Magnet Resources, Inc. v. Summit MRI, Inc.

A-6592-96T3 (N.J. Super. App. Div. 1998) (Unpublished)
  • Opinion Date: December 16, 1998

CONTRACTS; BREACHES; DAMAGES—A supplier need not declare its customer in breach of their contract but may, instead, suspend its performance pending the customer’s cure of its defaults within a reasonable time. When calculating damages, the party incurring the relevant costs is in the best position to show if “savings” should be deducted from those costs.

An operator of magnetic resonance image centers contracted with a company to provide preventive maintenance and emergency repair services for its equipment. The operator’s monthly payments were habitually late. In one memorandum to its customer, the servicing company complained that seven of its checks had been dishonored and declared that neither essential supplies nor emergency service would be provided (except under special arrangements) if an invoice was late by thirty days or more. About seven months later, the operator requested repair service for a site that was not on the contract. Service was refused because the customer then owed a substantial amount of money. The customer promised that if the necessary work was done, the servicing company would get “most of its money by the end of the week.” In reliance on that promise, the servicing company installed a necessary but expensive piece of equipment from its inventory. Neither that charge nor the other unpaid bills had yet been paid when the customer demanded weekend service even though its contract provided for only weekday service. The servicing company did not make the emergency repair. A few days later, when the bills had still not been paid, the operator requested more service which the servicing company refused to provide. Some time after suspension of service, the customer made arrangements with another servicing company and then barred the original servicing company from its premises. At the trial that followed, the servicing company alleged breach of contract and in calculating its damages claimed that it was entitled to its gross profit without any deduction for overhead expenses. In supplemental testimony, it claimed that its unallocated indirect cost and overhead expenses would not be avoided or reduced by reason of the operator’s termination of its contract. The servicing company further testified that termination of the contract did not free up any of its productive capacity to create additional revenue. The customer offered expert accounting testimony to contest the servicing company’s testimony.

The customer argued that the servicer’s refusal to provide service was a material breach of its contract, thereby excusing it from any further duty or performance. The Court held, however, that the customer’s non-compliance breached the contract. The service company, however, by declaring a suspension and not a cancellation of its undertaking to provide service, implied its willingness to resume service upon payment and, perhaps, upon adequate assurance of timely future payments. That statement of its implied readiness to continue the contract waived the materiality of the breach; that is, it precluded the servicing company from successfully relying on its customer’s payment history to excuse its refusal to provide service. In the Court’s view, the servicing company had the legal right to do what it said it was doing, i.e., suspend its performance pending its customer’s cure of its defaults within a reasonable time. Consequently, the suspension of performance did not materially breach the servicing company’s contractual obligations. In fact, it was the customer’s repudiation of the contract by arranging to have another firm service its MRI installations that constituted the first material breach, making the customer liable to the servicing company for lost profits.

If a party injured by a breach has lost profits which were reasonably anticipated to accrue from the contract, that party is entitled to recover those lost profits. On the other hand, an injured party cannot recover expenditures which will be “saved” because it has been excused from further performance by the other party’s breach. Allocable administrative costs which do not diminish because of a contract cancellation are considered “saved” only if the services, facilities, and materials for which they continue to be incurred are devoted to some other employment which could not have been undertaken if the contract had not been canceled. While each party has an opportunity to present evidence on the matter of what “savings” might be made, the enterprise which has incurred the relevant costs is in the best position to adduce the proof which will establish whether these costs were properly deductible from profits. Here, the jury, having been instructed to determine the extent, if any, to which those expenses had been avoided because of the contract cancellation, was entitled to make its judgment from the evidence before it.