Federal Circuit Affirms Court of Federal Claims Ruling on Damages Available for Partial Breach of Contract

In Indiana Michigan Power Company v.United States, No. 04-5122 (Fed. Cir. September 9, 2005), the Federal Circuit affirmed a decision by the United States Court of Federal Claims dismissing Indiana Michigan Power Company’s suit against the Government under a partial breach of contract theory, the ability to seek pre-breach mitigation costs as well as a present recovery for future damages. 

The Federal Circuit upheld the Court of Federal Claims’ ruling that damages for pre-breach mitigation costs were not available to the contractor under a partial breach theory, but disagreed with the Court of Federal Claims concerning the general rule on availability of pre-breach mitigation damages.  The Federal Circuit found that there was no per se rule that pre-breach mitigation damages were never available to plaintiffs suing under a partial breach theory.  The Federal Circuit reasoned that such a rule would conflict with a party’s duty to mitigate damages, a duty that applies even in situations of partial breach. 

With respect to future damages, the Federal Circuit agreed with the Court of Federal Claims and held that
"[b]ecause of its highly speculative nature, a claimant may not recover, at the time of the first suit for partial breach, prospective damages for anticipated future nonperformance resulting from the same partial breach.”  Future damages would have been available had the contractor been able to claim total breach. 

There are a number of reasons why a contractor may want to treat a material breach or repudiation by the Government as being merely a partial breach.  For example, the contractor may wish to continue to bind the Government to the “non-breached” contract terms.  Moreover, the available facts may most strongly support a partial breach theory.  In pursuing a claim based on partial breach, however, a contractor must be mindful that it is potentially limiting its available remedies and increasing its costs due to the necessity of instituting new proceedings to prosecute future claims.  In the event of an apparent partial breach by the Government, a contractor should exercise care to document fully the reasons for its decision to incur certain costs to mitigate or minimize the damages it will suffer.  In particular, the nexus between the costs and the Government’s actions must be made clear.