NM Supreme Court adopts rule from Hadley v. Baxendale in a case that proves Murphy’s Law is alive and well

Hydroponic Tomato Farm Copyright, Giancarlo Dessi Used With Permission Under Creative Commons License
Hydroponic Tomato Farm
Copyright, Giancarlo Dessi
Used With Permission Under Creative Commons License

Don’t forget to pay your electric bill.

That’s one lesson to be learned from Sunnyland Farms, Inc. v. Central New Mexico Electric Cooperative, Inc., a recent decision from the New Mexico Supreme Court written by Justice Edward Chavez, which settles the rule on consequential damages in New Mexico.

Sunnyland Farms, which operated a hydroponic tomato-growing facility in Estancia, did not pay its electric bill, apparently due to some confusion about the billing. Central New Mexico Electric Cooperative then cut off electric power on September 8, 2003, but without providing the usual 15-day notice to Sunnyland Farms to pay the overdue bill.

The very next day, as bad luck would have it, Sunnyland Farms employees engaged in welding near some flammable materials, which started a fire. The employees attempted to put out the fire with hoses, but with no electricity going to the pumps, there was no running water, nor did Sunnyland Farms think to have any back-up source of power. The fire department similarly had no access to well water due to the lack of electricity. The fire ultimately destroyed several buildings.

Sunnyland Farms then sued the Cooperative in tort and contract, claiming that it suffered $21.4 million in damages from having its electricity cut off, including $13.7 million in consequential damages for the net value of the lost crops it would have been able to grow and sell had the buildings not been destroyed.

The trial court found that the Cooperative was negligent in starting the fire, and assessed $21.4 million in damages, but also found that Sunnyland Farms was 80% at fault and reduced the Cooperative’s share of the tort damages to $4.28 million. On the contract claim, however, the trial court found the Cooperative breached its contract with Sunnyland Farms, and awarded the entire $21.4 million as contract damages.

The Court of Appeals ultimately reversed the contract award, and the Supreme Court affirmed, albeit on different grounds. The Court of Appeals held a party who breaches a contract is only liable for such damages if it has “explicitly or tacitly agree[d]” to be liable for the particular damages.

The Supreme Court rejected this analysis, holding that the proper rule in New Mexico is from the classic English case, Hadley v. Baxendale, which held that a party who breaches a contract may be liable for damages “only 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 the breach of it.” The Supreme Court explained that this “foreseeability standard is more stringent than ‘proximate cause’ in tort law; the loss must have been foreseeable as the probable result of breach, not merely as a possibility.”

The Cooperative could not be held liable for consequential damages in this case because it was not enough to show that the Cooperative was aware that Sunnyland Farms was a for-profit enterprise that depended on electricity. Rather, the Supreme Court said the Cooperative “would have needed to know not only that Sunnyland depended on its electricity for access to water, but that there was no backup power source, or that there was a particularized need for uninterrupted water or power.”

As this case shows, it’s hard to recover consequential damages in New Mexico. If you own a business and want to further reduce the risk of being held liable for such damages, you might want to consider including a provision disclaiming any responsibility for consequential damages. On the other hand, if you are worried that you might want to recover such damages from someone else, it’s probably best to get a good insurance policy, or failing that, to pay your electric bill on time.

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