Facts
- Sure-Trip, Inc. manufactured circuit breaker retrofit kits.
- Westinghouse Engineering (part of Westinghouse) had previously purchased small quantities of Sure-Trip’s kits and, in 1987, discussed using about 1,200 kits during 1988.
- Sure-Trip sent Westinghouse a letter proposing a Westinghouse-only pricing structure “based on” an average volume of 100 kits per month.
- Westinghouse’s purchasing manager drafted a written agreement incorporating this volume-based pricing proposal.
- A key paragraph in the agreement contained language that could be read as (a) a minimum purchase commitment of 100 kits per month in 1988 (1,200 total), and also (b) a price-differential mechanism if the volume target was not met.
- During 1988, Westinghouse purchased only 75 kits from Sure-Trip.
- Sure-Trip sued for breach of contract and sought lost profits under UCC § 2-708, claiming Westinghouse failed to buy 1,125 kits.
- On damages, Sure-Trip asserted it would have earned about $530 profit per kit, calculated as the contract price minus per-unit materials, labor, and packaging costs (using cost figures derived from the 621 units Sure-Trip sold in 1988).
- The district court asked Sure-Trip for proof of how variable expenses would have changed if production more than doubled to supply the additional 1,125 kits. Sure-Trip contended its expenses would not increase with higher output.
- Sure-Trip’s 1988 tax return reflected roughly $12,000 in income and listed expense deductions (including items such as rent, advertising, travel, office supplies, insurance, legal expenses, and contracting fees), which Westinghouse used to argue Sure-Trip’s claimed per-unit profit was overstated.
- The district court granted Sure-Trip summary judgment on liability, and later calculated damages by treating taxable income as the profit measure (about $12,000 spread across 621 units sold, roughly $19 per kit), awarding lost profits on that basis.
- Sure-Trip appealed the damages calculation; Westinghouse cross-appealed the liability ruling.
Issues
- Whether the agreement’s quantity/price-differential language was ambiguous, making summary judgment on breach improper.
- Whether the district court erred in computing lost-profit damages by using taxable income as a proxy for profits instead of determining profits under an incremental-cost approach consistent with UCC damages principles.
Decision
- The Second Circuit reversed the summary-judgment ruling on liability because the contract was reasonably susceptible to more than one interpretation regarding Westinghouse’s purchase obligation.
- The court vacated the damages award because the district court’s taxable-income approach did not properly measure contract lost profits.
- The case was remanded for a new trial on liability and, if liability is found, a proper determination of damages.
Legal Principles
- Summary judgment is improper when a contract is ambiguous and the parties’ competing interpretations are both reasonable, creating a genuine dispute of material fact.
- A contract must be read as a whole, giving effect to provisions that may qualify or alter an apparent minimum-quantity term.
- Under UCC seller-damages principles (including UCC § 2-708(2) where applicable), lost profits are measured by expected revenues from performance minus costs avoided; the focus is on the profit from the breached sales.
- Lost-profit calculations generally deduct only costs that would have increased with additional performance; fixed overhead is not automatically treated as an avoided cost.
- Tax-accounting figures such as taxable income do not control the legal measure of contract damages and may be misleading when used as a substitute for incremental profit.
- The seller bears the burden to prove lost profits with reasonable certainty, including evidence separating variable (output-related) costs from expenses that would not change with added production.
Conclusion
The Second Circuit held that the contract’s volume and price-differential language was ambiguous, so the district court could not resolve breach liability on summary judgment; it also held that taxable income is not an appropriate stand-in for lost profits and remanded for a new trial on liability and, if necessary, damages calculated using an incremental-cost lost-profits method.