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Pipkin v. Thomas & Hill Inc.

Filed: October 17, 1979.


On discretionary review of the decision of the Court of Appeals reported in Sharp, Chief Justice.*fn1


Initially, the primary relief which plaintiffs sought in this action was a decree ordering defendant to specifically perform its

commitment to provide long-term or "permanent" financing to enable plaintiffs to take up CCB's interim construction loan on their motel-restaurant project. Historically, courts of equity refused to decree specific performance of a contract to lend money on the ground that the disappointed borrower could be fully compensated by damages because, presumably, money could always be found elsewhere.*fn2 More recently, however, courts have employed the equitable remedy of specific performance when the circumstances of the particular case demonstrate the inadequacy of money damages to afford appropriate relief.*fn3 In this case the parties' stipulation that defendant is financially unable to comply with its contract rendered the availability of the remedy of specific performance immaterial. Plaintiffs, therefore, are relegated to such damages as they are legally entitled to recover, and are able to collect, from defendant.

A borrower's claim for damages resulting from a lender's breach of a contract to lend money is primarily circumscribed by the rule of Hadley v. Baxendale, 156 Eng. Rep. 145, 151 (Ex. 1854). This rule limits generally the recovery of damages in actions for breach of contract. To recover, a disappointed borrower must not only prove his damages with reasonable certainty, he must also show that they resulted naturally -- according to the usual course of things -- from the breach or that, at the time the contract was made, such damages were in the contemplation of the parties as a probable result of the breach. Additionally, the borrower must demonstrate that, upon the lender's breach, he minimized his damages by securing the money elsewhere if available. When alternative funds are unavailable, however, the borrower may recover the damages actually incurred because of the breach, subject to the general rules of foreseeability and certainty of proof. See 5 Corbin, Contracts § 1078 (1964); 11 Williston on Contracts, § 1411 (3d Ed. Jaeger 1968); Annot., 36 A.L.R. 1408 (1925); 22 Am. Jur. 2d Damages §§ 68, 69 (1965); Coles v. Lumber Co., 150 N.C. 183,

63 S.E. 736 (1909); Anderson v. Hilton and Dodge Lumber Co., 121 Ga. 688, 49 S.E. 725, 727 (1905); Bond Street Knitters, Inc. v. Peninsula National Bank, 266 App. Div. 503, 42 N.Y.S. 2d 744 (1943); Davis v. Small Business Investment Co. of Houston, 535 S.W. 2d 740, 742-43 (Tex. Civ. App.-Texarcana 1976).

The rule governing damages for breach of a contract to lend money is nowhere stated more succinctly than in Restatement of Contracts § 343 (1932):

"Damages for breach of a contract to lend money are measured by the cost of obtaining the use of money during the agreed period of credit, less interest at the rate provided in the contract, plus compensation for other unavoidable harm that the defendant had reason to foresee when the contract was made.

" Comment :

a. This Section is an application of the general rules of damages to a special class of contracts. The damages awarded are affected by the fact that money is nearly always obtainable in the market. If the loan was to be repayable on demand, or if the contract rate of interest is as much as the current market rate and the money is available to the borrower in the market, his recoverable damages are nominal only. He is expected to avoid other harm by borrowing elsewhere if he can, the reasonable expenses being chargeable to the defendant. Sometimes inability to borrow elsewhere or the delay caused by the lender's action results in loss of a specific advantageous bargain, an unfinished building, or an equity of redemption in mortgaged land; damages are recoverable for losses if the lender had reason to foresee them."

Clearly, the plaintiffs in this case have been injured by defendant's breach of contract. Without defendant's commitment to provide long-term financing they would not have begun construction of the motel project. When it was completed and the construction loan from CCB became due they were unable to obtain alternative long-term financing because none was available at any rate of interest. Plaintiffs were able to forestall foreclosure only by refinancing the construction loan with a demand note at a fluctuating rate of interest which varied from 2 to 3% above CCB's

prime rate and was always in excess of the contract rate. At the time of the trial CCB was still carrying the construction loan.*fn4 Thus, this case differs significantly from those cases involving a disappointed developer-borrower who, unable to obtain specific performance or an alternative permanent loan, either suffers foreclosure*fn5 or obtains alternative permanent ...

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