Facts
- National Controls, Inc. (NCI) manufactured electronic scales and entered into a contract to sell 900 scales to Commodore Business Machines, Inc. (Commodore) over a four-month period.
- Commodore accepted only 50 scales and repudiated the balance of the contract.
- NCI sold the remaining 850 scales to National Semiconductor, an existing customer.
- NCI sued Commodore for breach of contract seeking damages measured by the profits it would have earned on the Commodore transaction.
- At trial, NCI introduced evidence that, when it produced the scales for Commodore, it was operating at approximately 40% of its production capacity.
- The trial court found Commodore liable for breach and awarded NCI lost-profit damages on the Commodore contract without reducing the award by any profits NCI earned from the resale to National Semiconductor.
- Commodore appealed, arguing (in substance) that NCI’s resale proceeds should reduce or eliminate NCI’s recoverable damages.
Issues
- When a buyer repudiates a sales contract, may the seller recover lost profits on the breached sale without an offset for profits earned on a resale to another customer, where the seller had sufficient production capacity to make both sales?
Decision
- The Court of Appeal affirmed the lost-profit damages award for NCI.
- The court treated NCI as a lost-volume seller: because NCI had available capacity and would have made both the Commodore sale and the National Semiconductor sale, the resale was not a substitute transaction that eliminated NCI’s loss.
- As a result, the profits earned from the resale did not operate as a set-off against NCI’s damages for Commodore’s breach.
Legal Principles
- Under California’s UCC damages scheme, when the standard market-price or resale measures do not put the seller in as good a position as performance would have, the seller may recover its expected profit (including reasonable overhead) from the breached contract (lost-profit measure).
- A resale does not automatically reduce a seller’s damages. If the seller can show it had the capacity to perform the breached contract in addition to the resale and would have made the additional sale absent the breach, the seller is a lost-volume seller.
- For a lost-volume seller, the buyer’s breach causes the loss of one unit of profit even if the goods are later sold to another customer, because the resale would have occurred anyway; therefore, resale profits are not credited as mitigation against the lost profit on the breached sale.
- Evidence of unused production capacity is probative on whether the seller could have supplied both the breaching buyer and the resale customer, supporting lost-volume status and a lost-profit award.
Conclusion
National Controls held that Commodore’s repudiation entitled NCI to recover the profit it expected to earn on the 900-scale contract, and that NCI’s subsequent resale of the remaining units to an existing customer did not reduce those damages because NCI had the capacity to make both sales and thus lost the volume (and profit) of the Commodore transaction.