## Facts

- Canusa Corporation, a waste-paper recycler and broker, sought reliable paper supply and financed equipment to secure output from suppliers.
- A & R Lobosco, Inc., a paper recycler, contracted with New York City to accept large quantities of recyclable material and needed a baler to process it.
- Canusa and Lobosco entered an “Output Agreement” for Lobosco to ship old newsprint meeting “ONP 8” specifications, with stated quantities of 1100 tons/month for 1993 and 1500 tons/month for 1994–97; the parties understood the stated figures as minimums from Canusa’s viewpoint.
- Pricing was set monthly; the agreement regulated quality through limits on “outthrows” and a ban on “prohibitives.”
- A related baler lease/financing arrangement tied Lobosco’s equipment payments to paper deliveries, including weekly payment obligations and credits for excess shipments.
- Lobosco did not consistently meet the stated monthly quantities, approached 1500 tons/month only once, and by March 1994 shipments fell to zero.
- Lobosco attributed shortfalls to contamination in City recyclables, lower-than-expected City volumes, and the cost and time required to produce ONP 8 from the incoming stream.
- The parties discussed modifications: Canusa offered to accept 500 tons/month of lower-quality ONP 7/8 (unsigned but partially performed), later proposed alternative pricing, and made further modification attempts that were not accepted.
- Canusa sued for breach of contract, fraudulent inducement, and replevin; after resolution/abandonment of other claims, only breach of contract was tried in a bench trial.

## Issues

1. In an output contract governed by New York law, does a stated quantity operate as a binding minimum, or does the seller satisfy its duty by tendering its actual output produced in good faith?
2. When output falls far below an estimate (including to near zero), what standard determines breach under U.C.C. output-contract principles?
3. What effect, if any, did the parties’ attempted modifications and partial performance have on the seller’s obligations and the buyer’s breach claim?

## Decision

- The court treated the agreement as an output contract and held that good faith, not the stated estimate alone, controls whether reduced output constitutes breach under New York U.C.C. principles.
- The court ruled that the numeric tonnage terms functioned as estimates within an output-contract framework; liability turned on whether Lobosco’s reductions reflected good-faith limitations or bad-faith avoidance.
- Applying the good-faith standard to the evidence, the court found breach to the extent Lobosco’s nonperformance was not justified by good-faith output considerations.
- The court awarded contract remedies consistent with its good-faith and proof-of-damages analysis, and addressed recoverability of certain attorneys’ fees tied to the equipment-lease provisions.

## Legal Principles

- Under New York’s U.C.C. approach to output contracts, a seller promises to deliver its actual output as it occurs in good faith; stated quantities generally function as estimates rather than strict guarantees.
- A reduction below an estimate may constitute breach when it is the product of bad faith or is unreasonably disproportionate in relation to the estimate as limited by output-contract doctrine.
- Good faith requires evaluation of whether decreased production stems from legitimate operational constraints versus opportunistic behavior to escape an unfavorable deal.
- Proposed contract modifications and course of performance may affect obligations through U.C.C. modification, waiver, and estoppel concepts, but incomplete assent can limit their binding effect.
- Lost-profit damages in commercial supply disputes require a defensible causal link to the breach and sufficient certainty in the proof; fee shifting depends on contractual authorization and the scope of breach-related enforcement.

## Conclusion

The court held that the parties’ agreement operated as an output contract and that the seller’s duty was governed by good-faith output rather than strict compliance with the stated monthly tonnage estimates; breach and remedies depended on whether the seller’s drastic reduction in deliveries was justified by good-faith production limits and on the buyer’s proof of damages and contractually authorized fees.


Canusa Corp. v. A & R Lobosco, Inc., 986 F. Supp. 723 (E.D.N.Y. 1997)