Sterling Freight Lines, Inc. v. Prairie material Sales, Inc.

No. 2--96--0162
_________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT
_________________________________________________________________

STERLING FREIGHT LINES, INC.; ) Appeal from the Circuit Court
THOMAS E. RALEIGH, as Trustee ) of Du Page County.
in bankruptcy for Sterling )
Freight Lines, Inc.; and )
MICHAEL SMALL, as Successor in )
Interest of Sterling Freight )
Lines, Inc., Bankrupt, )
) No. 89--L--1633
Plaintiffs-Appellants, )
)
v. )
)
PRAIRIE MATERIAL SALES, INC., ) Honorable
) Bonnie M. Wheaton,
Defendant-Appellee. ) Judge, Presiding.
_________________________________________________________________

JUSTICE INGLIS delivered the opinion of the court:
Plaintiff, Sterling Freight Lines, Inc., sued defendant,
Prairie Material Sales, Inc., for breach of contract. During a
bifurcated bench trial, the circuit court of Du Page County first
found defendant liable for breach of contract. After the trial on
the issue of damages, the court determined plaintiff's damages
arising from the breach to be $84,820. Plaintiff appeals from the
damages award. We affirm in part and reverse in part and remand.
Defendant is in the ready-mix concrete business. Plaintiff
was a bulk hauling company. In 1975, defendant and plaintiff
signed an exclusive hauling agreement giving plaintiff the
exclusive right to haul bulk cement and additives from cement
manufacturers to defendant's plants located in the southern suburbs
and south side of Chicago. The agreement ran from June 1975 to
June 1981 and included two two-year options by which plaintiff
could extend the contract.
Plaintiff hauled bulk cement for defendant during the life of
the contract. In 1980, plaintiff chose to exercise its option to
extend the hauling contract. In June 1980, defendant purchased A-1
Cartage (A-1), a hauling company. On January 20, 1981, defendant
terminated the contract. Plaintiff thereafter filed for bankruptcy
in 1983.
During the damages trial, Raymond Throckmorton, plaintiff's
expert, testified that plaintiff's damages from January 1981 to
June 1984 due to defendant's breach totaled $1,657,119. Further,
when he adjusted for the effect of inflation through October 1995,
the damages totaled $2,567,469.
Concerning his methodology, Throckmorton testified that he
first calculated plaintiff's dry bulk revenues for the period
beginning January 1981 and ending June 1984. This was accomplished
by taking the 10 months of dry bulk revenue generated during fiscal
year 1980 (March 1980 to January 1981) and figuring a monthly
average. This figure was further modified by the percentage of dry
bulk hauls made on defendant's behalf compared to the total number
of dry bulk hauls to arrive at a final monthly average. This final
monthly average was used as a base number for the fiscal years 1981
through 1984. Throckmorton then calculated a growth rate based on
A-1's growth during the relevant time period and applied it to the
base number. Throckmorton next calculated the expenses saved by
defendant's breach in a similar fashion and subtracted them from
the revenues to arrive at the total damages amount of about $1.7
million. He finally calculated an inflation multiplier for the
period of March 1981 through September 1995 to arrive at the
inflation-adjusted figure of about $2.6 million.
Defendant did not present an expert witness of its own, but
challenged Throckmorton's methodology during cross-examination.
Defendant accepted plaintiff's general methodology but disagreed
with three assumptions: (1) the percentage of plaintiff's overall
business attributable to defendant; (2) the growth rate to be
applied to plaintiff's business; and (3) which expenses should be
used to calculate plaintiff's damages.
After the evidence was presented, the trial court rejected
plaintiff's figure for mix of business, which was based on a six-
year average (representing the life of the contract). Instead, the
court used a figure for mix of business for the year immediately
preceding the breach. Next, the court declined to apply any growth
rate over the remainder of the contract, finding that both the
plaintiff's and defendant's proposed growth rates were too
speculative. Finally, the court rejected plaintiff's tally of
expenses and instead included fixed costs and depreciation in the
damages calculation. The court also determined that an adjustment
for inflation would be improper in this case. The court found that
plaintiff had incurred damages of $84,820 arising from defendant's
breach of the exclusive hauling agreement.
Defendant raises a number of issues on appeal, all of which
are encompassed by the general question of whether the trial court
correctly calculated the damages arising from the breach of
contract. Defendant specifically challenges the trial court's
deduction of fixed overhead expenses from gross contract revenues;
the trial court's failure to apply an inflation adjustment factor
to the judgment; the trial court's rejection of plaintiff's growth
factor; and the trial court's rejection of plaintiff's mix-of-
business percentage.
Generally, the "monetary award [of damages] should, to the
extent possible, put the nonbreaching party in the position he
would have been in had the contract been performed." Ollivier v.
Alden, 262 Ill. App. 3d 190, 196 (1994). Damages must also be
proved with reasonable certainty. F.E. Holmes & Son Construction
Co. v. Gualdoni Electric Service Inc., 105 Ill. App. 3d 1135, 1141
(1982). Additionally, while lost profits, gross profits less
costs, provides the proper measure of damages, the parties disagree
about the method that should have been used to calculate
plaintiff's lost profits.
Plaintiff initially asserts that the trial court erred when it
deducted plaintiff's fixed overhead expenses from the gross
contract revenues. According to plaintiff, lost profits are
calculated by subtracting direct and variable costs from the
contract price. Plaintiff defines direct and variable costs as
those costs which are avoided as a result of the breach. Fixed
overhead, states plaintiff, is incurred regardless of the contract
at issue and cannot be avoided as a result of a breach. Therefore,
plaintiff asserts that they are not included in the damages
calculation and it was error for the trial court to include fixed
overhead expenses as a part of its damages calculation. Defendant
does not specifically address plaintiff's argument. Instead,
defendant essentially contends that the trial court's assessment of
damages was not against the manifest weight of the evidence.
We will not disturb the damages assessed by a trial court
sitting without a jury unless its judgment is against the manifest
weight of the evidence. Lynch v. Precision Machine Shop, Ltd., 93 Ill. 2d 266, 278 (1982). A trial court's damages assessment is
against the manifest weight of the evidence when it ignored the
evidence or used an incorrect measure of damages. B&Y Heavy
Movers, Inc. v. Fluor Constructors, Inc., 211 Ill. App. 3d 975, 984
(1991); MBC, Inc. v. Space Center Minnesota, Inc., 177 Ill. App. 3d
226, 234 (1988). It is on this latter ground that we hold that the
trial court erred in determining plaintiff's damages.
Damages assessed for lost profits are to be based on net
profits. Getschow v. Commonwealth Edison Co., 111 Ill. App. 3d
522, 534 (1982). Net profits are calculated by "subtracting the
expenses necessary for plaintiff's full performance from the
contract price because these expenses are generally avoided by the
defendant's breach." Holmes, 105 Ill. App. 3d at 1141. The cost
of performance is made up of direct costs, like labor and
materials, and indirect costs, such as overhead. Holmes, 105 Ill.
App. 3d at 1141. Those costs which are avoided as a result of the
defendant's breach are deducted from the contract price. Holmes,
105 Ill. App. 3d at 1141. These avoided expenses include the
direct costs and the indirect costs (overhead), called variable
indirect costs, avoided by the defendant's breach. Holmes, 105
Ill. App. 3d at 1141. The indirect costs that cannot be avoided by
the defendant's breach, called fixed indirect costs, are not
deducted from the contract price. Holmes, 105 Ill. App. 3d at
1141.
In the instant case, the trial court erred calculating lost
profits. The trial court stated:
"In this particular case involving a small business, it
defies common sense to exclude fixed costs when [defendant]
constituted in the area of 60 percent of the total revenues of
[plaintiff].
Perhaps the elimination of fixed costs would be proper in
a large corporation where the breach constitutes a fairly
small amount of the total revenue, but it is clear to the
Court that failure to consider the fixed costs and
depreciation would lead to a very skewed result."
The court then proceeded to deduct plaintiff's fixed costs from its
gross contract revenues in arriving at its damages amount. This
was error.
The facts in this case are governed by Central Information
Financial Services, Ltd. v. First National Bank, 128 Ill. App. 3d
1052 (1984). There, the defendant's breach cost the plaintiff one
of only two contracts on which it was working. Central
Information, 128 Ill. App. 3d at 1062. In determining damages, the
court reasoned that " 'since overhead is fixed and nonperformance
of the contract produced no overhead cost savings, no deduction
from profits should result.' " Central Information, 128 Ill. App.
3d at 1062, quoting Vitex Manufacturing Corp. v. Caribtex Corp.,
377 F.2d 795, 798 (3d Cir. 1967). The court determined that an
appropriate damages calculation would be "to award damages for the
contract price less the award of expenses saved because the injured
party is not required to perform." Central Information, 128 Ill.
App. 3d at 1063. This method is simple, "because it does not
require any determination as to the amount of overhead to allot to
the breached contract" and "will reach a fair result." Central
Information, 128 Ill. App. 3d at 1063.
The instant case is factually similar Central Information and
thus deserves similar treatment. Here, plaintiff lost slightly
less than half of its business due to defendant's breach of the
contract. Plaintiff presented evidence that its overhead expenses
could not be avoided due to the breach. Under the rationale of
Central Information, fixed overhead expenses should be entirely
excluded from the damages calculation. Hence, the trial court
erred by including plaintiff's overhead expenses in its damages
calculation. Accordingly, the damages award must be reversed and
the cause remanded to the circuit court in order to recalculate
plaintiff's net profits under the exclusive hauling agreement.
Plaintiff next asserts that the trial court's determination
that defendant accounted for 61.4% of plaintiff's business under
the exclusive hauling agreement was against the manifest weight of
the evidence. Plaintiff contends that its mix-of-business
calculation, using a six-year average, was mandated by the evidence
presented at trial. We disagree.
The evidence presented at trial showed that the number of
hauls plaintiff made for defendant declined by 30 points from 87%
in fiscal year 1979 to 57% in fiscal year 1981. Plaintiff contends
that this decrease was due to defendant pulling its business away
from plaintiff in anticipation of its breach. Thus, according to
plaintiff, its use of a six-year average corrects for the effect of
defendant's move away from plaintiff.
This contention overlooks testimony showing that plaintiff was
also expanding its business into hauling liquid chemicals and
edibles. Both Throckmorton, plaintiff's expert, and Richard
Jousma, Jr., plaintiff's president, admitted that plaintiff's
business strategy was to expand its customer base with new business
and to move towards becoming a chemicals and edibles hauler.
Based on this evidence, the trial court chose to use the mix
of business from the year immediately preceding the breach because
it was "the most representative measure of that mix of business
since it was the time immediately prior to the breach." The trial
court also noted that the mix of business over the length of the
contract had "vastly fluctuat[ed]." The trial court's rejection of
plaintiff's six-year average for the mix of business was thus
supported by evidence that the decline of plaintiff's business was
due to its own actions and business strategy. Accordingly, we
cannot say that the trial court's determination that the proper
mix-of-business factor was 61.4% was against the manifest weight of
the evidence.
Plaintiff next asserts that the trial court erred in its
damages calculation by refusing to apply a growth factor to its
calculation of plaintiff's lost profits. We hold that the trial
court's determination was not against the manifest weight of the
evidence.
At trial, plaintiff used A-1, defendant's captive hauling
company, as a model on which to base its own projected growth for
the period of the breach. Plaintiff contended that, but for
defendant's breach, it would have made the hauls that A-1 actually
made during the period of the breach. Plaintiff claimed that the
growth in the number of hauls A-1 made for defendant during the
period of the breach was similar to the growth it would have
experienced itself had defendant not breached the contract. Thus,
according to plaintiff, A-1's growth approximated that which it
should have experienced.
Plaintiff also asserts that "no evidence was admitted to
support the [trial c]ourt's assumption that [plaintiff's] business
would experience zero growth during the period of [defendant's]
breach." Plaintiff claims that "the only evidence presented at
trial regarding [its] growth rate established that [plaintiff]
would have experienced substantial positive growth during the
period of [defendant's] breach." This is not strictly true.
Defendant elicited evidence to show that A-1 was not an
independent hauling company like plaintiff, but rather, it was a
captive subsidiary. Plaintiff's expert, Throckmorton, did not
examine the actual industry profitability of noncaptive hauling
companies during the early 1980s, even though those years were a
tough period for hauling companies. Throckmorton also did not know
whether A-1 received any capital investment from defendant, whether
it hauled the same products as plaintiff, or whether it hauled to
the same plants as plaintiff. Moreover, defendant's vice-president
testified that A-1 hauled significantly different materials, hauled
to different plants, and worked more shifts than plaintiff.
Finally, Throckmorton did not investigate what caused A-1's growth.
Thus, there was ample evidence to allow the trial court to conclude
that A-1 was not a comparable company to plaintiff and that a
growth factor based on A-1's performance was speculative.
Accordingly, the trial court's rejection of the growth factor was
not against the manifest weight of the evidence.
Plaintiff finally argues that the trial court erred as a
matter of law by refusing to adjust its lost profits award for
inflation. Plaintiff contends that "it is proper to take into
account inflationary factors from the time of [the breach] to the
time of judgment." We disagree.
Plaintiff's "inflationary factor" is little more than a thinly
veiled attempt to secure prejudgment interest. Under Illinois law,
prejudgment interest may be awarded pursuant to an agreement
between the parties or to a specific statutory provision (Weidner
v. Szostek, 245 Ill. App. 3d 487, 492 (1993)), or where damages are
liquidated or can be easily determined and calculated (Marvel
Engineering Co. v. Commercial Union Insurance Co., 118 Ill. App. 3d
844, 854 (1983)). None of those circumstances are present here.
Therefore, plaintiff is not entitled to an award of prejudgment
interest.
Plaintiff attempts to justify its "inflation factor" by citing
to Getschow, 111 Ill. App. 3d at 533, and Raines v. New York
Central R.R. Co., 129 Ill. App. 2d 294, 302 (1970), rev'd on other
grounds, 51 Ill. 2d 428 (1972), for the proposition that an
adjustment due to inflation is proper when determining lost
profits. These cases, however, are inapposite. Getschow does not
affirmatively state that an inflationary adjustment is mandated in
a lost profits award, but, rather, found that such an award under
the facts of that case was not against the manifest weight of the
evidence. Getschow, 111 Ill. App. 3d at 534. Moreover, the use of
any inflationary adjustment there was not actually challenged on
the appeal. Getschow, 111 Ill. App. 3d at 532-35. Raines, on the
other hand, involved an award for a continuing physical injury,
damages for which would persist into the future. Raines, 129 Ill.
App. 2d at 298. The damages award in Raines sought to reduce the
plaintiff's lifelong injury to a present value. By contrast,
damages in the instant case were incurred over a fixed period and
can, in principle, be determined. Thus, the present-value problem
for future injury is not present in this case. Accordingly,
plaintiff's reliance on these cases is misplaced.
In summary, we find that the trial court erroneously
calculated plaintiff's damages by including plaintiff's fixed
overhead expenses in its damages calculation. On remand, we direct
the trial court to exclude the amount of fixed overhead expenses
plaintiff would have incurred during the period of the breach from
its damages calculation. See Central Information, 128 Ill. App. 3d
at 1063 (trial court should award damages for the contract price
less the award of expenses saved because the injured party is not
required to perform; this does not require any determination as to
the amount of overhead). We note that the method the trial court
originally used, determining a profit margin, is acceptable, so
long as the trial court limits its consideration only to that
portion of plaintiff's business directly attributable to defendant
under the exclusive hauling agreement, rather than considering the
profit margin for the whole of plaintiff's business.
For the foregoing reasons, the judgment of the trial court is
affirmed in part and reversed in part, and the cause is remanded
for further proceedings consistent with this opinion.
Affirmed in part and reversed in part; cause remanded.
GEIGER and HUTCHINSON, JJ., concur.