In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 01-3449

LINC EQUIPMENT SERVICES, INC.,

Plaintiff-Appellant,

v.

SIGNAL MEDICAL SERVICES, INC.,

Defendant-Appellee.

____________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 97 C 8049—David H. Coar, Judge.

____________

ARGUED DECEMBER 3, 2002—DECIDED FEBRUARY 5, 2003

____________

Before EASTERBROOK, MANION, and EVANS, Circuit

Judges.

EASTERBROOK, Circuit Judge. Signal Medical leased

from Linc Equipment a mobile magnetic resonance imager

(MRI), an expensive device that had a monthly net rental

in the $30,000 range. (The “net” signifies that Signal

covered expenses, including insurance and taxes, on top

of the $30,000.) Signal promised to return the MRI at the

end of the lease in good condition, less normal wear and

tear. Signal, which like Linc is a merchant in the business

of renting medical equipment, subleased this MRI to a

hospital, which later returned the machine directly to

Linc. Unfortunately, the MRI was left on during transit,
2 No. 01-3449

which damaged the magnet and required the machine to

be taken out of service for 10 months while it was repaired.

The repairs, which cost about $130,000, were paid for by

the insurance carrier. Linc sued in state court both Signal and the firm that handled the machine’s transportation; the insurer intervened to make a third-party claim in

subrogation against Signal. This suit was removed to

federal court under the Carmack Amendment, 49 U.S.C.

§14706, applicable because of the interstate transportation. Signal, the insurer, and the carrier resolved their

differences, leaving only Linc’s claim against Signal for 10

months’ lost rental value. Because the damage to the MRI

likely occurred during transit, the state-law claims are

sufficiently related to the federal-law theory that they

come within the supplemental jurisdiction. See 28 U.S.C.

§1367(a); Stromberg Metal Works, Inc. v. Press Mechanical,

Inc., 77 F.3d 928, 932-33 (7th Cir. 1996).

After the parties agreed to a bench trial, the district

judge tackled damages ahead of the merits. The judge

assumed that Signal is responsible for any harm to the MRI

and held a hearing to explore the question whether it is

liable for consequential damages (repair costs already

having been resolved). As the judge understood Illinois law,

which the parties agree governs, consequential damages

may be awarded only if the signatories “expressly contemplated” them. The contract does not in so many words

entitle Linc to consequential damages, and at the evidentiary hearing the persons who negotiated the lease testified that they had not discussed or thought about this

subject. As a result, the judge concluded, consequential

damages could not have been “expressly contemplated.”

This finding led to judgment on the merits in Signal’s favor.

We doubt that Illinois requires “express contemplation”

of consequential damages—or that, if it does, this phrase

implies a subjective as opposed to an objective inquiry.

Although the district judge and the parties did not mention
No. 01-3449 3

it, Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145

(1854), remains the dominant source of law on the recovery

of consequential damages for breach of contract, and we

have held that Illinois follows Hadley’s approach. See, e.g.,

Afram Export Corp. v. Metallurgiki Halyps, S.A., 772 F.2d

1358, 1368-69 (7th Cir. 1985); Evra Corp. v. Swiss Bank

Corp., 673 F.2d 951, 955-59 (7th Cir. 1982). What Hadley

holds is that a consequential loss is compensable only if

“reasonably foreseeable,” not that it must be “expressly

contemplated.” Although the phrase “expressly contemplated” crops up in some Illinois cases, that state’s judiciary

has explained that it is used as a synonym for foreseeability. See, e.g., Vranas & Associates, Inc. v. Family Pride

Finer Foods, Inc., 147 Ill. App. 3d 995, 1007, 498 N.E.2d

333, 342 (2d Dist. 1986). Signal, which like Linc was a

merchant in the medical-equipment-rental business, reasonably could have foreseen that return of the MRI in bad

condition would cost Linc rental revenue while it was being

repaired. That the lease excluded consequential damages in

an action by Signal, but not in an action by Linc, shows that

the parties must have understood this possibility. We do not

see in Article 2A of the Uniform Commercial Code, which

covers equipment leases, any provision negating Hadley’s

application. Although §530, enacted in Illinois as 810 ILCS

§5/2A-530, permits lessors to recover “incidental damages”

without mentioning “consequential damages”, this does not

imply that consequential damages are forbidden; §532 (810

ILCS §5/2A-532) preserves other remedies.

What is more, it is hard to see why income lost because

of inability to rent a chattel should be classified as “consequential” damages at all. Lost rental value is a direct

outcome of the broken promise and does not depend on the

details of Linc’s business or any idiosyncratic way that

Linc would employ the MRI—things that Signal might not

know and therefore could not consider when deciding how

much care to take with Linc’s machine. To see this, sup-
4 No. 01-3449

pose that Linc wanted to sell rather than rent the MRI

immediately after its return from Signal’s customer. The

selling price of a MRI depends on expected net income

(rental or billings to patients, less costs), plus scrap value

at the end of its economically useful life, all discounted to

present value. Suppose that this MRI in good condition

would have had 60 months of service remaining before

becoming obsolete. The same machine, with the damage

actually sustained, would have had only 50 months’ service remaining (deferred for 10 months) and required a

$130,000 capital investment to repair. It therefore would

have sold for less than the same machine in operable

condition. The difference between what the MRI would have

fetched in a sale immediately after its return in damaged

condition, and what it could have been sold for had Signal

kept its promise to return it in good condition, is the real

economic loss caused by transporting the machine with

the magnet on. It fits nicely within standard measures

of damages in contract cases. See generally E. Allan

Farnsworth, III Farnsworth on Contracts §12.9 (2d ed.

1990).

Because the market price of rental equipment capitalizes the expected rental stream—not only reducing cash

flows to present value but also taking into account the

probability that some months will not fetch rentals, when

machines are between customers or demand is slack—

it would be double counting to award a lessor anything extra for lost rental income. Consider what should

happen if one of Hertz’s customers has an accident and

the car must be taken out of the fleet for a month while

being repaired. Would Hertz recover not only the cost

of repair (say, $1,000) but also the $50 daily rental during that month ($50 × 30 = $1,500)? Such a measure frequently would overcompensate the lessor. If the accident caused the value of the used car to decline by, say,

$1,500 (from $15,000 in good condition to $13,500 with
No. 01-3449 5

repairs pending), Hertz could sell the damaged car for

$13,500, invest an extra $1,500, buy a used car equal in

value to the one it expected to receive at the end of the

rental, and rent that car for $50 per day. Its full loss

would be $1,500 (the difference in resale prices); if Hertz

neglected to cover in the market, and instead claimed a

loss of $2,500, it would be met with the defense that it

had failed to mitigate damages. Just so with Linc. If it

had a ready market for MRI machines, it could have covered when it learned of the problem and leased out the

newly purchased machine; then its full loss would have

been the difference between the cost of cover and the

amount it could have realized when selling the damaged

machine.

One must consider as well the possibility that MRI

machines have lives that depend on accumulated use

(wear and tear) rather than technological obsolescence.

In that event, taking the machine out of service did not

cost Linc ten months’ rental but only postponed its receipt.

Then damages would be limited to the time value of money (that is, to interest on the deferral of income). The

magnet’s rebuilding might even have extended the machine’s useful life. All of this is captured automatically in

the difference between the sale prices of sound and damaged MRI devices, which makes this calculation preferable

to judicial attempts to determine how likely it was that

a particular machine would have been rented during

these particular months, what its expected useful life may

have been, and so on. Best to take advantage of market

prices that reflect this information, rather than try to

generate the information on the witness stand. We know

that this MRI was sold for $475,000 immediately after the

repairs were completed; such a price for a fully functional MRI, with many future months of rental in store,

strongly implies that $300,000 would be an excessive

award for the loss of 10 months’ use.
6 No. 01-3449

So the district court was right to conclude that Linc is

not entitled to damages measured by the monthly rental

times the number of months required for repair, but

wrong to think that the cost of making repairs sets a cap

on damages. The judgment is vacated, and the case is

remanded for further proceedings consistent with this

opinion.

A true Copy:

Teste: 

 ________________________________

Clerk of the United States Court of

Appeals for the Seventh Circuit 

USCA-02-C-0072—2-5-03