Opinion ID: 6103948
Heading Depth: 2
Heading Rank: 2

Heading: Damages for the Company’s Lost Market Value

Text: Prior to the breach, SIS confidentially negotiated its sale to Primoris for $42 million. It is undisputed that IP knew nothing about the pending sale to Primoris when it agreed to the slaker contract. As a result, the loss of the deal cannot have been a foreseeable consequence of the breach. This is so even if SIS could show that the breach caused the deal to collapse. Foreseeability is an independent element of any claim for consequential damages. Basic Cap., 348 S.W.3d at 901. Even if caused by the breach, damages are not recoverable if they were not within the breaching party’s reasonable contemplation at the time of contracting. Stuart, 964 S.W.2d at 921. Because of IP’s undisputed lack of awareness of the Primoris deal at the time of contracting, the court of appeals rejected the lost $42 million sale as a basis for consequential damages. 628 S.W.3d at 578. In this Court, SIS acknowledges that the loss of the Primoris sale was not itself foreseeable to IP. SIS instead defends the $42 million award as a measurement of lost “company value” rather than as 9 damages for loss of the Primoris deal. 2 SIS contends the jury measured its lost “company value” as the difference between the price offered by Primoris ($42 million) and the company’s market value at the time of trial (“less than zero,” according to witnesses). After framing the award in this way, SIS asks us to assess whether the decline in the company’s market value—not loss of the sale itself—was a foreseeable consequence of the breach. As explained below, we conclude that it was not. To begin with, the court of appeals was justified in rejecting SIS’s argument that the $42 million lost Primoris sale is sufficient evidence of a decline in company value of $42 million or more. This is so for several reasons. First, the jury awarded the entire amount of the Primoris offer (and more), not the difference between the highest offer and subsequent, post-breach offers. A company does not lose all its value by forfeiting one sale opportunity, particularly when the record reflects later offers. Second, treating the $42 million as reflecting a decline in the company’s market value would render duplicative the $12.4 million in lost book value, which the jury awarded on top of the $42 million. Third, SIS cannot use the $42 million sale price to estimate its pre-breach value and then use expert testimony on book value to estimate its post-breach value. Market value and book value are not interchangeable measures. 3 2 The jury charge instructed the jury to measure “damages to Signature’s company value that were the natural and probable consequence of the failure to comply and that were foreseeable when the agreement was made.” 3City of Harlingen v. Est. of Sharboneau, 48 S.W.3d 177, 187 (Tex. 2001) (Baker, J., concurring in the judgment) (“Market value is the price the property would bring ‘when it is offered for sale by one who desires, but is not obligated 10 SIS nevertheless asks us to consider the entire consequential damages award of $56.3 million as reflecting a decline in its market value and to view the lost Primoris sale merely as some evidence of that value. This way of understanding the jury’s award is consistent with the jury charge, which instructed the jury to award “damages to Signature’s company value that were the natural and probable consequence of the failure to comply and that were foreseeable when the agreement was made.” Even assessing the award on those terms, however, the damages awarded cannot stand because they were not “foreseeable when the agreement was made.” Again, “[f]oreseeability is a fundamental prerequisite to the recovery of consequential damages for breach of contract.” Basic Cap., 348 S.W.3d at 901. To establish the foreseeability of the damages it seeks, SIS must prove that IP “contemplated at the time” it agreed to the slaker contract that a catastrophic collapse in SIS’s market value far outpacing the $2.4 million IP refused to pay “would be a probable result of the breach.” Stuart, 964 S.W.2d at 921; see also RESTATEMENT (SECOND) OF CONTRACTS § 351. It has not done so. to sell, and is bought by one who is under no necessity of buying it.’”) (quoting State v. Windham, 837 S.W.2d 73, 77 (Tex. 1992)); JEFFREY J. HAAS, CORPORATE FINANCE 74 (2d ed. 2021) (“Book value (BV) is the simplest valuation method because it is derived directly from the numbers on the company’s balance sheet. The book value of a company on any given date is simply the value of its total assets (TA) less the value of its total liabilities (TL), both as reported on the balance sheet on that date. In other words, book value is the amount of the company’s assets that would be left after the company’s creditors are paid off in full. Thus, book value is also known as ‘shareholders’ equity.’”); see id. at 24 (noting that the balance sheet approach “is limited” because it “requires the omission of the current fair values of most assets and liabilities”). 11 SIS attempts to show its collapse was foreseeable to IP by demonstrating that IP knew SIS needed payments on the slaker contract to fund future business opportunities. SIS relies on our decision in Basic Capital, in which we held that damages for lost business opportunities were foreseeable on the facts of that case. Basic Cap., 348 S.W.3d at 903. In Basic Capital, the contract was for loans to fund specific capital investments by the plaintiff. The nature of the contract thus made it clear that withholding payment would impair the plaintiff’s anticipated investments. Id. We concluded that the plaintiff need not prove that the details of each lost real estate venture were known to the defendant at the time of contracting. Because the defendant “clearly knew how the [money] would be used,” the plaintiff did not need to establish that the particulars of each lost opportunity were known to the defendant at the time of contracting in order for the lost profits predictably flowing from the breach to be recovered as consequential damages. Id. Unlike in Basic Capital, however, SIS does not seek compensation for the loss of specific business opportunities. Recovery of the lost profits flowing from lost business opportunities, as in Basic Capital, has long been recognized as a valid theory of consequential damages. Phillips, 475 S.W.3d at 278–79 (detailing the standards governing awards of lost profits). Instead of travelling the well-worn path—calculating the profits it would have made from the business it lost due to IP’s breach— SIS pursued a novel damages model premised on a decline in the company’s overall market value as an asset. But SIS cites no contract case in which a court has upheld an award of consequential damages 12 premised on a drop in a company’s market value as an asset. 4 The few Texas courts that have addressed the question have not allowed such a recovery. 5 This case will not be the first. 4 The cases cited by SIS do not support an award of consequential damages for reduced company value in a breach-of-contract case. In Sawyer v. Fitts, 630 S.W.2d 872 (Tex. App.—Fort Worth 1982, no writ), the court allowed loss-of-value damages in a tort suit, although—unlike here—the lost value had been realized by a transaction that locked in the plaintiff’s actual losses. The same was true for Wellogix, Inc. v. Accenture, LLP, 823 F. Supp. 2d 555 (S.D. Tex. 2011), aff’d, 716 F.3d 867 (5th Cir. 2013), also a tort case. Whether a decline in a company’s market value could ever be an appropriate measure of damages in a tort suit is a question we do not address. SIS cites one contract case involving lost-value damages, R.G. McClung Cotton Co. v. Cotton Concentration Co., 479 S.W.2d 733 (Tex. App.—Dallas 1972, writ ref’d n.r.e.). There, however, the devalued asset at issue was a commodity, not a company. The defendant delayed delivery of cotton, and the price dropped during the delay. The subject of the contract was the fluctuating commodity itself, and the court allowed the breaching defendant to be charged with the decline in market value during the delay in delivery. The case does not mention foreseeability. In any event, charging cotton dealers with knowledge of the cotton market is a far cry from charging IP with knowledge of the market for buying and selling companies like SIS. 5 Transitional Entity LP v. Elder Care LP, No. 05-14-01615-CV, 2016 WL 3197160, at  (Tex. App.—Dallas May 27, 2016, no pet.) (reversing an award that “appear[ed] to compensate appellees for the loss in value of a business” rather than basing damages on the benefit of the bargain); Abraxas Petroleum Corp. v. Hornburg, 20 S.W.3d 741, 761 (Tex. App.—El Paso 2000, no pet.) (agreeing that lost value was an inappropriate measure and distinguishing lost profits from lost value); Nelson v. Data Terminal Sys., Inc., 762 S.W.2d 744, 747–48 (Tex. App.—San Antonio 1988, writ denied) (“DTS contends that diminution of value in support of Nelson’s breach of contract cause of action is not a proper measure of damages. We agree with DTS . . . .”); see also Robehr Films, Inc. v. Am. Airlines, Inc., 85 CIV. 1072 (RPP), 1989 WL 111079, at  (S.D.N.Y. Sept. 19, 1989) (“Under Texas law, damages for diminution in value of a business are not recoverable in a breach of contract action, but are only recoverable in tort.”), aff’d, 902 F.2d 1556 (2d Cir. 1990); cf. Hollywood Fantasy Corp. v. Gabor, 151 F.3d 203, 214 (5th Cir. 1998) (“Under Texas law, the loss of goodwill or business reputation is not 13 It stands to reason that losing business opportunities will often contribute to a decline in a company’s market value, but whether this will be the case—and to what extent—depends on many factors typically beyond the reasonable contemplation of the breaching party. The market for ownership of a business is distinct from the market the business serves. See Henry G. Manne, Mergers and the Market for Corporate Control, 73 J. POL. ECON. 110, 112 (1965). Dense volumes detail the proper way to value companies. See, e.g., TIM KOLLER ET AL., VALUATION: MEASURING AND MANAGING THE VALUE OF COMPANIES (7th ed. 2020). Students in business schools (and increasingly in law schools) ponder asset pricing models and formulas for calculating the weighted average cost of capital. Peter H. Huang & Michael S. Knoll, Corporate Finance, Corporate Law and Finance Theory, 74 S. CALIF. L. REV. 175, 175–76 (2000). Despite detailed knowledge of their own industry, companies often do not understand the market for buying and selling companies like themselves, much less companies in other lines of work. As a result, specialized bankers and consultants are frequently hired when companies have reason to explore either their own market value or that of other companies. SIS proffered no evidence that IP ever had any reason to concern itself with SIS’s market value in the eyes of those, like Primoris and its advisors, who buy and sell companies. That alone renders SIS’s lost market value unforeseeable to IP and therefore unrecoverable. Yet even if IP knew SIS’s market value at the time of contracting, foreseeing the recoverable in a breach of contract action.”); Sterling Projects, Inc. v. Fields, 530 S.W.2d 602, 605 (Tex. Civ. App.—Waco 1975, no writ) (same). 14 impact of breaching a promise to pay on a company’s market value is at least as difficult as valuing the company in the first place. When valuing a business, “confounding events may be hard to disentangle.” FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 193 (1996). Isolating the impact of the breach of contract from other factors contributing to investors’ reduced interest in a company will rarely be an easy task. The law does not charge contracting parties with a duty to understand how their actions will affect the counterparty’s market valuation. SIS points to no authority to the contrary, and we are aware of none. We do not expect contracting parties, regardless of their sophistication, to study the market for acquiring their counterparties before entering into a contract or breaching one. As a general rule, neither the counterparty’s market value nor the impact of breach on that value will be reasonably foreseeable at the time of contracting. SIS offered no evidence distinguishing IP from this general rule. It attempted to show that IP was intimately familiar with SIS’s business because of the companies’ close relationship. But again, knowledge of a business is not the same as knowledge of the market for buying and selling that business. 6 As we said in Basic Capital, “a general knowledge of a prospective borrower’s business does not give a lender reason to foresee the probable results of its refusal to” perform. 348 S.W.3d at 902. In other words, a 6 Even companies that know the market for buying and selling businesses will generally have no duty to investigate or foresee the market value of companies with which they contract, provided that the contract itself is not concerned with the market value of the counterparty. 15 party’s mere familiarity with another company does not alone make the collapse of that company a foreseeable consequence of breach. Id. at 901–02. The same is true here. IP’s familiarity with SIS’s business did not make SIS’s precipitous decline in attractiveness to buyers a foreseeable consequence of breach. SIS contends that, beyond general familiarity, IP was specifically aware that SIS needed speedy payment to fund future business and that an unexpected cash-flow crunch could be devastating to SIS. The only evidence SIS offered on this point was (1) the parties’ longstanding familiarity with one another, (2) the fact that IP’s employees later learned of SIS’s financial distress, and (3) the assertion that construction is a “gossipy-type industry.” Even assuming that SIS established IP’s knowledge of SIS’s precarious financial position, that does not make the effect of breach on SIS’s market value foreseeable. As in Basic Capital, one traditional measure of consequential damages is lost profits, which must be established with reasonable certainty. 348 S.W.3d at 898, 901. SIS could have sought such damages, but it chose not to. Instead, it laid its overall decline in market value—not the discrete injuries that caused its market value to decline—at IP’s feet. But even if IP should reasonably have foreseen that its breach would cost SIS a great deal of business, SIS’s decline in market value is a fundamentally different matter. Damages for that loss were unforeseeable and therefore unavailable. 7 7 In addition to arguing foreseeability, IP also argues that “company value” damages are not available as a matter of law because they reflect “paper losses” in SIS’s theoretical market value, not actual cash losses suffered by the time of trial. See DAN B. DOBBS & CAPRICE L. ROBERTS, LAW OF REMEDIES 16 Parties need not scour the balance sheets of their counterparties and weigh the likely consequences of breach on the counterparty’s attractiveness to investors. 8 Far from helping new and unstable § 3.4 (3d ed. 2018) (explaining that “consequential losses must have been realized or must be likely to be realized in the future” to be recoverable, so “bookkeeping losses do not count when it comes to consequential damages”). Because we reverse the award for lack of foreseeability, we do not consider whether the damages suffer from this additional defect. We also do not consider another potential bar to “company-value” damages. IP argued in the court of appeals that SIS could never recover for its decline in market value because those losses were suffered by the company’s owners, not by SIS itself. Unlike withholding payment to SIS on the slaker contract, which harms SIS itself, a deterioration in SIS’s value as an asset harms those who hold the asset—so the argument goes. After all, it is SIS’s owners, not SIS itself, who would be paid by a buyer like Primoris if SIS were sold. If this argument is correct, then SIS itself was ineligible to seek recovery for a decline in its market value, and the eligible entities—SIS’s owners—were not parties to the slaker contract and therefore could not sue for its breach. But IP does not press this argument here, so we do not consider it. 8 Of course, parties can give notice of their dire financial straits at the time of contracting. See, e.g., W. Union Tel. Co. v. Brooks, 279 S.W. 443, 444 (Tex. 1926). When one party has given notice of the consequences of breach at the time of contracting, no further inquiry into the foreseeability of those consequences is required. Elijah Ragira/VIP Lodging Grp., Inc. v. VIP Lodging Grp., Inc., 301 S.W.3d 747, 756 (Tex. App.—El Paso 2009, pet. denied) (“[I]f 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.”) (emphasis added) (quoting Hadley, 9 Exch. at 354–55); RESTATEMENT (SECOND) OF CONTRACTS § 351 cmt. b (“If loss results other than in the ordinary course of events, there can be no recovery for it unless it was foreseeable by the party in breach because of special circumstances that he had reason to know when he made the contract.”). Relying on this rule, a party in SIS’s position could give notice of its pending sale and of its expectation that a breach would scuttle the sale and drive its company’s value into the ground, thereby resulting in losses far exceeding the size of the contract. Whether anyone would contract with such a company is 17 businesses like SIS, such a rule would encourage parties to contract only with large, established companies. Few rational parties would contract with a fledgling company for whom a $2.4 million non-payment might one day be worth $56 million in “company value” damages. In sum, the decline in SIS’s market value reflected in the jury’s award was not foreseeable to IP and was therefore not available as consequential damages. We affirm the court of appeals’ reversal of $42 million of the award on foreseeability grounds. The court of appeals left in place $12.4 million of the award, to which we now turn.