Farmers' Electric Cooperative, Inc., Respondent v. Missouri Department of Corrections, Appellant.

This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court. Opinion Missouri Court of Appeals Western District Case Style: Farmers' Electric Cooperative, Inc., Respondent v. Missouri Department of Corrections, Appellant. Case Number: WD58424 Handdown Date: 03/06/2001 Appeal From: Circuit Court of Cole County, Hon. Thomas J. Brown, III Counsel for Appellant: Gary Lee Gardner Counsel for Respondent: Victor Shane Scott Opinion Summary: Missouri Department of Corrections appeals the judgment in favor of Farmers' Electric Cooperative, Inc., awarding $3,154,296 in damages for breach of contract. AFFIRMED. Division holds: The trial court did not err in its damage award to Farmers'. (1) Farmers' would have, but for MDC's breach of contract between the parties, had the exclusive right to provide and then continue to provide electric service to Crossroads for its life. Farmers' is entitled to recover lost profits for the term of the contract, that is, until the year 2008, and for the life of Crossroads, until 2046. (2)There is substantial evidence of Farmers' lost profits to support the judgment. Citation: Opinion Author: Ronald R. Holliger, Presiding Judge Opinion Vote: AFFIRMED. Lowenstein and Newton, J.J., concur. Opinion: Missouri Department of Corrections (MDC) appeals from the judgment of the trial court in favor of Farmers' Electric Cooperative, Inc. (Farmers'), awarding $3,154,296 in damages for breach of contract. MDC claims the trial court

erred: (1) by misapplying the measure of damages in permitting recovery of damages beyond the term of the contract, and (2) in that the judgment was not supported by substantial evidence. We affirm. FACTS and PROCEDURAL HISTORY On September 10, 1986, the parties entered into a contract under which Farmers' would supply, at a special rate, all the electricity MDC might need upon its land in DeKalb County, Missouri. The contract was for a term of 20 years following the initial billing period. Farmers' began supplying electricity to MDC's existing facility, the Western Missouri Correctional Center (WMCC), and billing for services beginning September 22, 1988. In 1994, MDC sought and was granted a voluntary annexation of its land to the City of Cameron, Missouri. During 1995-1996, MDC constructed a second correctional facility on its land, the Crossroads Correctional Center (Crossroads), which began operation in 1997. MDC purchased electric services for Crossroads from the City of Cameron. Farmers' has never provided electric service to Crossroads. Farmers' sued for breach of contract, and the trial court found in favor of MDC. On appeal, the Missouri Supreme Court (in Farmers' I) held that the City was the lawful provider to supply electricity to Crossroads, but because MDC agreed to voluntary annexation, it breached the implied covenant of good faith and fair dealing in its contract with Farmers'. Farmers' Elec. Coop., Inc. v. Missouri Dep't. of Corr., 977 S.W.2d 266, 272 (Mo. banc 1998). The Supreme Court directed the trial court to enter judgment in favor of Farmers', holding MDC liable for breach of contract. Id. On remand, the trial court awarded damages of $3,154,296. The trial court based its award on Farmers' claim for lost profits for fifty years,(FN1) beginning in 1997 (when Crossroads began accepting electricity from the City of Cameron) and until

1. MDC appeals the award, challenging the measure of damages applied by the trial court in determining its award,

and the sufficiency of the evidence to support it. STANDARD OF REVIEW We will uphold the judgment of the trial court unless there is no substantial evidence to support it, unless it is against the weight of the evidence, unless it erroneously declares the law, or unless it erroneously applies the law. Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976). In determining the sufficiency of the evidence, we will accept as true the evidence and all reasonable inferences from it that are favorable to the trial court's judgment, disregarding all contrary evidence. Silver Dollar City, Inc. v. Kitsmiller Const. Co., Inc., 931 S.W.2d 909, 913 (Mo. App. 1996). DISCUSSION In its sole point, MDC argues, alternatively, that (1) the trial court misapplied the measure of damages by permitting recovery for the years 2008 until 2046, since either party could unilaterally terminate the contract after 2008, or

(2) even if recovery between 2008 and 2046 were permissible, there was no substantial evidence to support recovery of lost margins beyond 2008.

1. Measure of Damages

MDC's first argument is that, because either party could terminate the contract in 2008, damages should have been awarded only for the period from the opening of Crossroads in 1997 until 2008. MDC admits that it owes damages for that initial period. MDC asserts that the measure of damages for a breach of contract is "the value of the performance of the contract, that is, the injured party is entitled to the benefit of the bargain, that being whatever net gain he or she would have made under the contract." Inuauen Packaging Equip. Corp. v. Integrated Indus. Serv., Inc., 970 S.W.2d 360, 368 (Mo. App. 1998). "Based on the evidence presented by Farmers'," the trial court found that Farmers' damages "for the contract period, or through 2008," amounted to $1,518,110. MDC claims that the trial court should have entered judgment in favor of Farmers' only in that amount. Farmers' agrees, of course, that it is entitled to the net gain under the contract for the years 1997 to 2008 ($1,518,110), but argues that it is also entitled to recover lost profits beyond that period (until 2046) because, under section 394.315, it would have had the statutory authority to continue to provide service after the end of the contract. We agree. At the time the contract was entered into, in 1986, MDC's land was in a rural area because it was "not included within the boundaries of any city, town ... ." Section 394.020. Because MDC was in a rural area at that time, Farmers' had the exclusive authority to provide it with electric service because an electric cooperative shall have the power to provide electricity to rural areas until a municipality purchases the property, i.e., annexation. Section 394.080. At the time the contract was signed, had there been no annexation, pursuant to sectionsection 394.020 and 394.080, and the contract, Farmers' had the right to begin providing electric service to any new structure built by MDC, including Crossroads. If Crossroads had been built prior to annexation, Farmers' would have begun providing electric service as it had a right to. Under section 394.315, Farmers' would have been entitled to continue service to Crossroads, presumably for its lifetime, because "[o]nce a rural electric cooperative ... lawfully commences supplying retail electrical energy to a structure through permanent service facilities, it shall have the right to continue serving such structure ... ." Section 394.315. Had MDC not breached the contract by seeking voluntary annexation, clearly Farmers' would have had the right to begin providing service to Crossroads under the contract and under section 394.080. And once it had begun providing service to Crossroads and billing for it, then Farmers would have had the right to continue providing service to Crossroads under the contract and under section 394.315.

MDC sought voluntary annexation of its land in 1994. The City of Cameron approved the request and it became effective on April 5, 1994. Construction on Crossroads began in 1995 and continued throughout 1996. Crossroads began operation in 1997. Upon its opening, electricity was supplied to Crossroads by the City. At no time did Farmers' provide electric service to Crossroads. MDC's voluntary annexation was the cause of the breach of the contract between the parties. "Once the land in the contract was annexed, Farmers' no longer had the right to provide electric service to any new structures built on the land." Farmers' I, 977 S.W.2d at 271. For this reason, there was no electric service to Crossroads for Farmers' to continue to provide. "Because Farmers' never provided electric service to Crossroads prior to annexation, section 394.315.2 does not provide a basis for Farmers' to provide electric service to Crossroads." Id. We conclude that, but for the annexation, Farmers' would have had the exclusive right to provide and then continue to provide electric service for the life of Crossroads (until 2046). MDC also argues, however, that the damages sought by Farmers' do not flow from the contract but rather from the statute and that Farmers' is not entitled to damages under the statute because such relief was not pled. MDC cites Clay v. Missouri Highway and Transp. Comm'n, 951 S.W.2d 617, 631 (Mo. App. 1997), which held that "a party cannot recover for a cause of action not pleaded." Id. Farmers' responds that this argument ignores the ability of an injured party to recover actual damages for the direct and natural consequences of the breach, or for damages that were within the contemplation of the contracting parties. Ross v. Holton, 640 S.W.2d 166, 173 (Mo. App. 1982). We disagree that the damages sought by Farmers' beyond 2008 were from an unpleaded statutory claim. Because Farmers' would have had the exclusive right to provide and to continue to provide electric service for the life of Crossroads, absent MDC's breach of the contract by seeking voluntary annexation, its damages were a direct and natural consequence of that breach. The damages Farmers' was entitled to recover include the net gain it would have realized under the contract, until 2008, as well as lost profits beyond that period, until 2046 (profits it would have received by providing service to Crossroads for its lifetime). Since we have found that Farmers' is entitled to contract damages beyond 2008 to the year 2046, we next consider MDC's second argument, whether there is substantial evidence to support the trial court's award of $3,154,296 to Farmers'.

1. Evidence of lost profits

MDC claims that there is no substantial evidence to support the projected electricity use at Crossroads between the years 2008 and 2046.(FN2) MDC argues that to meet its burden of proving damages with reasonable certainty, Farmers' was required to present evidence of electrical usage at WMCC for more than 10 years.(FN3) MDC complains

that Farmers' method of calculation assumed no potential for rate and usage reductions,(FN4) and that future damages must be based on actual facts and not assumptions. Farmers' responds that there is no legal requirement that there be equal evidence of past usage with which to compute future usage, and that the evidence presented by Farmers' was sufficient to provide a rational estimate of its lost future profits. Moreover, Farmers' argues, its expert witness, despite having plenty of data with which to forecast future usage of Crossroads, froze the growth rate for usage at the same rate determined for the 10-year experience period for WMCC; and that this method, according to Farmers' expert witness, gave the "benefit of doubt" to MDC. Missouri has previously held that the plaintiff in a breach of contract action has the duty to prove the existence and amount of damages with reasonable but not absolute certainty. Scullin Steel Co. v. Paccar, Inc., 708 S.W.2d 756, 761 (Mo. App. 1986). Where the damages are in the nature of lost profits, they must be supported by the best evidence available. Id. at 762-63. The law requires the production of all relevant facts tending to show the extent of the damages, and one is not excused from a breach of contract resulting in damages simply because the damages may not be established with certainty. Id. at 761. In Missouri, the modern emphasis on the requirement that damages be shown with certainty is on the fact of damages and not on the particularized amount. Gasser v. John Knox Village, 761 S.W.2d 728, 731 (Mo. App. 1988). "The proof must be sufficient to provide a rational basis for estimating the amount of loss sustained," but "may not be based on speculation or conjecture." Id. at 731-32. The evidence of Farmers' damages before the trial court included the following: (a) the statistical age of Crossroads, projected at 50 years, based on that of correctional facilities across the country; (b) Crossroads' electric usage for the years 1997 and 1998, the only period of electrical usage by Crossroads available by which to establish its electrical usage experience; (c) for the years 1999 to 2008, Farmers' projected average annual growth rates based on the increases that had occurred at WMCC during the preceding 10 years; and (d) for the years 2009 until 2046, Farmers' did not project any growth in demand beyond 2008, but assumed a level usage (giving MDC the benefit of the doubt that future usage would not increase). In calculating Farmers' damages, the trial court also considered and reduced the damages by a present value discount rate, a capital credit allocation, a customer service charge, and a cost of service study reduction. The trial court concluded that Farmers' established that it lost profits as a result of the breach of contract, that is, the net gain it would have realized from the sale of electricity to Crossroads for the life expectancy of the structure. In a situation in which the loss is "of a character which defies exact proof," as in the present case, "it is reasonable to require a lesser degree of certainty as to the extent of loss, leaving a greater degree of discretion to the court or jury." Id. at 731.

All that Farmers' is required to provide is a reasonable estimate of its lost profits. Rarely will a party claiming loss of prospective profits be able to present evidence of them with absolute certainty. Id. at 734. However, uncertainty as to the amount of profits that would have been made does not prevent a recovery. Id. The evidence presented by Farmers' was the best it had available. Therefore, viewing the evidence in the light most favorable to the verdict, as this court is compelled to do, we conclude that Farmers' presented sufficient evidence from which the trial judge could estimate the amount of Farmers' lost profits with reasonable certainty. The judgement of the trial court is affirmed. Footnotes: FN1.The estimated useful life of the Crossroads facility is 50 years. FN2.MDC does not contest Farmers' evidence of the estimated life of Crossroads (50 years). FN3.This, of course, Farmers' could not do because WMCC had not been open for more than ten years at the time of trial. FN4.Ironically, MDC does not complain that the projections for increased usage from 1999 to 2008 are speculative. Separate Opinion: None This slip opinion is subject to revision and may not reflect the final opinion adopted by the Court.