Summary
In Freeman v Lanning Corp, 61 Mich. App. 527; 233 N.W.2d 68 (1975), this Court remanded to the trial court for recomputation of an award for future damages to be reduced to present value according to the formula provided in SJI 34.03, the predecessor to SJI 53.03.
Summary of this case from Goins v. Ford Motor Co.Opinion
Docket No. 21185.
Decided May 30, 1975.
Appeal from Muskegon, James F. Schoener, J. Submitted Division 3 February 14, 1975, at Detroit. (Docket No. 21185.) Decided May 30, 1975.
Complaint by A.C. Freeman, doing business as Ole Tacos, against Lanning Corporation for damages for breach of a lease agreement. Judgment for plaintiff. Defendant appeals. Reversed and remanded.
Street, Stevens, Schuler, Johnson, Hipkiss, Piasecki Knowlton, for plaintiff.
Cochran, Vander Ploeg, Collinge Silky, for defendant.
Before: LESINSKI, C.J., and J.H. GILLIS and QUINN, JJ.
Plaintiff A.C. Freeman sued defendant Lanning Corporation for breach of a written lease agreement. The trial court heard the case without a jury and returned a judgment for plaintiff. Defendant appeals as of right and contests only the trial court's computation of damages.
Defendant granted plaintiff a lease of space in a shopping center in which plaintiff would operate a fast-food Mexican restaurant. As part of this lease, the parties agreed that plaintiff could sell milk shakes in his business. However, defendant had previously granted another party the exclusive right to sell dairy products in the center. The party with the exclusive right to sell dairy products in the center obtained specific performance of his exclusive dealing agreement against both plaintiff and defendant. Subsequently plaintiff sued defendant for the loss he would sustain over the term of the lease by reason of his inability to sell milk shakes. The trial court determined that 1.8% of plaintiff's business would have been the sale of milk shakes and that the profit margin on the shakes was between 53 and 62%. The court then computed damages as follows:
"The Court then projects that the operation of this K-Mart location by Ole Taco will, over the entire 15 years, eventually gross $1,421,000. 1.8 percent of that gross, as the Court computed, is $25,578, and the profit thereof, which the plaintiff has been denied, would be at 60 percent, or $15,346.80."
Defendant now complains that the trial court erred in entering judgment for $15,346.80, as the full amount of future damages, without first reducing such damages to their present value.
Michigan law clearly requires that damages for future losses be reduced to present value. E.g., Currie v. Fiting, 375 Mich. 440, 454; 134 N.W.2d 611, 616 (1965), Nagi v. Detroit United Railway, 231 Mich. 452, 461; 204 N.W. 126, 129-130 (1925), Bruno v. Detroit Institute of Technology, 51 Mich. App. 593, 599-600; 215 N.W.2d 745, 749 (1974), Coger v. Mackinaw Products Co, 48 Mich. App. 113; 210 N.W.2d 124 (1973). The court must instruct the jury to reduce damages to present value, or must do so itself, even where the parties have not requested such a reduction. See Currie v Fiting, supra; Nagi v. Detroit United Railway, supra. A reduction to present value is necessary because money itself possesses earning power and usually increases itself over time. To grant recovery in the full amount of future damages in effect overcompensates a plaintiff by the amount of interest which the money earns. See Rivers v. Bay City Traction Electric Co, 164 Mich. 696, 708-710; 128 N.W. 254; 131 N.W. 86 (1910). In order to prevent such overcompensation our courts have uniformly required the reduction of prospective damages to present worth.
Plaintiff argues, however, that reduction to present value actually results in undercompensation for losses sustained in the future. Because the current rate of inflation is high, the earning power of money at low interest rates is more than offset by the depreciation in the purchasing power of money. Thus, given the statutory interest rate of 6 percent and a hypothetical continuing inflation rate of 10 percent, money received as compensation today will actually depreciate at 4 percent per year, rather than appreciate. It is apparent, plaintiff contends, that the trial court took account of the effect of inflation on his recovery and reached an equitable solution by refusing to reduce the future damages by the 6 percent discount rate. Upon this basis he urges us to affirm the trial court's award.
MCLA 600.6013; MSA 27A.6013.
Courts have divided on whether an award of damages for losses suffered in the future may take account of inflationary trends in the economy. No Michigan cases have directly addressed this question. A large number of other jurisdictions have refused to allow consideration of rising costs in fixing prospective damages. Frankel v. Heym, 466 F.2d 1226 (CA 3, 1972), aff'g Frankel v. United States, 321 F. Supp. 1331 (ED Pa, 1970), Petition of United States Steel Corp, 436 F.2d 1256 (CA 6, 1970), Williams v. United States, 435 F.2d 804 (CA 1, 1970), Armentrout v. Virginian R Co, 72 F. Supp. 997 (SD W Va, 1947), rev'd on other grounds, 166 F.2d 400 (CA 4, 1948), Raines v. New York Central R Co, 129 Ill. App.2d 294; 263 N.E.2d 895 (1970), Zaninovich v. American Airlines, Inc, 26 App. Div. 2d 155; 271 N.Y.S.2d 866 (1966). The principal argument advanced against considering the effects of economic trends on damage recoveries is that such trends are inherently unpredictable. In addition, it is said, a plaintiff may place his award in investments which gain a higher return than the statutory interest rate, and the adverse effects of inflation will thus be reduced.
A prominent text has called this justification "unrealistic". 2 Harper James, Law of Torts, § 25.11, p 1325, fn 8. A few other jurisdictions also reject this reasoning. See, e.g., Beaulieu v. Elliott, 434 P.2d 665 (Alas, 1967), Schnebly v Baker, 217 N.W.2d 708 (Iowa, 1974).
Plaintiff contends, upon the authority of Normand v. Thomas Theatre Corp, 349 Mich. 50, 61-62; 84 N.W.2d 451, 456 (1957), that the trial court was entitled to take judicial notice of the effects of inflation in fixing damages and that the court took account of such effects. Normand and cases like it stand only for the principle that courts need not be bound by the size of past awards in determining whether a current award is excessive. Rather they may take note of rising prices due to past inflation in order to justify large verdicts against a charge of excessiveness. See Williams v. United States, 435 F.2d 804, 807 (CA 1, 1970).
The trial court erred in not reducing the plaintiff's recovery to present value. We remand this cause for a recomputation according to the formula provided in SJI 34.03. We note that this requires that the total award found by the trial judge be apportioned on a yearly basis and discounted at the statutory rate of 6 percent. MCLA 600.6013; MSA 27A.6013.
Reversed and remanded for proceedings not inconsistent with this opinion. Costs to defendant.