Friday, December 12, 2008

Excluding Lost Profits and Consequential Damages Under UCC 2-719: Too Much of a Good Thing?

Whittlestone, Inc. v. Handi-Craft Company 2008 WL 4963053 (USDC, N. D. Ca. Nov. 19, 2008)
Buyers and sellers often limit the damages recoverable for breach contract in sale of goods cases. Under UCC 2-709(3) such limitations are enforceable, with exceptions for unconscionability. If the exclusionary language is too broadly written, it could be interpreted to preclude direct liability on the contract, not merely consequential damages.

Seller Whittlestone entered a 20 year contract to supply Handi-Craft with products. Buyer Handi-Craft was required to purchase a minimum amount each year. Buyer terminated the contract early. Seller filed suit, claiming the termination was a breach of contract. Buyer asked for damages under the contract, including the value of the lost minimum amount of sales over the remaining term of the contract.

Oops. Buyer's and seller's contract provided that in the event of "termination due to a material breach," "neither party shall be liable to the other for compensation, reimbursement, or damages because of the loss of anticipated sales...." The court enforced this literally against seller, finding that seller could not sue for direct lost sales to the breaching buyer. The court struck the language in the complaint damages for "the lost value of the twenty year contract..., lost profits, consequential damages."

This result is not within the typical spirit of consequential damage limitations, which are generally intended to eliminate liability for lost sales to third parties, not lost direct contract sales between the parties. On the other hand, because of the long term, the parties may have specifically contemplated this when the agreement was drafted.

Moral of the story: be careful about a limitation on "lost sales" that is so broad you don't have any direct damages left under the contract.

Saturday, December 6, 2008

Sun-Dried Tomatoes, Anyone? Seller Recovery on Buyer Breach: Damages Based on A Lost-Volume Seller Theory UCC 2-702(2)

Culinary Farms, Inc. v. Mooney, 2008 WL 4889621 (Cal. App 3 Distr. Nov. 13, 2008) (Not Officially Published- Non Citable)

This case concerned the appropriate measure of damages where a buyer failed to complete the purchase of sun-dried tomatoes. Although the seller was able to recover possession and resell the tomatoes, it claimed damages as a “lost-volume seller” under Section 2708(2) of the Commercial Code.

A lost-volume seller is one who can establish that the buyer’s breach meant a lost sale that was not recouped by a resale of the product to another buyer, because the seller would have sold product to the other buyer in any event. Under these circumstances, the seller is allowed to recover its lost profits under Commercial Code Section 2708(2), because the seller would not otherwise be able to recover the economic damages suffered when the buyer refused to purchase.

In this case the defaulting buyer asserted that although the seller may have been a lost-volume seller for dried tomatoes generally, the particular product at issue was California sun-dried tomatoes, and the seller was not a lost-volume seller of this type of tomatoes. This was a good theory, and may have worked, but unfortunately for the seller, the facts got in the way. The court found that the breaching seller had not actually proved its contention, and in fact cited the defendant’s own deposition testimony against the defendant.