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A breach of contract occurs when a promisor fails, without any legal excuse or cause, to perform any of the obligations, undertakings, or promises stipulated in the contract. In such a case, the non-breaching party, also called the aggrieved party, is entitled to seek to a remedy against the breaching party. In most cases, this involves a suit for money damages. In some cases, a party may seek an injunction or a writ of specific performance in a court of equity in conjunction with a contract action. An injunction compels a party to do or refrain from specific acts.
Damages that are awarded to compensate the non-breaching party for the loss of the bargain are called compensatory damages. Compensatory damages may also be known as “general damages” or “benefit of the bargain” damages. For a breach of contract, “the law of damages seeks to place the aggrieved party in the same economic position he would have had if the contract had been [fully] performed.” In a contract for the sale of goods, at least two possibilities exist. If the seller commits a breach and fails to deliver the goods called for in the contract, one possible measure of damages is the difference between the contract price and the market price of the goods at the time of the breach.
Suppose that Seton Hall University contracts to buy 10 Notebook Computers from Computers R-Us at $4,000 each. If Computers R-Us fails to deliver the Notebooks as called for in the contract, and the current price of the computers is $4,500, Seton Hall’s measure of damages in this case is $5,000 (ten times $500—the difference in the current price and contract price).
In other cases, the buyer may avail himself of the remedy of “cover”; that is, the buyer may go into the marketplace and make “in good faith and without any unreasonable delay any reasonable purchase or a contract to purchase goods in substitution” for those due from the seller. The buyer may then recover from the seller the difference between the cost of cover and the contract price, plus any incidental or consequential damages, less any expenses saved. The remedy of cover is found in UCC §2712, and is the preferred action for an aggrieved buyer under the Uniform Commercial Code.
Incidental damages [UCC §2715] are any reasonable expenses incurred in effecting cover (i.e., transportation charges, freight charges, phone calls, etc.) or in the resale of the goods [UCC §2-710].
In our PC example, if Seton Hall absolutely needed the Notebooks for an important conference, they might go to a local computer dealer and effect cover. Suppose the cover price was $4,650. Under the UCC, Seton Hall would be entitled to recover the difference between the cover price ($4,650) and the contract price ($4,000), equaling $650 per unit, plus any incidental damages, minus any expenses saved, provided, of course, that this purchase had been made in “good faith.”
On the other side of the equation, under UCC §2706, a seller may elect to resell the goods which a buyer has wrongfully rejected or when the buyer has refused to take delivery. Here, the seller may recover the difference between the resale price and the contract price (together with any incidental damages under UCC §2710, but less any expenses saved). All of the elements of the resale must be reasonable, and in some cases, notice of the resale must be given to the breaching party.
Interestingly, prior to 1854, there were almost no rules relating to contract damages. Assessment of damages was generally left to the discretion of the jury. In 1854, the important case of Hadley v. Baxendale was decided. The court laid down two important rules, applicable generally to the area of contract damages. First, the aggrieved party may recover those damages “as may fairly and reasonably be considered… arising naturally, i.e., according to the usual course of things, from such breach of contract itself.” Second, the aggrieved party may recover damages “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.” Under the first rule, for example, cover or resale damages under UCC §2-712 or UCC §2-706 will naturally and obviously flow from the breach so everyone will be deemed to contemplate them. Under the second rule, “special” or “consequential” damages may be deemed to be within the contemplation of the parties, but only under well-defined “special circumstances.”
Consequential damages are those caused by special circumstances occurring beyond the contract itself. Such damage, loss, or injury does not flow directly and immediately from the act of the breaching party, but from some of the consequences or results of such an act. In order for a court to award consequential damages (often in the form of lost profits), the breaching party must know that “special circumstances” will cause the non-breaching party to suffer an additional loss. In practical terms, the non-breaching party may have to give the breaching party “notice” of the special circumstances.
The ice shipment for the Fubarski Meat Market is not delivered as required by contract. Consequently, Fubarski’s entire freezer of fresh kielbasa is ruined. Fubarski goes to the local 7-Eleven and purchases ice, at an additional cost of $100 over and above the contract price. The ice company would be liable for the additional $100 as “cover” damages. In addition, the ice company might also be held liable for the meat spoilage as consequential damages arising from the consequences of the failure to deliver the ice.A second type of special or consequential damages occurs in cases where a defective product causes personal injury. Compensation for personal injury would be an example of consequential damages that might arise in a breach of warranty action.
Let’s look at the classic common law case of Hadley v. Baxendale.
Hadley v. Baxendale
156 Eng. Rep. 145 (1845)
BACKGROUND AND FACTS
The plaintiffs ran a flour and gristmill in Gloucester, England. The crankshaft attached to the steam engine broke, causing the mill to shut down. The shaft had to be sent to a foundry located in Greenwich so that the new shaft could be made to fit the other parts of the engine. The defendants were common carriers, who transported the shaft from Gloucester to Greenwich. The plaintiffs claimed that they had informed the defendants that the mill was stopped and that the shaft must be sent immediately. The freight charges were collected in advance, and the defendants promised to deliver the shaft the following day. They did not do so, however. Consequently, the mill was closed for several days. The plaintiffs sued to recover their lost profits during that time. The defendants contended that the loss of profits was “too remote.” The court held for the plaintiffs, and the jury was allowed to take into consideration the lost profits. The high court reversed.
We think that there ought to be a new trial in this case; but, in so doing, we deem it to be expedient and necessary to state explicitly the rule which the Judge, at the next trial, ought, in our opinion, to direct the jury to be governed by when they estimate the damages.
* * * Now we think the proper rule in such a case as the present is this: Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or 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. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract. For, had the special circumstances been known, the parties might have specially provided for the breach of contract by special terms as to the damages in that case; and of this advantage it would be very unjust to deprive them. Now the above principles are those by which we think the jury ought to be guided in estimating the damages arising out of any breach of contract.
* * * Now, in the present case, if we are to apply the principles above laid down, we find that the only circumstances here communicated by the plaintiffs to the defendants at the time the contract was made, were, that the article to be carried was the broken shaft of a mill, and that the plaintiffs were the millers of that mill. But how do these circumstances show reasonably that the profits of the mill must be stopped by an unreasonable delay in the delivery of the broken shaft by the carrier to the third person? Suppose the plaintiffs had another shaft in their possession put up or putting up at the time, and that they only wished to send back the broken shaft to the engineer who made it; it is clear that this would be quite consistent with the above circumstances, and yet the unreasonable delay in the delivery would have no effect upon the intermediate profits of the mill. On the other hand, again, suppose that, at the time of the delivery to the carrier, the machinery of the mill had been in other respects defective, then, also, the same results would follow. Here it is true that the shaft was actually sent back to serve as a model for a new one, and that the want of a new one was the only cause of the stoppage of the mill, and that the loss of profits really arose from not sending down the new shaft in proper time, and that this arose from the delay in delivering the broken one to serve as a model. But it is obvious that, in the great multitude of cases of millers sending off broken shafts to third persons by a carrier under ordinary circumstances, such consequences would not, in all probability, have occurred; and these special circumstances were here never communicated by the plaintiffs to the defendants. It follows, therefore, that the loss of profits here cannot reasonably be considered such a consequence of the breach of contract as could have been fairly and reasonably contemplated by both the parties when they made this contract. ∗∗∗∗∗∗∗∗∗∗
The English court ordered a new trial, holding that the “special circumstances” that caused the loss of profits had not been sufficiently communicated by the plaintiffs to the defendants. The plaintiff would be required to give “express notice” of these circumstances in order to collect special damages.
Punitive damages are also called exemplary damages. Punitive damages are designed to punish a “guilty” party for intentional, malicious, willful, or wanton conduct in order to make an example of the breaching party. The purpose of awarding punitive damages is to deter the wrongdoer from similar conduct in the future, as well as to deter others from engaging in similar conduct. Generally, punitive damages will not be awarded in cases of simple breach of contract, except for a category of cases involving contract fraud, due to the presence of “scienter,” or the intent to deceive. The court may add an additional amount (in some cases, three times the actual damages, called treble damages) in order to punish the breaching party for this wrongful conduct.
The United States Supreme Court entered the debate concerning punitive damages in 1996 and held in BMW of North America, Inc. v. Gore (517 U.S. 559) that under the Due Process Clause of the Fourteenth Amendment the amount of punitive damages awarded by a jury cannot be “grossly excessive” and must bear some reasonable relationship to the actual damages sustained. There have also been attempts by several state legislatures to limit or even abolish punitive damages in a wide variety of tort cases. The issue of excessive damage awards is often addressed by the request of a party for a remittitur of the damages awarded.
Where a party has suffered no true or provable damage, a court may choose to award only nominal damages which recognize the existence of a breach. In our Notebook computer case, if the cost of the Notebooks had declined, and Seton Hall could not demonstrate any incidental damages, Seton Hall might only be entitled to the award of nominal damages for this “technical breach,” because no actual monetary loss had been sustained. In such a case, a prudent plaintiff might think twice and decide not to file a lawsuit in the first place.
A contract may specify an exact dollar amount that is to be paid in the case of a default or a breach. Such a clause is called a liquidated damage clause. Under the common law, a court would enforce a liquidated damage clause if:
- The amount set as liquidated damages is a reasonable estimate of the probable loss; and
- The parties must intend to provide for damages rather than a penalty.
Suppose that a student had attempted to rent an apartment in South Orange and had submitted a standard rental application. As part of the application process, the student had to put down one month’s rent (approximately $800). The contract stated that the student would forfeit the deposit if she failed to rent the apartment. When the student changes her mind, she is informed that her deposit will be retained as liquidated damages. Can the landlord keep the deposit? What standards should the court apply? Evaluate.
In the United States (as opposed to Great Britain, which has adopted a modified “loser pays” view), an award of damages will not ordinarily include reimbursement of the successful party’s attorney’s fees. Attorney’s fees should be viewed in light of the prior discussion of consequential damages. However, it has become common practice for commercial and residential leases, commercial paper, and contracts for sale of real estate to contain a clause providing for the collection of “reasonable attorney’s fees” in a case of non-payment A majority of courts uphold such agreements, permitting recovery of a stipulated amount in excess of the damages that would accrue, provided that the amount demanded is reasonable. What do you think of the “Loser Pays” rule found in Great Britain?
The Remedy of Specific Performance
The remedy of specific performance is an extraordinary remedy developed in a court of equity, also called a Chancery Court, to provide relief when the legal remedy of damages was inadequate. The remedy of specific performance is most appropriate when the non-breaching party is not seeking monetary damages; rather, the non-breaching party asks a court to issue a decree ordering a party affirmatively to carry out contractual duties (called a mandamus action), or desires performance of the promises in the contract.
Generally, courts will award specific performance if monetary damages are inadequate to put the non-breaching party in as good a position had the contract had been fully performed. In most cases of contracts for the sale of goods, monetary damages will be deemed adequate, since substitute goods may be readily available in the marketplace through the remedy of cover, or the goods can be sold in the marketplace through the remedy of resale. However, under the common law, if the goods were considered unique, a court of equity may issue a decree of specific performance. Under the common law, such “unique” items included antiques, objects of art, racehorses, stock in a closely held corporation, and all land. Recall the remedy W.O. Lucy was seeking in Lucy v. Zehmer.
Courts are very reluctant to grant specific performance in personal service contracts because public policy considerations discourage what would amount to involuntary servitude. In addition, courts do not generally desire to monitor a continuing personal service contract to assure that it is carried out. Specific performance is rarely available in an action in a small claims court.
Read Tower City Grain v. Richman for a discussion of specific performance under the UCC. Although the UCC attempted to liberalize the availability of the remedy of specific performance in §2-716, such relief may remain the extraordinary rather than the ordinary remedy because courts generally prefer aggrieved parties to avail themselves of the remedies of cover and resale in cases of a breach of contract involving the sale of goods.
Tower City Grain Co. v. Richman
232 N.W.2d, 61 N.D. (1975)
Plaintiff sued the defendant for specific performance of an oral contract for the sale of wheat. The lower court ordered specific performance and the defendant appealed. The defendant contended that specific performance was not a proper remedy in this case.
* * * The Uniform Commercial Code is controlling in the instant case and states in part:
1. Specific performance may be decreed where the goods are unique or in other proper circumstances.
2. The decree for specific performance may include such terms and conditions as to payment of the price, damages, or other relief as the court may deem just. (Emphasis added.)
While the Richmans’ contention that fungible goods were not a proper subject for the remedy of specific relief under prior law is correct, the adoption of the Uniform Commercial Code in 1966 liberalized the discretion of the trial court to grant specific performance in a greater number of situations. The Official Comment to §2-716, UCC, provides in pertinent part:
1. The present section continues in general prior policy as to specific performance and injunction against breach. However, without intending to impair in any way the exercise of the court’s sound discretion in the matter, this Article seeks to further a more liberal attitude than some courts have shown in connection with the specific performance of contracts of sale.
2. In view of this Article’s emphasis on the commercial feasibility of replacement, a new concept of what are “unique” goods is introduced under this section. Specific performance is no longer limited to goods which are already specific or ascertained at the time of contracting. The test of uniqueness under this section must be made in terms of the total situation which characterizes the contract.
In addition, (the Code) states that “the remedies provided by this title shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed.” We cannot presume that an award of damages fails to put an aggrieved party in as good a position as if the other party had fully performed. There was no finding or conclusion to that effect by the trial court in this case.
A complaint which prays for the equitable remedy of specific performance must clearly show that the legal remedy of damages is inadequate. A defendant should not be deprived of a jury trial, to which he would be entitled in an action at law, unless the plaintiff is clearly entitled to the equitable remedy he seeks.
Historically, specific performance, which is an equitable remedy, was applied primarily to contracts relating to goods which were “unique.” All real estate was deemed to be unique, and so were goods which had sentimental as distinguished from market value. Another basis for invoking specific performance was the inadequacy of the remedy at law.
A factual basis for a conclusion that the remedy of specific performance is available should be found by the trier of facts in order, that this court, on appeal may know the basis upon which it arrived at such a conclusion.
There is no finding by the trial court in this case that indicates what it believes to be the proper circumstances. Our examination of the record indicates no evidence upon which such finding could be based. The fact that the complaint prayed for specific performance and that the Richmans have in their possession the type and quantity of wheat called for in the contract are not adequate to support such a finding.
The buyer may obtain specific performance of the contract for the sale when the goods are unique or other proper circumstances are shown. Because the purpose of this section is to liberalize the right to specific performance, it would appear that it is not to be of great significance whether a given circumstance is regarded as involving “unique goods” or “proper circumstances”; ordinarily, circumstances which are proper will impart uniqueness to the goods. “Uniqueness in a reasonable commercial setting is the significant point.”
Without holding that specific performance can never be invoked to enforce a contract for grain or other fungible goods, we conclude that it was a manifest abuse of discretion and an error as a matter of law for the trial court to grant such a remedy under the circumstances of this case.
Judgment reversed and remanded with leave to amend.
As can be seen, the writers of the UCC attempted to broaden the scope of specific performance by adding a section [§2716 (1)] which states that specific performance may be decreed where the goods are “unique” or “in other proper circumstances.” Yet, many courts are reluctant to go beyond the conventional categories of unique goods found in the common law. Under the code, what is the precondition to filing a suit for specific performance? What are “proper circumstances”? Why are some courts so reluctant to go beyond the common law?
The court found that specific performance would be an appropriate remedy in Campbell Soup Co. v. Wentz. However, the court ultimately refused to issue the decree for specific performance because it ruled that the underlying contract was unconscionable. What did the court find unconscionable about the contract between the parties?
Campbell Soup Co. v. Wentz
172 F.2d 80 (3d Cir. 1948)
BACKGROUND AND FACTS
Campbell Soup Company, the plaintiff, entered into a contract for the sale of carrots with farmers who grew and produced the particular variety of carrots used in the company’s canned goods. Under the terms of the contract, a farmer was required to cut, clean, and bag the produce. When the carrots were delivered, the company determined if they conformed to company specifications. Another provision in the contract excused the company from accepting carrots under certain circumstances but retained the right to prohibit the sale of those carrots elsewhere unless the company agreed. The carrots involved in this case were Chantenay red carrots.
Campbell Soup made a written contract with the defendant, Wentz, a Pennsylvania farmer. Wentz was to deliver all the Chantenay red carrots he grew on his fifteenacre farm that year for $30 per ton. During the year, the market price of the carrots rose sharply to about $90 per ton, and Chantenay red carrots became virtually unobtainable. The defendant told a Campbell representative that he would not deliver his carrots at the contract price. Then, he sold the rest of his carrots to a neighboring farmer. Campbell bought about half the shipment from the neighboring farmer and then realized that it was purchasing its own “contract carrots.” Campbell refused to purchase any more and sought an injunction against both the defendant and the neighboring farmer to prohibit them from selling any more of the contract carrots to others. In addition, Campbell sought to compel specific performance of the contract against Wentz. The trial court denied the equitable relief requested by Campbell.
GOODRICH, Circuit Judge
* * *
The trial court denied equitable relief. We agree with the result reached, but on a different ground from that relied upon by the District Court.
* * *
We think that on the question of adequacy of the legal remedy the case is one appropriate for specific performance. It was expressly found that at the time of the trial it was “virtually impossible to obtain Chantenay carrots in the open market.” This Chantenay carrot is one which the plaintiff uses in large quantities, furnishing the seed to the growers with whom it makes contracts. It was not claimed that in nutritive value it is any better than other types of carrots. Its blunt shape makes it easier to handle in processing. And its color and texture differ from other varieties. The color is brighter than other carrots. The trial court found that the plaintiff failed to establish what proportion of its carrots is used for the production of soup stock and what proportion is used as identifiable physical ingredients in its soups. We do not think lack of proof on that point is material. It did appear that the plaintiff uses carrots in fifteen of its twenty one soups. It also appeared that it uses Chantenay carrots diced in some of them and that the appearance is uniform. The preservation of uniformity in appearance in a food article marketed throughout the country and sold under the manufacturer’s name is a matter of considerable commercial significance and one which is properly considered in determining whether a substitute ingredient is just as good as the original.
* * *
Judged by the general standards applicable to determining the adequacy of the legal remedy we think that on this point the case is a proper one for equitable relief. There is considerable authority, old and new, showing liberality in the granting of an equitable remedy. We see no reason why a court should be reluctant to grant specific relief when it can be given without supervision of the court or other time consuming processes against one who has deliberately broken his agreement. Here the goods of the special type contracted for were unavailable on the open market, the plaintiff had contracted for them long ahead in anticipation of its needs, and had built up a general reputation for its products as part of which reputation uniform appearance was important. We think if this were all that was involved in the case specific performance should have been granted.
We are not suggesting that the contract is illegal. Nor are we suggesting any excuse for the grower in this case who has deliberately broken an agreement entered into with Campbell. We do think, however, that a party who has offered and succeeded in getting an agreement as tough as this one is, should not come to a chancellor and ask court help in the enforcement of its terms. That equity does not enforce unconscionable bargains is too well established to require elaborate citation.
This case provides an interesting glimpse into the relationship between the equitable remedy of specific performance and the doctrine of unconscionability. Since specific performance is an equitable remedy, the petitioner must come to court “with clean hands,” reflecting the following legal maxim: “He who seeks equity must do equity.” What do you think this phrase means?
The Requirement of Mitigation
In a situation where a breach of contract has occurred, the non-breaching party may be required to lessen or mitigate damages. A party who has suffered a wrong by a breach may not unreasonably sit by and allow damages to accumulate or worsen. The law will not permit the aggrieved party to recover from the breaching party those damages that he “should have foreseen and could have avoided by reasonable effort without undue risk, expense, or humiliation.” [Restatement, Contracts §336(1)].
The doctrine requires reasonable efforts by the non-breaching party to mitigate or lessen damages. However, the wronged party is not required to mitigate if the cost of mitigation would involve unreasonable expense or if the effort itself would be unreasonable. The case of Parker v. Twentieth Century Fox demonstrates the operation of the mitigation principle in a case of a breach of an employment contract.
Parker v. Twentieth Century Fox Film Corp.
474 P.2d 689 (1970)
Shirley McLain Parker signed a contract to play the female lead in Twentieth Century Fox’s projected motion picture Bloomer Girl. Before production began, the corporation decided not to produce the picture and notified the actress of its decision. With the professed purpose of avoiding damage to the actress, the corporation offered her the leading role in another film entitled Big Country, Big Man. She rejected the alternate role and sued for damages. The corporation claimed the actress had unreasonably refused to mitigate harm to her career by refusing to accept the substitute role. Parker won the case.
The trial court pointed out that although the contract for the substituted role offered identical compensation and terms as the prior contract, Bloomer Girl was to have been a musical, and Big Country was to be a dramatic western movie. Furthermore, the musical was to be filmed in California, the western in Australia. The original contract also specified that the actress could approve the director for the musical, and if that person failed to direct the picture, she was to have the right to approve any substitute director. The actress also had the right to approve of the musical’s dance director and the screenplay. The western offer eliminated or impaired each of those rights. Twentieth Century Fox’s sole defense is that the actress unreasonably refused to mitigate damages by rejecting the substitute offer of employment.
In this case, the offer to star in the western was for employment both different from and inferior to that of making the musical, and no factual dispute exists on that issue. The female lead as a dramatic actress in a western style motion picture can by no stretch of the imagination be the equivalent of or substantially similar to the lead in a song-and-dance production. In addition, the western offer proposed to eliminate or impair the approvals the actress had under the original musical contract, and thereby constituted an offer of inferior employment.
There is a split of authority in real estate leasing cases, although the majority view would indicate that the lessor must at least attempt to mitigate damages in case of a breach by a lessee by at least attempting to re-rent the property. Any reasonable expenses incurred in these efforts would be recoverable as “incidental expenses.”
Two Seton Hall University students are renting an apartment in South Orange. For no good reason, the students decide to move out, causing a breach of the lease agreement. Under these circumstances, most states would require that the landlord use reasonable means to secure a new tenant. If such a tenant becomes available, the landlord will be required to mitigate the damages that are recoverable from the former tenant. Of course, the breaching party is liable for the difference between the amount of the original rent and the rent received from the new tenant. The landlord would also be entitled to recover any costs reasonably incurred in the mitigation effort. Now suppose the landlord did absolutely nothing and refused to take steps to re-rent the apartment. The court might reduce the amount of damages awarded by the amount the landlord could have received had reasonable steps in mitigation been taken.
In a case where an employee has been terminated for no just cause, but where the employer alleges that the employee had failed to mitigate their damages by refusing to accept alternate employment, the burden of proof is on the employer to prove the existence of an alternate job and to prove that the employee could have been hired—that is, that the employee had failed to mitigate his or her damages by refusing to accept suitable alternate employment.
Should a state legislature place an arbitrary limit on the award of punitive damages or should this issue be strictly reserved for a jury, subject always to a motion for a remittitur to a judge?
Generally, a court of law or an arbiter cannot order specific performance of a contract. Do you agree or disagree with this prohibition? If specific performance were an option to a judge or arbiter, would that fundamentally change the role of the court or of an arbiter?
Hadley v. Baxendale
- What remedy was the plaintiff seeking?
- What is a “common carrier”?
- How did the court formulate the rule established in this case for awarding damages?
- Where would you expect to find an agreement to provide for consequential damages?
Tower City Grain v. Richman
- What remedy was the plaintiff seeking? Why?
- What is the definition of “uniqueness” under common law? Under the Code?
- What finding must be made before a court can award specific performance?
- Who decides whether the remedy of specific performance would be an appropriate one?
- What items fall within the definition of uniqueness under the common law?
Campbell Soup v. Wentz
- Was the remedy of specific performance appropriate in this case? Why or why not?
- Who is a “chancellor”? What is equity?
- What was unconscionable about the contract entered into between the parties?
- Explain the “clean hands” doctrine.
Parker v. Twentieth Century Fox
- What is mitigation?
- What would be the measure of Parker’s damages?
- Who has the burden of proof concerning mitigation?