National v Commodore

163 Cal.App.3d 688, 209 Cal.Rptr. 636
Court of Appeal of California, First District, Division 3.

NATIONAL CONTROLS, INC.,
v.
COMMODORE BUSINESS MACHINES, INC.

Jan. 15, 1985.

SCOTT, Associate Justice. Respondent National Controls, Inc. (NCI) brought an action for breach of contract against appellant Commodore Business Machines, Inc. (Commodore). After a court trial, judgment was entered awarding NCI over $280,000 in damages, and Commodore has appealed.

NCI manufactures electronic weighing and measuring devices. Among its products is the model 3221 electronic microprocessor technology load cell scale (the 3221), which is designed to interface with a cash register for use at check-out stands. NCI sells the 3221 to cash register manufacturers, also termed original equipment manufacturers, or O.E.M.s. NCI does not maintain an inventory stock of the scales, but builds them to specific order by an O.E.M. The 3221 is a standard unit, which is modified by NCI to meet the specifications of each O.E.M. with respect to cash register compatability, paint, and logo.

In November 1980, Commodore had initial discussions with NCI about the possibility of Commodore becoming an O.E.M. customer. By telephone, Commodore purchased one 3221, which was sent by NCI to Commodore's Texas facility, along with NCI's standard specifications for the 3221 and its standard price schedule. In December 1980, Commodore ordered and paid for four more scales. Again, the orders were made by telephone. NCI did not receive a purchase order from Commodore; instead, Commodore merely gave NCI a Commodore purchase order number over the phone; that number was written on the sales order prepared by NCI and sent to Commodore.

In March 1981, Terry Rogers of Commodore ordered an additional 30 scales. The order was placed by telephone, and once again Commodore did not send NCI a purchase order. Instead, Rogers gave Wiggins of NCI a purchase order number by telephone; that number was entered by Wiggins on NCI's sales order.

On March 31, 1981, in a phone conversation with Wiggins, Rogers placed a firm order for 900 scales: 50 to be delivered in May, 150 in June, 300 in July, and 400 in August. Wiggins and Rogers agreed on quantity, price, and delivery schedule. As in the previous transactions, Rogers gave Wiggins a purchase order number over the telephone, Wiggins then prepared an NCI sales order, entered on it the Commodore purchase order number, and mailed a copy of that sales order to Commodore. NCI also sent a copy of its sales order to its Florida manufacturing facility, which began manufacture of the units. ***

Delivery was made to Commodore of the first 200 units, and 300 units were ready to ship in June of 1981. As of that date, the remaining 400 units of the order were nearly complete. However, Commodore accepted only the first 50 scales, and did not accept or pay for the remaining 850 units. Thereafter, all of the 850 units were resold to National Semiconductor, an existing O.E.M. customer. NCI's vice president and general manager in charge of its Florida manufacturing facility testified that in 1980 and 1981, the plant had the production capacity to more than double its output of 3221's.

Among its findings and conclusions, the trial court concluded that the terms of the parties' contract were those established during their telephone discussions prior to and on March 31, 1981, and in the November 1980 letter from NCI to Commodore enclosing a price schedule, as well as “the terms” of NCI's prior sales orders. *** The court also found that NCI was a “lost volume seller” who was entitled to recover the loss of profit it would have made on the sale of the 850 units to Commodore, notwithstanding its subsequent resale of those units to another customer. ***

III

Commodore also contends that the trial court erred when it relied on [UCC 2-708(2)], to award NCI damages by way of lost profits. In a related argument, Commodore contends that if lost profits were the proper measure of damages, it was entitled under the plain language of [UCC 2-708] to credit for the proceeds of NCI's resale of the contract goods to National Semiconductor.

Damages caused by a buyer's breach or repudiation of a sales contract are usually measured by the difference between the resale price of the goods and the contract price, as provided by Uniform Commercial Code section 2–706. When it is not appropriate to use this difference to measure the seller's loss (as when the goods have not been resold in a commercially reasonable manner), the seller's measure of damages is the difference between the market and the contract prices as provided in Uniform Commercial Code section 2–708, subdivision (1). Ordinarily, this measure will result in recovery equal to the value of the seller's bargain. However, under certain circumstances this formula is also not an adequate means to ascertain that value, and the seller may recover his loss of expected profits on the contract under subdivision (2) of Uniform Commercial Code section 2–708. (3 Hawkland, Uniform Commercial Code Series (1982–1984) §§ 2–708—2–708:04.). [UCC 2-708] provides:

(1) Subject to subdivision (2) and to the provisions of this division with respect to proof of market price (Section 2-723), the measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at the time and place for tender and the unpaid contract price together with any incidental damages provided in this division (Section 2-710), but less expenses saved in consequence of the buyer's breach.

(2) If the measure of damages provided in subdivision (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with any incidental damages provided in this division (Section 2-710), due allowance for costs reasonably incurred and due credit for payments or proceeds of resale.

When buyers have repudiated a fixed price contract to purchase goods, several courts elsewhere have construed subdivision (2) of Uniform Commercial Code section 2–708 or its state counterpart to permit the award of lost profits under the contract to the seller who establishes that he is a “lost volume seller,” i.e., one who proves that even though he resold the contract goods, that sale to the third party would have been made regardless of the buyer's breach. (Neri v. Retail Marine Corporation (1972) 30 N.Y.2d 393, 334 N.Y.S.2d 165, 168, 285 N.E.2d 311, 314; [citations omitted]. The lost volume seller must establish that had the breaching buyer performed, the seller would have realized profits from two sales. (See Goetz & Scott, Measuring Sellers' Damages: The Lost-Profits Puzzle (1979) 31 Stan.L.Rev. 323, 326.)

In Neri v. Retail Marine Corporation, supra, 285 N.E.2d 311, seller contracted to sell a new boat, which it ordered and received from its supplier. The buyer then repudiated the contract. Later, seller sold the boat to another buyer, for the same price. The court relied on Uniform Commercial Code section 2–708, subdivision (2), to award the seller its lost profits under the contract, reasoning that the record established that market damages would be inadequate to put the seller in as good a position as performance would have done. The court drew an analogy to an auto dealer with an inexhaustible supply of cars. A breach of an agreement to buy a car at a standard price would cost that dealer a sale even though he was able to resell the car at the same price. In other words, had the breaching buyer performed, seller would have made two sales instead of one. (Id., at pp. 312–315.)

While the seller in Neri was a retailer, the lost volume seller rule is also applicable to manufacturers. (Nederlandse, etc. v. Grand Pre-Stressed Corp., supra, 466 F.Supp. 846.) In Nederlandse, seller, a manufacturer of steel strand, brought an action against buyer for breach of an agreement to purchase approximately 1,180 metric tons of strand. Defendant had accepted only about 221 tons, and repudiated the remaining 958 tons, of which 317 tons had been already produced by seller. Seller resold the 317 tons to various third party purchasers. (Id., at p. 849.)

The court held that seller was entitled to lost profits under Uniform Commercial Code section 2–708, subdivision (2), and that no set-off would be allowed for profits earned through the sales to third parties. The evidence established that seller had sufficient production capacity to supply not only the 1,180 tons required by the contract, but also the 317 tons sold to third parties. The fact that seller was a manufacturer rather than a retailer, and that he produced only to order rather than maintaining an inventory, was of no significance in determining the applicability of Uniform Commercial Code section 2–708. (Id., at pp. 853–854.)

Commodore accurately points out that the lost volume seller rule has been criticized by some commentators as overly simplistic. (Goetz & Scott, supra, 31 Stan.L.Rev. 323, 330–354.) Nevertheless, those courts considering the question have held that Uniform Commercial Code section 2–708 does allow lost profits to a “lost volume seller” and that criticism has not resulted in any revision of the section.

Commodore also contends that if NCI was entitled to lost profits under the contract, Commodore should have received credit for the proceeds of the resale. The literal language of [UCC 2-708(2)] does provide some support for that contention:

If the measure of damages provided in subdivision (1) is inadequate to put the seller in as good a position as performance would have done then the measure of damages is the profit (including reasonable overhead) which the seller would have made from full performance by the buyer, together with ... due credit for payments or proceeds of resale.

However, courts elsewhere have uniformly held that the underscored language does not apply to a lost volume seller. (See Neri v. Retail Marine Corporation, supra, 285 N.E.2d at p. 314, fn. 2 [citations omitted]). As the court in Snyder v. Herbert Greenbaum & Assoc., Inc., supra, 380 A.2d 618 explained,

Logically, lost volume status, which entitles the seller to the § 2–708(2) formula rather than the formula found in § 2–708(1), is inconsistent with a credit for the proceeds of resale. The whole concept of lost volume status is that the sale of the goods to the resale purchaser could have been made with other goods had there been no breach. In essence, the original sale and the second sale are independent events, becoming related only after breach, as the original sale goods are applied to the second sale. To require a credit for the proceeds of resale is to deny the essential element that entitles the lost volume seller to § 2–708(2) in the first place—the mutual independence of the contract and the resale.

Practically, if the ‘due credit’ clause is applied to the lost volume seller, his measure of damages is no different from his recovery under § 2–708(1). Under § 2–708(1) he recovers the contract/market differential and the profit he makes on resale. If the ‘due credit’ provision is applied, the seller recovers only the profit he makes on resale plus the difference between the resale price and the contract price, an almost identical measure to § 2–708(1). If the ‘due credit’ clause is applied to the lost volume seller, the damage measure of ‘lost profits' is rendered nugatory, and he is not put in as good a position as if there had been performance. (Id., at p. 625.)

In this case, the evidence was undisputed that in 1980 and 1981, NCI's manufacturing plant was operating at approximately 40 percent capacity. The production of the 900 units did not tax that capacity, and the plant could have more than doubled its output of 3221's and still have stayed within its capacity. That evidence was sufficient to support the court's findings that NCI had the capacity to supply both Commodore and National Semiconductor, and that had there been no breach by Commodore, NCI would have had the benefit of both the original contract and the resale contract. Accordingly, the trial court correctly determined that NCI was a lost volume seller, that the usual “contract price minus market price” rule set forth in subdivision (1) of section 2-708 was inadequate to put NCI in as good a position as performance would have done, and that NCI was therefore entitled to its lost profits on the contract with Commodore, without any set-off for profits on the resale to National Semiconductor.

Judgment is affirmed.

***

This material was reprinted from Westlaw with permission of Thomson Reuters.