## Facts

- Vitex Manufacturing Corporation, Ltd. agreed to process 125,000 yards of woolen material for Caribtex Corporation at $0.26 per yard.
- Vitex had previously closed its Virgin Islands plant but re-opened it to perform the contract, rehired workers, and obtained needed chemicals and supplies.
- Caribtex never delivered any wool to Vitex for processing.
- Vitex sued for breach of contract, seeking lost profits measured by expected profit from full performance.
- After a bench trial, the District Court of the Virgin Islands found expected gross profits of $31,250 and direct (non-overhead) costs of $10,136, awarding Vitex $21,114 plus interest.
- Caribtex argued the court should have treated Vitex’s overhead as a cost of performance and deducted it from gross profits, reducing damages.

## Issues

1. Whether, in calculating lost-profit damages for breach of a processing contract, the seller’s overhead must be treated as a cost of performance and deducted from gross profits.

## Decision

- The Third Circuit affirmed the judgment for Vitex.
- The court held the district court did not err by declining to deduct overhead from Vitex’s lost-profit calculation.
- The court rejected Caribtex’s contention that the contract was unconscionable, finding no basis to invalidate the agreement given the parties’ bargaining positions.

## Legal Principles

- Lost profits are generally measured as expected revenue minus costs avoided by nonperformance.
- Fixed overhead that is not reduced by the breach is ordinarily not an “avoided cost” and is not deducted from the seller’s lost-profit recovery.
- Overhead typically lacks a direct relationship to any single transaction; allocating it to a particular contract for accounting purposes does not establish that the breach saved that overhead.
- Because fixed overhead remains, a breach may increase the overhead burden borne by the seller’s remaining business; deducting overhead from the breached contract’s lost profits can understate the seller’s actual loss.
- Reasonable uncertainty in the amount of damages, when the fact of loss is shown, is resolved against the breaching party rather than used to defeat recovery.

## Conclusion

The court affirmed an award of $21,114 plus interest, holding that where a breach produces no savings in fixed overhead, overhead is not deducted as a cost in computing the seller’s lost profits and may be treated as part of the recoverable profit measure.


Vitex Manufacturing Corp. v. Caribtex Corp., 377 F.2d 795 (3d Cir. 1967)