to value the lost opportunity. (22)
These references to "odds," "probabilities," and "approximately ascertainable" open the door to an entirely new theory of contract damages that has not yet matured in Florida. The Miller court cites and follows the commentary of Professors Calamari and Perillo. The citation in Miller presumably refers to the following:
One may well question the wisdom of the limitation imposed upon the [loss of chance] doctrine by the Restatement [holding the doctrine is limited to promised performance which is aleatory]. If damages based upon a theory of probability is a sound approach for aleatory contracts, why is it unsound as to other contracts? For example, if a manufacturer wrongfully terminates a distributorship, it will frequently be impossible to prove that the distributorship would have made a profit and the amount, if any, of such profits. Aside from the possibility of electing to claim merely reliance damages, the distributor in such a case faces an all or nothing prospect: Full recovery for the profits he would have made or merely nominal damages. If, as an alternative, he were permitted to recover the value of the lost opportunity to strive for the profit, the hazards and possible injustice of the all or nothing approach would be reduced. Recovery would be allowed on the basis of the price that a reasonable businessman would pay for the opportunity. (23)
Another exemplary application lies in the area of insurance claims adjustment. Suppose, for example, that a workers' compensation insurer in Florida accepts a claim as compensable without proper investigation. This hypothetical claim involves an injured worker who tested positive for cocaine use on the day he suffered an injury when he fell off a ladder while working on a construction project. The insurer contractually agreed to handle all the employer's claims according to the insurer's own "best practices," which clearly state that all investigations must be completed within 14 days. No such investigation was conducted--no witnesses or doctors were interviewed, no laboratory reports were requested, no site inspection occurred, etc. The insurer did, however, receive the laboratory report indicating a high level of cocaine in the employee's blood. The insurer buried the report in the file and did nothing with it.
In Florida, the claim must be accepted or denied within 120 days. After 120 days, the claim can no longer be challenged unless facts were developed that could not have been learned within the first 120 days. On the other hand, an intoxication defense does not prevail without proof the intoxication was a proximate cause of the accident. The claim was nevertheless accepted by the insurer as compensable 119 days after the alleged accident.
The employer has no recourse on the insurance contract if it must prove the intoxication defense would have been viable but for the lack of investigation. Such proof would necessarily be speculative. But it is precisely because the insuer did not comply with its own best practices that the employer/insured cannot demonstrate the employee's intoxication caused--or might have caused--the injury. Witnesses have disappeared or forgotten; laboratory samples were destroyed; and the scene no longer resembles its condition on the date of the alleged accident. According to Miller, though, the employer may sue on the value of his lost opportunity to deny the claim, by settlement leverage, or otherwise.
Such a lost economic opportunity is imbedded in the insurance industry's common practices of auditing its claims handling practices to keep the insured's exposure and the insurer's costs to a legal minimum. The phrase "lost economic opportunity"--or "LEO"--appears to have first arisen in the insurance industry in 1988, when Travelers retained McKinsey & Co., Inc., (24) to audit and revamp its workers' compensation claims handling efficiency. The acronym "LEO" was absorbed by the industry, (25) which developed synonyms such as "slippage" and "leakage." (26)
The potential applications of Miller are not, however, limited to spoliation of evidence or lost opportunities in the management of insurance claims. (27) Given that contractual promises need not be aleatory for the loss of a chance doctrine to apply, alternative damages may be sought in actions involving terminated employment contracts tied to commissions or bonuses, many forms of fiduciary obligations, and even the failure to place a bet as promised.
The number of applications of Miller is limited only by its lack of use by counsel for plaintiffs in appropriate breach of contract actions. The plaintiff's loss of a chance to prove contractual damages with reasonable certainty--if the loss of chance is caused by the very wrongdoing over which the lawsuit is brought--is itself damage that may be proven by approximation or probabilities. The loss of an economic opportunity is a basis for compensatory damages. But again, "counsel in this country seem seldom to have made this argument." (28)
(1) Gooding v. University Hosp. Bldg., Inc., 445 So. 2d 1015, 1021 (Fla. 1984).
(2) Miller v. Allstate Ins. Co., 573 So. 2d 24 (Fla. 3d D.C.A. 1990).
(3) CALAMARI & PERILLO, CONTRACTS, CERTAINTY, [section] 14-10, pages 533-34 (2d ed. 1977).
(4) Taylor, 39 N.Y. at 144.
(5) Story Parchment Co. v. Paterson Parchment Paper Company, 282 U.S. 555, 563 (1931); accord, Commonwealth Trust Co. of Pittsburgh v. Hackmeister Lind, Co., 181 A. 787, 790 (Pa. 1935) (It is "legalized robbery" to relieve any wrongdoer from liability because his wrongful act caused damages to be uncertain, and "substantial justice is better than exact justice.").
(6) Story Parchment, 282 U.S at 564.
(7) Story Parchment, 282 at 565; accord, Eastman Co. v. S. Photo Co., 273 U.S. 359 (1927); Bigelow v. RKO Radio Pictures, Inc., 327 U.S. 251 (1946); Miller, 573 So. 2d at 28 n.6 (rule is applicable to both contracts and torts).
(8) Bangor, 543 F.2d at 1111 (citations omitted).
(9) Story Parchment, 282 U.S. at 564.
(10) Seaboard Lumber Co. v. U.S, 308 F.3d 1283, 1302 (C.A. Fed. 2002).
(11) McCORMICK, DAMAGES, 117-23; Restatement (First) of Contracts, [section] 332.
(12) See, e.g., Grayson v. Irvmar Realty, 184 N.Y.S.2d 33 (1st Dept. 1959) (singer awarded damages for deprived career opportunity for damage to her voice, even though the chances of success were speculative and remote).
(13) Taylor, 39 N.Y. at 144-45.
(14) See, e.g., Smith v. Superior Court, 151 Cal. App.3d 491,198 Cal. Rptr. 829 (1984) (applying an equity exception to the presumptive rule requiring certainty of damages).
(15) C. McCORMICK, DAMAGES, [section] 31, at 101-02 (1935).
(16) Miller, 573 So. 2d at 28 n.4.
(17) Id. at 29.
(18) Id. at 29-30.
(19) Id. at 29, n.9 (quoting BLACK'S LAW DICTIONARY at 65 (5th ed. 1979) ("A contract is aleatory or hazardous when the performance of that which is one of its objects depends on an uncertain event. It is certain when the thing to be done is supposed to depend on the will of the party, or when in the usual course of events it must happen in the manner stipulated.").
(20) The remainder of the comment states, "If the injured party's duty is conditional on such an event, it would be unfair if, after the breach, he were allowed to take advantage of a material change in the likelihood of its occurrence when deciding whether to treat his remaining duties as discharged. If it was more likely that it would occur, it would be to his advantage to treat those duties as discharged. For this reason, he is precluded from treating them as discharged if there has been an adverse change in his situation because the event has occurred or because there has been a material increase in the probability of its occurrence. The same principle applies to the case where a right rather than a duty of the injured party is conditional on the occurrence of such an event."
(21) Miller, 573 So. 2d at 29.
(22) Id. at 20-30 (quoting C. McCORMICK, DAMAGES, [section] 31, at 123 (1935)).
(23) CALAMARI & PERILLO, CONTRACTS, CERTAINTY, [section] 14-10, pages 533-34 (2d ed. 1977).
(24) McKenzie & Company, Reaching for Leadership in Workers' Compensation, Interim Report Findings (Sept. 14, 1988).
(25) See, e.g., Greer, The Top 10 Indicators of Best in Class Claims Management, (usclaimnet.com/bestclmsprctce.html, July 28, 2000) ("Just as the ball that falls to the ground may lose the game, lost opportunities in claims management may result in the loss of hundreds, if not thousands, of dollars.").
(26) See, e.g., Garcia, Effective Subrogation Prevents Unnecessary Loss, CLAIMS MAGAZINE (Aug. 2004) pp. 68-70 ("Failure to identify subrogation potential is the largest area of leakage.").
(27) See, e.g., Koby v. US., 53 Fed. Cl. 493, 502 (Ct. Fed. Cl. 2002) (buyer of property at tax auction had viable claim for damages under the "loss of chance doctrine" after the government voided the sale for failure of the Internal Revenue Service to give proper notice of the sale to the owner); see also, 5 CORBIN, CONTRACTS, [subsection] 1029-30, 1089-92 (1964 & Supp. 1980); 11 WILLISTON, CONTRACTS, [subsection] 1363, 1400 (3d ed. 1968) and cases cited therein.
(28) See CALAMARI & PERILLO, CONTRACTS, CERTAINTY, [section] 14-10, pages 533-34 (2d ed. 1977).
Robert Sturgess is of counsel to McConnaughhay, Duffy, Coonrod, Pope & Weaver in Jacksonville. He is a former senior law clerk for the First District Court of Appeal, and presently a member of the Appellate Court Rules Committee. He practices in the areas of insurance and business litigation.
This column is submitted on behalf of the Business Law Section, Mark J. Wolfson, chair, and G. Steven Fender, editor.
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|Author:||Sturgess, Robert H.|
|Publication:||Florida Bar Journal|
|Date:||Oct 1, 2005|
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