[Contract Law 2 #11. Harrell v. Sea Colony, Inc.-#15. Bunnett v. Smallwood]

[Veronica Kim]

#11. Harrell v. Sea Colony, Inc.

Maryland Court of Appeals, 35 Md. App. 300, 370 A.2d 119 (1977)

I. Facts  

In 1972, Sam L. Harrell (plaintiff) contracted with Sea Colony, Inc. (defendant) to purchase a condominium in Bethany Beach, Delaware for $74,900. The agreement required an $11,235 deposit, composed of $5,000 in cash and a $6,235 promissory note payable at settlement. The contract allowed Sea Colony to retain the cash deposit and enforce the note in case of purchaser default. Settlement was to occur within thirty days of written notice of substantial completion. Additionally, the contract gave Harrell the right to rescind and obtain a refund if the unit was not delivered by January 1, 1974, later extended to December 31, 1974.

Harrell later sought to cancel or assign the contract, citing personal financial concerns and the refusal of assignment. He submitted a cancellation request contingent on refund of the deposit, but Sea Colony subsequently sold the unit to another buyer for $82,000 and declared Harrell in default, retaining the $5,000 deposit. The trial court ruled that Harrell unilaterally cancelled the contract, constituting breach. Harrell appealed, arguing anticipatory repudiation by Sea Colony.

II. Issue

Whether Harrell’s communications and actions constituted an anticipatory breach or repudiation of the purchase contract, thereby justifying Sea Colony’s retention of his deposit and resale of the unit, or whether Sea Colony itself breached or the parties mutually rescinded the agreement.

III. Rule

A. Precedent

1. A.S. Abell Co. v. Skeen, 265 Md. 53, 288 A.2d 596 (1972)
   a. An agent is liable only if the principal is undisclosed, fictitious, or incompetent.
   b. If the principal is disclosed and valid, the agent bears no contractual liability absent agreement.
   c. Applied here to Freeman Associates, shielding it from liability.
2. Friedman v. Katzner, 139 Md. 195, 114 A. 884 (1921)
   a. Anticipatory breach requires refusal to perform to be positive and unconditional.
   b. Mere doubts, conditions, or negotiations do not constitute repudiation.
3. Corbin on Contracts, § 973
   a. Anticipatory repudiation exists only when there is a “definite and unequivocal manifestation” of intent not to perform.
   b. Requests for cancellation or modification do not automatically equal repudiation.

B. Statute

Not directly statutory, but the Maryland contract enforcement framework governs enforcement of promissory notes, deposits, and remedies upon breach.

C. Common Law

1. General rule: A party may terminate only upon clear default or breach.
2. Retention of deposits as liquidated damages requires valid breach.
3. Mutual rescission may discharge obligations if both parties agree.

D. Modern Rule

Under contract doctrine, anticipatory breach demands clear, definite, and unconditional refusal to perform. Courts discourage treating ambiguous negotiations or requests for rescission as breach to protect fairness in contractual dealings.

IV. Application

A. Plaintiff’s Argument (Harrell)

1. He did not repudiate because:
   a. His May 28 request to cancel was exploratory, not definitive.
   b. His July cancellation form expressly conditioned release on refund of deposit.
   c. At no time did he receive notice of substantial completion—the contractual trigger for settlement.
2. Sea Colony breached by:
   a. Selling the unit to another buyer without resolving Harrell’s rights.
   b. Retaining his deposit despite no unequivocal breach.
   c. Attempting to unilaterally convert his conditional cancellation request into repudiation.
3. Remedy sought:
   a. Recovery of deposit.
   b. Damages for resale at higher price (difference between $74,900 and $82,000).

B. Defendant’s Argument (Sea Colony, Inc.)

1. Harrell repudiated:
   a. His May 28 statements that he “wanted to cancel” and could not proceed financially amounted to anticipatory breach.
   b. His failure to respond to settlement letters indicated unwillingness to perform.
2. Contract allowed retention of deposit as liquidated damages.
   a. Under default provisions, seller had the right to keep $5,000.
   b. Promissory note cancellation was further accommodation, not obligation.
3. Sea Colony’s resale was legitimate mitigation.
   a. Since Harrell abandoned the contract, resale to another buyer was lawful.

C. Court’s Decision

1. As to Freeman Associates (agent):
   a. Not a party to the contract.
   b. Fully disclosed principal (Sea Colony).
   c. No liability. Judgment affirmed in Freeman’s favor.
2. As to Sea Colony:
   a. Harrell did not anticipatorily breach—his requests were conditional, not absolute.
   b. Sea Colony’s actions converting a conditional rescission into repudiation were improper.
   c. Trial court erred in finding unilateral breach by Harrell.
3. Outcome:
   a. Judgment for Sea Colony vacated.
   b. Case remanded for determination whether Sea Colony breached or whether mutual rescission occurred.
   c. Depending on findings, Harrell may recover deposit and possibly damages.

V. Conclusion

The appellate court vacated judgment for Sea Colony but affirmed as to Freeman, remanding for determination of whether Sea Colony breached by reselling or whether the parties mutually rescinded.

#12. Kemp v. Gannett, 50 Ill. App. 3d 429, 365 N.E.2d 1112 (1977)

I. Facts  

William Kemp, a contractor, built a single-family home and listed it for sale through realtor Gannett. Kemp agreed to re-list the property with Gannett for another 90 days, but only on the condition that if the home did not sell, Gannett would purchase it himself and assume the mortgage payments during the second 90-day listing. Gannett failed to purchase the property after the listing expired and did not fulfill his promise. Kemp ultimately sold the house almost a year later at a lower price, incurring real estate taxes, mortgage payments, interest, utilities, and resale expenses.

The trial court found for Kemp, awarding $4,725 in damages. Gannett appealed, arguing improper computation of damages and erroneous admission of evidence. Kemp cross-appealed, claiming the damages should be higher.

II. Issue

Whether a seller of land may recover not only the difference between the contract price and resale price but also consequential damages such as taxes, mortgage payments, interest, utilities, and resale expenses when a buyer breaches a real estate purchase agreement.

III. Rule

A. Precedent

1. Dickson v. Turner (1909), 149 Ill. App. 394
   a. Established the rule that damages for breach of land-sale contracts equal the difference between contract price and fair market value at breach.
   b. Market value can be shown through resale price if timely and in good faith.
2. Mahoney v. Tingley (1974), 10 Wash. App. 814, 520 P.2d 628
   a. Resale price within a reasonable time and at best obtainable price is admissible evidence of market value at breach.
3. Warner v. Wilkey (Mass. App. 1974), 307 N.E.2d 847
   a. Supports resale price as probative of fair market value.
4. Anderson v. Long Grove Country Club Estates (1969), 111 Ill. App. 2d 127, 249 N.E.2d 393
   a. The aim of damages is to place the non-breaching party in the position as if the contract had been performed.
5. Osborne v. Flood (1882), 11 Ill. App. 408
   a. Parties may contractually fix their own measure of damages.
6. Frank v. Jansen (1975), 226 N.W.2d 739 (Minn.)
   a. Necessary utilities to maintain property for resale are recoverable as consequential damages.

B. Statute
No specific statute governs; Illinois courts rely on contract common law principles of compensatory damages.

C. Common Law
Contract law permits recovery of damages reasonably foreseeable, naturally flowing from the breach, or expressly agreed upon by the parties.

D. Modern Rule
Damages in real estate contract breaches include: (1) difference between contract price and fair market value at breach, and (2) foreseeable incidental and consequential expenses incurred in mitigation, such as taxes, interest, mortgage payments, and utilities.

IV. Application

A. Plaintiff’s Argument (Kemp)

1. Kemp argued that Gannett’s breach caused him not only a loss in resale price but also ongoing carrying costs.
   a. The resale price, though a year later, reflected fair market value after diligent efforts.
   b. He incurred real estate taxes, mortgage payments, and interest to preserve the property while attempting to resell.
   c. These damages naturally arose from Gannett’s failure to buy.
2. Kemp maintained that Gannett had expressly promised to assume the mortgage during the second 90 days.
   a. This agreement created a contractual right to reimbursement.
3. He further claimed reimbursement for utilities was essential since keeping the home habitable and marketable was necessary to mitigate damages.
4. He argued damages must restore him to the position he would have occupied if Gannett had performed.

B. Defendant’s Argument (Gannett)

1. Gannett contended that the only recoverable measure was contract price minus market value at breach.
   a. He argued there was no direct proof of market value at the time of breach.
   b. Resale price one year later was too remote to reflect breach-date value.
2. He rejected incidental and consequential damages.
   a. Real estate taxes, utilities, interest, and resale expenses were not recoverable under traditional rules.
   b. The trial court improperly allowed letters from plaintiff’s attorneys, which he deemed hearsay and self-serving.
3. He further claimed that Kemp abandoned the contract by calling Gannett’s secretary to withdraw the listing, thereby excusing performance.

C. Court’s Decision

1. The appellate court upheld the trial court’s ruling for Kemp, affirming that resale price within a reasonable time after diligent effort is competent evidence of market value.
2. It approved damages for taxes, mortgage, and resale expenses, reasoning they were foreseeable and necessary.
3. It reversed on cross-appeal to include utilities, holding that such expenses are naturally incurred to protect and market the house.
4. The court rejected Gannett’s evidentiary objections, finding the letters admissible to show intent rather than hearsay.
5. The judgment was affirmed in part and remanded for recalculation of damages.

V. Conclusion

The judgment was affirmed in part and remanded for recalculation of damages. The appellate court correctly noted that the letters were admitted not for their truth but to establish Kemp’s intent, a legitimate non-hearsay use.

#13. HADLEY v. BAXENDALE

Court of Exchequer, 156 Eng. Rep. 145 (1854)

I. Facts  

The Hadley firm operated the City Steam-Mills in Gloucester. Its crankshaft broke, stopping the mill. A new shaft had been ordered from Joyce & Co. in Greenwich. To fabricate a proper replacement, Joyce needed the broken shaft as a pattern. The Hadleys delivered the broken shaft to Pickford & Co. (the defendants, common carriers trading as Pickford), paid the carriage, and were told that if the shaft was sent before noon it would be delivered the next day. Delivery was delayed for several days. The mill remained idle for that additional period, during which the Hadleys claimed lost profits, wages paid to idle workers, and related consequential losses. At trial, a jury awarded damages beyond the nominal carriage delay. The carrier moved for a new trial, arguing that the claimed profits were legally too remote.

II. Issue

Whether a carrier that delays delivery of goods is liable for the promisee’s lost profits from a mill shutdown when the special circumstance causing the loss, although partially mentioned in the booking office, was not made the clear and mutual basis of the contract so that such losses were within the reasonable contemplation of both parties at the time of contracting.

III. Rule

A. Precedent

1. Robinson v. Harman, 1 Ex. 850 (1848)
   a. The injured party is to be placed, as far as money can do it, in the position as if the contract had been performed.
   b. This sets the expectation interest as the baseline measure of damages.
   c. It does not by itself resolve the scope of consequential losses, which requires a limiting principle.
2. Alder v. Keighley, 15 M. & W. 117 (1846–49)
   a. Courts should give juries definite rules for assessing damages.
   b. Measure is what would have been received if the contract had been kept.
   c. Still requires a principled boundary to avoid speculative or remote losses.
3. Blake v. Midland Railway Co., 18 Q.B. 93 (1852)
   a. A new trial may be ordered if the jury is not instructed by a clear rule of damages.
   b. Signals judicial insistence on an administrable standard.
4. Flureau v. Thornhill, 2 W. Bl. 1078 (1776)
   a. Denial of speculative profits as damages in certain contract settings.
   b. Emphasizes caution where profit calculations rest on conjecture.
5. Related authorities discussed by the parties
   a. Borradaile v. Brunton, Bodley v. Reynolds, and others show recovery where the loss is the natural and necessary consequence of breach in ordinary course of things.
   b. These cases are distinguished where profits depend on special circumstances that the promisor did not know or adopt as part of the bargain.

B. Statute

No controlling statute governed the case. Liability and measure of damages were determined by the common law of contracts and carriage.

C. Common Law

At common law, damages for breach are limited to losses that either arise naturally in the usual course of things from the breach or were within the reasonable contemplation of both parties at the time of contracting because special circumstances were communicated and formed part of the shared basis of the bargain.

D. Modern Rule (Doctrinal Legacy)

1. Hadley Foreseeability Rule
   Loss is recoverable if it either
   a. arises naturally from the breach in the ordinary course of events, or
   b. flows from special circumstances that both parties contemplated at the time of contracting because those circumstances were communicated or otherwise known.
2. Restatement (Second) of Contracts § 351
   Damages are not recoverable for loss that the party in breach did not have reason to foresee as a probable result when the contract was made. Foreseeability may arise from ordinary course of events or from special circumstances known to the breaching party.
3. U.C.C. § 2-715(2)(a)
   Consequential damages include loss resulting from general or particular requirements and needs of which the seller, at the time of contracting, had reason to know and which could not reasonably be prevented by cover or otherwise.

IV. Application

A. Plaintiff’s Argument

1. Foreseeability through notice at booking
   a. The clerk was told the mill was stopped and immediate dispatch was necessary.
   b. The promise that next-day delivery would occur if received before noon showed the carrier understood urgency and the risk of delay.
   c. Because the new shaft could not be fabricated without the old one as a pattern, delay in delivery naturally produced delay in resuming operations.
2. Losses are the only real harm suffered
   a. The profit loss, wages paid during idleness, and missed sales are not speculative but represent the actual economic injury created by the delay.
   b. Compensation should restore the expected position as if timely delivery had occurred.
3. Analogy to cases allowing profits or related consequential items
   a. Where breach predictably halts the use of tools or machinery, lost earnings follow as a natural and necessary consequence.
   b. The stop of a commercial mill is a direct and foreseeable result of delaying a critical engine part.
4. Policy fairness
   The carrier set its price with knowledge of urgency. Placing the risk of delay on the professional carrier aligns incentives for care and dispatch.

B. Defendant’s Argument

1. Remoteness and lack of mutual contemplation
   a. Carriers accept a default duty to carry with due care within a reasonable time, but they do not underwrite the buyer’s entire business operations without a special contract and price.
   b. Profit loss depends on special circumstances that are not presumed and were not fully communicated as part of the bargain.
2. Speculative and administratively unworkable profits
   a. Profits vary with markets, management, and demand.
   b. Courts avoid conjectural awards and keep to damages that flow in the ordinary course.
3. Need for a limiting rule
   a. The proximate rather than remote cause must govern.
   b. Unless the carrier clearly knew and agreed to bear the risk of shutdown, only ordinary carriage damages are recoverable.
4. Notice to a booking clerk is not a special contract
   a. The casual conversation did not transform the default liability standard.
   b. A higher risk should be priced through an express undertaking, which did not occur.

C. Court Decision

1. Adoption of a two-pronged foreseeability test
   a. Recoverable damages are those that arise naturally in the ordinary course from the breach.
   b. Or, they are damages that both parties reasonably contemplated as probable at the time of contracting because special circumstances were communicated.
2. Application to these facts
   a. Lost mill profits do not arise in the ordinary course of a carrier’s late delivery of a metal shaft without more.
   b. The record did not show that the special circumstance of total mill shutdown due to the need to use the broken shaft as a pattern was communicated in a manner that made it part of the parties’ shared contemplation and risk allocation.
3. Jury instruction error and remedy
   The trial judge did not provide the definite limiting rule. A new trial was ordered with instructions that lost profits should not be considered on the evidence presented.
4. Outcome
   Rule absolute for a new trial. The guiding principle on foreseeability and remoteness was set for the retrial and for future cases.

V. Conclusion  

Lost profits were not recoverable on this record. A new trial is required with instructions that consequential profits are recoverable only if they arise naturally in the ordinary course or were within the mutual contemplation of the parties due to communicated special circumstances at the time of contracting. On retrial, unless the Hadleys can prove shared contemplation of business interruption losses, recovery should be limited to ordinary delay damages.

#14. ROCKINGHAM COUNTY v. LUTEN BRIDGE CO.

United States Court of Appeals for the Fourth Circuit, 35 F.2d 301 (1929)

I. Facts  

Rockingham County awarded Luten Bridge Company a contract on January 7, 1924 to build a bridge that would connect with a planned hard-surface road. Political conflict erupted. One commissioner, Pruitt, resigned on February 11, the clerk of the superior court accepted the resignation the same day, and then appointed Hampton as Pruitt’s replacement. Hampton took the oath and, with two sitting commissioners, held twenty-five meetings from February to December. At a properly called meeting on February 21, and again at regular meetings in March and April, the board adopted resolutions declaring the bridge contract invalid, instructing Luten not to proceed, and warning that any work would be at Luten’s own risk. A further September resolution stated that no bills connected to the bridge would be paid.

Despite multiple written notices, Luten continued building. On November 24, 1924 Luten sued the County. Three outgoing commissioners who had favored the contract met privately with counsel and filed an answer admitting the complaint. The newly elected board moved to strike that answer, pled the cancellation resolutions and notice, and sought to prove Pruitt’s resignation, Hampton’s appointment, and the County’s repudiation. The trial judge treated the three-commissioner answer as the County’s answer, excluded the County’s repudiation evidence, and directed a verdict for Luten for the full amount of work claimed as of November 3. The County appealed.

II. Issue

Whether, after the County unequivocally repudiated an executory construction contract and gave clear notice to stop, the contractor could continue performance and recover the full contract price, or was limited to expectancy damages measured as costs incurred plus anticipated profit as of the date of repudiation. Ancillary issues included whether the private answer by three commissioners bound the County and whether the repudiation resolutions were valid County action given the board’s composition.

III. Rule

A. Precedent

1. Mitigation after repudiation
   a. A nonbreaching party may not continue performance after an absolute repudiation and then charge the breaching party for avoidable post-repudiation costs.
   b. The classic statement is Clark v. Marsiglia, 1 Denio 317, where the painter could not finish after a countermand and claim the price.
   c. American authority generally holds that a plaintiff must avoid piling up damages when further performance would be wasteful or useless to the defendant.
2. Anticipatory breach timing
   a. Roehm v. Horst, 178 U.S. 1, allows suit upon anticipatory repudiation without waiting for the time of performance.
   b. Roehm does not authorize a plaintiff to continue performance to enlarge damages once repudiation is clear. The distinction is between the right to sue and the duty to mitigate.
3. County action requires corporate act in legal session
   a. County boards act only when legally convened as a board in regular or duly called sessions, not by individual or casual gatherings. See North Carolina authorities such as Cleveland Cotton-Mills v. Commissioners and O’Neal v. Wake County.
   b. A majority outside a lawful meeting cannot bind the County.
4. De facto officer doctrine
   a. Acts of officers who occupy office under color of lawful appointment are valid as to the public and third parties until ousted by judicial decree.
   b. Where the public reasonably relies on the apparent officer, board actions at regular sessions are treated as binding.

B. Statute

1. North Carolina Consolidated Statutes
   a. § 1296, governing called meetings and required advertising of special sessions.
   b. § 1294, vesting authority to fill board vacancies in the clerk of the superior court.
   c. § 3204, providing that a person admitted and sworn into office is deemed rightfully in office until ousted by judicial sentence.
2. These provisions frame both the validity of the County’s repudiation through board resolutions and the status of Hampton as at least a de facto commissioner.
3. Common meeting-law requirements also confirm‎ that official board action must occur in corporate session with quorum.

C. Common Law

The mitigation principle requires a nonbreaching party to take reasonable steps to prevent avoidable loss. A party cannot manufacture damages by continuing performance after explicit countermand where the performance will be useless to the promisor. The proper measure upon repudiation is reliance expenses to date plus the profit that would have been earned, less any losses avoided with reasonable effort.

D. Modern Rule

Modern contract law states the same rule in expectancy terms. Upon anticipatory repudiation of an executory construction contract, the contractor’s recovery equals: costs reasonably incurred before repudiation, plus the profit the contractor would have earned on full performance, minus any amounts saved or reasonably avoidable. Continued performance after an unequivocal stop-work notice is unreasonable when it creates a structure with no utility to the promisor.

IV. Application

A. Plaintiff’s Argument (Luten Bridge Co.)

1. County liability on the contract
   a. The County executed and breached a valid contract.
   b. The County lacks unilateral rescission power and cannot avoid the bargain simply due to political change.
   c. Luten performed in good faith and should receive the contract amount for work accomplished plus any sums due under the pricing formula.
2. Procedural and evidentiary points
   a. The trial court correctly treated the three-commissioner answer as an admission of liability by the County or, at least, an evidentiary admission that the County owed payment.
   b. Any attempt to reverse course after the contract award was a legal nullity because the earlier supporting majority still existed and a commissioner’s attempted resignation was withdrawn.
   c. Even if the board later regretted the contract, failure to follow statutory rescission procedures and the lack of full board concurrence make the repudiation ineffective.
3. Damages theory
   a. Even if repudiation occurred, Luten is entitled to be placed in the position it would have occupied had the County performed.
   b. The County’s notices were equivocal or unlawful, so Luten reasonably continued work, especially since the bridge was physically feasible and the County’s earlier vote was valid.
   c. The safe path is to award the contract measure for the quantities furnished and work done, not a truncated expectancy limited to an early date.

B. Defendant’s Argument (Rockingham County)

1. Three-commissioner answer is not the County’s act
   a. County action occurs only at regular or duly called meetings.
   b. The three commissioners’ private filing, at the end of their terms and without notice to colleagues, could not bind the County.
   c. As a matter of corporate law and statute, the answer must be stricken and cannot serve as an evidentiary admission by the County.
2. Board resolutions were valid County action
   a. Pruitt’s resignation was accepted by the proper appointing authority, and Hampton was appointed and sworn.
   b. Hampton, with two others, constituted a quorum. At twenty-five regular and called meetings they transacted all County business, including the repudiation of the bridge project and notice to Luten.
   c. At minimum Hampton was a de facto officer, so the board’s resolutions and notices were valid as to third parties like Luten.
3. Mitigation limits the measure of recovery
   a. The County gave prompt, repeated, and unequivocal notice not to proceed.
   b. Luten had expended about 1,900 dollars in labor and materials when the first repudiation resolution issued, and could have stopped.
   c. Building a bridge to a road the County no longer planned served no County purpose. Luten could not enlarge damages by finishing a useless structure. The proper measure is costs incurred to repudiation plus expected profit.

C. Court Decision

1. Three-commissioner answer stricken
   a. The Fourth Circuit held the private answer was not a County act because board action must be taken by the board in legal session.
   b. The trial court erred by admitting the private answer and treating it as the County’s pleading.
   c. Individual commissioners sued in official capacities cannot file personal answers that bind the County as a corporation.
2. Repudiation resolutions and notices were valid evidence of County action
   a. The County was entitled to introduce evidence of Pruitt’s resignation, Hampton’s appointment, and the resolutions that repudiated the contract and instructed Luten to stop.
   b. Even if Hampton’s appointment had a flaw, he was at least a de facto officer, which validates the board’s acts as to the public and third parties.
   c. The exclusion of this evidence and the peremptory instruction to find for Luten were reversible error.
3. Measure of damages limited by mitigation
   a. Once repudiation occurred and notice was given, Luten had a duty to do nothing that would increase the loss.
   b. The contractor could recover labor and materials expended and reasonable cost or profit expectations up to the repudiation date, plus anticipated profit on the unperformed balance, but not the cost of continuing after notice.
   c. The directed verdict for full claimed sums was wrong. The case was reversed and remanded for a new trial on the proper damage measure.

V. Conclusion

The Fourth Circuit reversed. The County’s repudiation, adopted in lawful board sessions with at least a de facto quorum, triggered Luten’s duty to mitigate. Luten may recover pre-repudiation expenditures and expected profit, not the value of work deliberately continued after a clear stop-work notice.

#15. Bunnett v. Smallwood

Supreme Court of Colorado, en banc, 793 P.2d 157 (1990)

I. Facts  

William E. Bunnett and Donald E. Smallwood co-owned a Colorado-based fertilizer and feed company incorporated in Texas. Relations fractured in 1984. Smallwood resigned, formed a competitor, and Bunnett sued him in August 1984 for misrepresentation related to raw-materials purchases. Smallwood also faced possible exposure on a personal guaranty to a Texas bank that supported the company’s credit line.

On October 3, 1984, the two met informally at a Denver restaurant. Smallwood offered to transfer his remaining corporate stock and “end the hassle.” After receiving the stock, Bunnett voluntarily dismissed the August 1984 suit and told the Texas bank that Smallwood would no longer be personally liable. The parties disputed the scope of the oral settlement. Smallwood said it released him from any and all claims by Bunnett or the corporation. Bunnett said the release went only to the August 1984 dispute.

Despite the meeting, Bunnett later filed two new suits. In the “Bunnett case,” he alleged conversion of partnership property. Smallwood counterclaimed that the October agreement released all claims and that filing the new suits breached the agreement not to sue, causing him to incur attorneys’ fees. A jury found that the October 1984 agreement was a release of all claims, that Bunnett breached it, and it awarded Smallwood about 30,000 dollars equal to the attorneys’ fees and costs he had incurred in both cases. In the separate “Bunnett/Smallwood corporate case,” the trial court granted Smallwood summary judgment based on collateral estoppel from the jury’s determination regarding the release. The court of appeals consolidated both matters and affirmed. The Colorado Supreme Court granted certiorari on one narrow question: whether a prevailing party may recover attorneys’ fees and costs as damages for breach of an agreement not to sue when there is no independent contractual, statutory, or rule-based fee authority.

II. Issue

Whether the non-breaching party to a release can recover attorneys’ fees and costs as damages for defending a later lawsuit filed in violation of that release, absent any express fee-shifting provision, statute, or court rule authorizing such an award.

III. Rule

A. Precedent

1. The American Rule on fees
   a. Prevailing parties ordinarily bear their own attorneys’ fees and costs unless a statute, contract, or rule provides otherwise. See Alyeska Pipeline Service Co. v. Wilderness Society, 421 U.S. 240, 247 (1975).
   b. Federal and Colorado cases apply the same baseline. See Cement Asbestos Products Co. v. Hartford Accident & Indemnity Co., 592 F.2d 1144, 1148 (10th Cir. 1979); Buder v. Sartore, 774 P.2d 1383, 1390 (Colo. 1989); Beebe v. Pierce, 185 Colo. 34, 38, 521 P.2d 1263, 1265 (1974).
   c. Rationale includes equality of litigants, non-penalization for asserting legal rights, and administrative simplicity. Treatises recognize fees are not typical “actual damages” flowing from the underlying wrong.
2. Authorities that allowed fees as damages for breach of a release or settlement
   a. Anchor Motor Freight, Inc. v. Int’l Bhd. of Teamsters, 700 F.2d 1067 (6th Cir. 1983) suggested that where a release bars suit, the fees incurred to defeat the barred suit can be the measure of damages.
   b. Other decisions following this approach include Widener v. ARCO Oil & Gas Co., 717 F. Supp. 1211 (N.D. Tex. 1989); Borbely v. Nationwide Mut. Ins. Co., 547 F. Supp. 959 (D.N.J. 1981); Desroches v. Ryder Truck Rental, Inc., 429 So. 2d 1010 (Ala. 1983); Colton v. New York Hospital, 53 A.D.2d 588 (N.Y. App. Div. 1976); Scott v. Reedy, 5 Ohio Dec. Reprint 388 (1876).
   c. Two theories recur: i) the fees are “the subject of the suit” once a release is raised, and ii) equity favors making the released party whole because the point of a release is to avoid litigation.
3. Authorities that rejected fee damages absent contract, statute, or bad faith
   a. Isaacs v. Caterpillar, Inc., 702 F. Supp. 711 (C.D. Ill. 1988); Dodge v. United Services Auto. Ass’n, 417 A.2d 969 (Me. 1980); Child v. Lincoln Enterprises, Inc., 200 N.E.2d 751 (Ill. App. 1964) apply the American Rule and deny fees unless agreed to or authorized.
   b. Some courts permit fees only if the new suit was brought in bad faith or was an obvious, bad faith breach. See Artvale, Inc. v. Rugby Fabrics Corp., 363 F.2d 1002 (2d Cir. 1966); Bellefonte Reinsurance Co. v. Argonaut Ins. Co., 757 F.2d 523 (2d Cir. 1985); Quill Co. v. A.T. Cross Co., 477 A.2d 939 (R.I. 1984); Winchester Drive-In Theater, Inc. v. Warner Bros. Pictures Distrib. Corp., 358 F.2d 432 (9th Cir. 1966).
4. Nature of a release
   a. A release is the relinquishment of a vested claim and is interpreted as a contract. See Neves v. Potter, 769 P.2d 1047 (Colo. 1989); Restatement (Second) of Contracts § 284; Rocky Mountain Ass’n of Credit Mgmt. v. Hessler Mfg. Co., 553 P.2d 840 (Colo. App. 1976).

B. Statute

1. Colorado’s fee-sanction framework
   a. C.R.S. § 13-17-101 et seq. allows fee shifting where the action or defense is substantially frivolous, groundless, or vexatious. Courts must construe these provisions liberally. See Western United Realty, Inc. v. Isaacs, 679 P.2d 1063 (Colo. 1984).
   b. These provisions are designed to address abuse and bad faith without rewriting private bargains.

C. Court Rules

Colorado Rules of Civil Procedure expressly authorize fee or cost shifting in discrete contexts, for example: filing or prosecuting actions vexatiously (Rule 3(a)), improper signing of pleadings (Rule 11), discovery abuse (Rules 30(g), 37(a)(3), 37(c)), bad faith affidavits (Rule 56(g)), and contempt (Rule 107(d)).

D. Modern Rule (Colorado, as clarified in Bunnett)

The non-breaching party to a release who successfully defeats a claim filed in violation of that release is not entitled to attorneys’ fees and costs as contract damages unless a fee remedy is expressly provided by contract or authorized by statute or court rule. Fee awards remain available under Colorado’s bad-faith or sanction regimes where the statutory or rule standards are met.

IV. Application

Role note for clarity: Smallwood is the counterclaiming party who sought fee damages for breach of an agreement not to sue. For the “Plaintiff’s Argument” section below, treat Smallwood as the plaintiff on the counterclaim and Bunnett as the defendant to that counterclaim.

A. Plaintiff’s Argument (Smallwood)

1. The October 3, 1984 meeting yielded a global release. By giving his stock and extracting relief from the bank guaranty, Smallwood purchased peace from “any and all” claims.
   a. Filing two new suits after the release constituted a direct breach of the agreement not to sue.
   b. The natural and foreseeable consequence of that breach was the need to hire counsel and incur defense costs in both cases.
2. Attorneys’ fees are the appropriate measure of damages here because the very purpose of a release is to avoid litigation.
   a. Equity requires placing the released party in the position he would have occupied but for the breach, which means being free from litigation expense.
   b. Decisions such as Anchor Motor Freight and Widener treat these defense expenses as compensatory damages that flow directly and proximately from the breach of a promise not to sue.
3. Characterizing fees as the “subject of the suit” avoids the American Rule problem.
   a. Once the release is pleaded, the defendant is litigating the contractual promise to forgo suit.
   b. Damages for that breach ought to include the attorneys’ fees incurred to establish the release as a defense.
4. Policy. If courts deny fee damages, a breaching releasor can impose costs on the released party with impunity and the consideration exchanged for peace will be illusory.

B. Defendant’s Argument (Bunnett)

1. The American Rule controls.
   a. No express fee clause exists in the oral release.
   b. No statute or rule authorizes shifting fees here.
   c. Fees are not “actual damages” for breach of contract in the ordinary sense because they do not flow from the underlying wrong that is the subject of the suit.
2. Colorado’s statutory and rule-based frameworks already address the exceptional case.
   a. If the suits were frivolous, groundless, or vexatious, Smallwood could invoke C.R.S. § 13-17-101 or Rules 3(a), 11, 37, and similar provisions.
   b. No court found bad faith, frivolousness, or grounds for sanctions, so fee shifting is not warranted.
3. The “fees as subject of the suit” theory misdescribes the litigation.
   a. The subject of the action is whatever claims the plaintiff pleaded, not the defense.
   b. Treating defense costs as contract damages would swallow the American Rule and make fee awards the norm whenever a release is raised.
4. Policy. Allowing fee damages without an explicit term would chill informal settlement and invite follow-on litigation about whether the breach was “clear.” Parties who desire fee shifting can bargain for it.

C. Court Decision

1. Holding
   a. The Supreme Court of Colorado reversed the court of appeals.
   b. Absent an express fee provision in the release, or a statute or court rule authorizing fees, the released party cannot recover attorneys’ fees and costs as damages for breach of the agreement not to sue.
   c. The case was remanded with directions to dismiss Smallwood’s counterclaim for fee damages.
2. Reasoning
   a. The American Rule applies. Defense fees are not the “subject” of the suit merely because a release is asserted.
   b. Colorado has robust statutory and rule exceptions that allow fees for frivolous, groundless, vexatious, or bad-faith litigation. Those targeted tools are sufficient protection.
   c. The competing tests from Artvale and Winchester invite collateral disputes over what counts as a “clear” breach or “good faith” dispute about existence or scope of the release. Colorado declines to adopt such open-textured standards because its statutes and rules already cover abusive conduct.
   d. The oral agreement here was ambiguous and imprecise. Penalizing a party with fee damages for misjudging ambiguous scope without any finding of bad faith would be unfair and would distort settlement incentives.
3. Treatment of other authorities
   a. The court rejected the “fees as damages” line typified by Anchor Motor Freight and Widener.
   b. It aligned with Dodge and similar cases that preserve the American Rule unless contract, statute, or rule directs otherwise.
4. Other case outcomes preserved
   The court did not revisit the jury’s determination that a release existed, nor the collateral estoppel effect used by the trial court in the corporate action. Those matters stood outside the fee question presented.

V. Conclusion

 The Supreme Court of Colorado reversed the court of appeals. The case was remanded with directions to dismiss Smallwood’s counterclaim for fee damages. The Colorado Supreme Court reaffirmed the American Rule and held that attorneys’ fees and costs cannot be recovered as contract damages for breach of an agreement not to sue unless the parties expressly agreed to fee shifting, or an applicable statute or court rule authorizes such an award. Fee sanctions remain available where a suit is substantially frivolous, groundless, or vexatious.