## Facts

- Ambassador Steel Company and Ewald Steel Company were Michigan corporations and merchant sellers of steel.
- On or about October 4–5, 1966, Ambassador sold steel to Ewald for $9,856.44.
- Ewald paid $4,107.60, leaving an unpaid balance of $5,748.84.
- Ambassador sued in assumpsit to recover the unpaid balance, waiving amounts over $5,000 to fit the trial court’s jurisdiction.
- Ewald admitted the purchase price but asserted a setoff for breach of the implied warranty of merchantability, claiming the steel was not “commercial quality.”
- Ewald resold the steel; its buyer reported the steel cracked when welded onto railroad cars and charged back losses to Ewald.
- Ewald contended that “commercial quality” steel in the trade required a carbon content of 1010 to 1020 and alleged the delivered steel did not meet that standard.
- The trial court allowed Ewald to set off nearly the full amount of the downstream charge-back, excluding overhead, and entered judgment for Ambassador for $1,055.78.
- The circuit court affirmed; Ambassador appealed further, challenging the amount of the recovery after setoff.

## Issues

1. Whether Ewald proved Ambassador breached the implied warranty of merchantability by supplying steel that failed to meet trade “commercial quality” standards.
2. Whether Ewald’s setoff could include essentially the full amount of the downstream customer’s charge-back as consequential damages deducted from the unpaid price.
3. Whether the evidence supported the scope and components of the damages allowed as a setoff under the U.C.C.

## Decision

- The court affirmed that Ewald established breach of the implied warranty of merchantability based on trade standards and the steel’s failure in ordinary use.
- The court held that a setoff against the price was available in principle for damages resulting from the breach.
- The court reduced the amount of the setoff, concluding the trial court’s allowance of nearly the entire charge-back was broader than the evidence and U.C.C. damages limits permitted.
- The judgment for Ambassador was increased accordingly, while the breach finding was otherwise left intact.

## Legal Principles

- Between merchant sellers, an implied warranty of merchantability applies to goods of the kind sold, and merchantability may be informed by trade usage and commercial standards.
- Evidence that goods fail in ordinary applications may support a finding that the goods were not merchantable.
- A buyer may deduct damages resulting from the seller’s breach from the price still due (setoff), but the buyer must prove the damages with reasonable certainty.
- Consequential damages from downstream resale problems may be recoverable if causally linked to the breach and sufficiently supported, but courts may exclude speculative items and nonrecoverable components (including unsupported overhead-type claims).

## Conclusion

The court accepted that the steel was not merchantable under the trade’s “commercial quality” standard and that the buyer could offset resulting losses against the price, but it limited the setoff to damages adequately proved under U.C.C. standards, increasing the seller’s net recovery.


Ambassador Steel Co. v. Ewald Steel Co., 33 Mich. App. 495, 190 N.W.2d 275 (Mich. Ct. App. 1971)