Summary
explaining nonbreaching party's options for damages under U.C.C. § 2-713
Summary of this case from A&G Coal Corp. v. Integrity Coal Sales, Inc.Opinion
Argued April 22, 1987
Decided June 9, 1987
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, Alvin F. Klein, J.
John J. Witmeyer III, Michael L. Anania, Elizabeth M. DeCristofaro and John F. Boland for appellant. Charles H. Critchlow, Norman H. Seidler and Douglas F. Broder for respondent.
A seller (Phoschem) breached its contract to timely deliver goods to a buyer-trader (Fertico) who properly sought cover (under the Uniform Commercial Code that means acquiring substitute goods) from another source (Unifert) in order to avoid breaching that buyer-trader's obligation to a third-party buyer (Altawreed). The sole issue involves the applicable principles and computation of damages for breach of the Phoschem-to-Fertico contract.
We hold that under the exceptional circumstances of this case plaintiff Fertico, as a buyer-trader, is entitled to damages from seller Phoschem equal to the increased cost of cover plus consequential and incidental damages minus expenses saved (UCC 2-712). In this case, expenses saved as a result of the breach are limited to costs or expenditures which would have arisen had there been no breach. Thus, the seller Phoschem is not entitled to a credit from the profits of a subsequent sale by the first buyer-trader Fertico to a fourth party (Janssens) of nonconforming goods from Phoschem. Fertico's letter of credit had been presented by Phoschem and honored so, under the specific facts of this case, Fertico had no commercially reasonable alternative but to retain and resell the fertilizer. This is so despite Fertico's exercise of cover in connection with the first set of transactions, i.e., Phoschem to Fertico to Altawreed. The covering buyer-trader may not, however, as in this case, recover other consequential damages when the third party to which it made its sale provides increased compensation to offset additional costs arising as a consequence of the breach.
In October 1978 appellant Fertico Belgium S.A. (Fertico), an international trader of fertilizer, contracted with Phosphate Chemicals Export Association, Inc. (Phoschem), a corporation engaged in exporting phosphate fertilizer, to purchase two separate shipments of fertilizer for delivery to Antwerp, Belgium. The first shipment was to be 15,000 tons delivered no later than November 20, 1978 and the second was to be 20,000 tons delivered by November 30, 1978. Phoschem knew that Fertico required delivery on the specified dates so that the fertilizer could be bagged and shipped in satisfaction of a secondary contract Fertico had with Altawreed, Iraq's agricultural ministry. Fertico secured a letter of credit in a timely manner with respect to the first shipment. After Phoschem projected a first shipment delivery date of December 4, 1978, Fertico advised Phoschem, on November 13, 1978, that the breach as to the first shipment presented "huge problems" and canceled the second shipment which had not as of that date been loaded, thus ensuring its late delivery. The first shipment did not actually arrive in Antwerp until December 17 and was not off-loaded until December 21, 1978. Despite the breach as to the first shipment, Fertico retained custody and indeed acquired title over that first shipment because, as its president testified "[w]e had no other choice" (Rec on app, at 597-598) as defendant seller Phoschem had presented Fertico's $1.7 million letter of credit as of November 17, 1978, and the same had been honored by the issuer (see, UCC 5-114).
Fertico's predicament from the breach by delay of even the first shipment, a breach which Phoschem does not deny, was that it, in turn, would breach its contract to sell to Altawreed unless it acquired substitute goods. In an effort to avoid that secondary breach, Fertico took steps in mid-November to cover (UCC 2-712) the goods by purchasing 35,000 tons of the same type fertilizer from Unifert, a Lebanese concern. The cost of the fertilizer itself under the Phoschem-to-Fertico contract was $4,025,000, and under the Unifert-to-Fertico contract $4,725,000, a differential of $700,000. On the same day Fertico acquired cover, November 15, 1978, Fertico's president traveled to Baghdad, Iraq, to renegotiate its contract with Altawreed. In return for a postponed delivery date and an additional payment of $20.50 per ton, Fertico agreed to make direct inland delivery rather than delivery to the seaport of Basra. Fertico fulfilled its renegotiated Altawreed contract with the substitute fertilizer purchased as cover from Unifert.
In addition to the problems related to its Altawreed contract, Fertico was left with 15,000 tons of late-delivered fertilizer which it did not require but which it had been compelled to take because Phoschem had received payment on Fertico's letter of credit. This aggrieved international buyer-seller was required to store the product and seek out a new purchaser. Fertico sold the 15,000 tons of the belatedly delivered Phoschem fertilizer to another buyer, Janssens, on March 19, 1979, some three months after the nonconforming delivery, and earned a profit of $454,000 based on the cost to it from Phoschem and its sale price to Janssens.
In 1981 Fertico commenced this action against Phoschem seeking $1.25 million in damages for Phoschem's breach of the October 1978 agreement. A jury returned a verdict of $1.07 million which the trial court refused to overturn on a motion for judgment notwithstanding the verdict. The Appellate Division vacated the damage award, ordered a new trial on the damages issue only and ruled, as a matter of law, (1) that the increased transportation costs on the Altawreed contract were not consequential damages; (2) that the higher purchase price paid by Altawreed to Fertico was an expense saved as a consequence of the Phoschem breach; and (3) that the Fertico damages had to be reduced by the profits from the Janssens' sale (Fertico Belgium v Phosphate Chems. Export Assn., 120 A.D.2d 401). Fertico appealed to this court on a stipulation for judgment absolute. We disagree with propositions (2) and (3) in the Appellate Division ruling, and conclude that the Uniform Commercial Code and our analysis support a modification and reinstatement of $700,000 of the damage award in a final judgment resolving this litigation between the parties.
Failure by Phoschem to make delivery on the contract dates concededly constituted a breach of the contract (White and Summers, Uniform Commercial Code § 6-2, at 207 [2d ed]). The Uniform Commercial Code § 2-711 gives the nonbreaching party the alternative of either seeking the partial self-help of cover along with recovery of damages (UCC 2-712), or of recovering damages only for the differential between the market price and the contract price, together with incidental and consequential damages less expenses saved (UCC 2-713; see also, Productora e Importadora de Papel, S.A. de C.V. v Fleming, 376 Mass. 826, 383 N.E.2d 1129). Fertico exercised its right as the wronged buyer-trader to cover in order to obtain the substitute fertilizer it required to meet its obligation under its Altawreed contract (see, UCC 2-712, comment 1).
A covering buyer's damages are equal to the difference between the presumably higher cost of cover and the contract price, plus incidental or consequential damages suffered on account of the breach, less expenses saved (UCC 2-712). Fertico is thus entitled to a damage remedy under this section because its cover purchase was made in good faith, without unreasonable delay, and the Unifert fertilizer was a reasonable substitute for the Phoschem fertilizer (UCC 2-172 [1]; Reynolds Sec. v Underwriters Bank Trust Co., 44 N.Y.2d 568, 572-573).
Fertico's additional costs for delivering the fertilizer inland rather than at a seaport would usually constitute consequential damages because they resulted from Phoschem's breach, because Phoschem knew that Fertico would incur damages under its separate contract obligation and because the damages were not prevented by the cover (UCC 2-715). The increased costs attendant to the Altawreed contract are consequential damages because they did not "arise within the scope of the immediate [Phoschem-Fertico] transaction, but rather stem from losses incurred by [Fertico] in its dealings [with Altawreed] which were a proximate result of the breach, and which were reasonably foreseeable by the breaching party at the time of contracting" (Petroleo Brasileiro, S.A. Petrobras v Ameropan Oil Corp., 372 F. Supp. 503, 508). Ordinarily, an award for consequential damages occasioned by the seller's breach would be necessary to put a buyer like Fertico in as good a position as it would have been had there been no breach (UCC 1-106; see, Neri v Retail Mar. Corp., 30 N.Y.2d 393; 3 Hawkland, Uniform Commercial Code Series § 2-715:01, at 389). Inasmuch as Altawreed compensated Fertico for the additional delivery costs, Fertico was insulated from any loss in that respect as a result of Phoschem's breach, thereby eliminating this category of potential damages. On this question of consequential damages, the Appellate Division was correct.
The additional compensation to Fertico, an international trader, from Altawreed is not, however, an expense saved as a consequence of the seller Phoschem's breach for which Phoschem is entitled to any credit (UCC 2-712). In most instances, and particularly in this case, saved expenses must be costs or expenditures which would be anticipated had there been no breach (see, Productora e Importadora de Papel, S.A. de C.V. v Fleming, 376 Mass. 826, 839, 383 N.E.2d 1129, 1137, supra). For example, if a seller were to breach a contract to deliver an unpackaged product to the buyer and the buyer were to cover with the same product prepackaged, the cost of packaging which the buyer would have had to perform is an expense saved as a consequence of the breach (see, 3 Hawkland, Uniform Commercial Code Series § 2-712:02, at 362). The increased remuneration from Altawreed was compensation for the additional shipment responsibilities incurred by Fertico, not a cost or expenditure anticipated in the absence of a breach, and therefore was erroneously analyzed and credited in Phoschem's favor by the Appellate Division.
The third prong of the damages analysis relates to the profit made from the independent sale of the Phoschem fertilizer to Janssens. The Appellate Division erred in offsetting this profit against the damages otherwise suffered since that court mistakenly concluded that the sale stemmed from and was dependent upon Phoschem's breach. This offset, on these peculiar facts, would severely disadvantage Fertico, a trader in fertilizer who both buys and sells, and who would have pursued such commercial transactions had there been no breach by Phoschem. It would be anomalous to conclude that had it not been for Phoschem's breach Fertico would not have continued its trade and upon such reasoning to counterpoise the profits from the Janssens' sale against the damages arising from Phoschem's breach. Inasmuch as the facts here are exceptional because Fertico met its subsale obligations with the cover fertilizer and yet acquired title and control over the late-delivered fertilizer from Phoschem, our decision does not fit squarely within the available Uniform Commercial Code remedies urged by the dissent. Thus, strict reliance on Neri v Retail Mar. Corp. ( 30 N.Y.2d 393, supra) and on Hawkland's commentary (3 Hawkland, Uniform Commercial Code Series § 2-714:05, at 384), as undertaken by the dissent, does not provide an adequate resolution to the particular problem presented in this case.
Fertico learned of Phoschem's breach after Phoschem had negotiated Fertico's $1.7 million letter of credit, which constituted complete payment for the first shipment. With no commercially reasonable alternative, Fertico took custody of the first shipment but canceled the second (UCC 2-601 [c]), having previously notified Phoschem of its breach (UCC 2-607). The loss resulting to Fertico by having to acquire cover, even in the face of its acceptance of a late-delivered portion of the fertilizer, is properly recoverable under section 2-714 (1) (3 Hawkland, Uniform Commercial Code Series § 2-714:05, at 384-385). At the same time, Uniform Commercial Code § 1-106 directs that the remedies provided by the Uniform Commercial Code should be liberally administered so as to put the aggrieved party in as good a position as if the other party had fully performed. Had Phoschem fully performed, Fertico would have had the benefit of the Altawreed transaction and, as a trader of fertilizer, the profits from the Janssens' sale as well. "Gains made by the injured party on other transactions after the breach are never to be deducted from the damages that are otherwise recoverable, unless such gains could not have been made, had there been no breach" (5 Corbin, Contracts § 1041, at 256; see also, Steen Indus. v Richer Communications, 226 Pa. Super. 219, 314 A.2d 319). Fertico's profit made on the sale of a nonspecific article such as fertilizer, of which the supply in the market is not limited, should not therefore be deducted from the damages recoverable from Phoschem (5 Corbin, Contracts § 1041, at 258-260; see also, Neri v Retail Mar. Corp., 30 N.Y.2d 393, 401, supra).
Fertico was concededly wronged by Phoschem's breach and Fertico resorted to Uniform Commercial Code remedies which are rooted in what we perceive to be the realities of the marketplace. Fertico did what reasonable traders would do and would like to do in mitigating risks inflicted in this case by Phoschem and in exerting its commercial resourcefulness. That is, it took steps to save its business, its customers, its good will and its deals and ultimately to also recover appropriate damages from a wrongdoer. That did not produce a "windfall" or a "double benefit" to the aggrieved party as the dissenting opinion asserts. The result we reach today countenances no such thing. On the contrary, to deprive the buyer-trader Fertico of its rightful differential damages of $700,000 and to credit this transactionally independent profit to Phoschem would perversely enrich the wrongdoer at the expense of the wronged party, a result those in the marketplace would find perplexing and a result which the generous remedial purpose of the Uniform Commercial Code does not compel or authorize. The dissent's characterization of the recovery by an injured party of damages for a breach of contract as a "benefit" is wrong, since that functionally attributes a kind of lien against the independently pursued benefit derived out of that separate transaction.
Accordingly, the order of the Appellate Division affirming liability but vacating, on the law, the damage award and remanding the matter for a new trial on the issue of damages, as appealed to this court on a stipulation for judgment absolute, should be modified and damages awarded to Fertico in the amount of $700,000 in accordance with this opinion.
Chief Judge WACHTLER and Judges SIMONS, KAYE and HANCOCK, JR., concur with Judge BELLACOSA; Judge TITONE dissents and votes to affirm in a separate opinion in which Judge ALEXANDER concurs.
Order modified, with costs to appellant, in accordance with the opinion herein and, as so modified, affirmed.
At issue in this appeal is the relationship among the various remedies that article 2 of the Uniform Commercial Code provides for buyers aggrieved by sellers' defaults. Central to the analysis is the principle that the Code's remedies "shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed" (UCC 1-106 [emphasis supplied]). Here, the majority has concluded that the aggrieved buyer may retain both cover damages and the profit from the resale of the late-delivered goods, in effect, securing the benefit of its bargain twice. Since that result is not required by, and indeed is not even consistent with, the purpose of Code's generous remedial provisions, I must respectfully dissent.
My disagreement with the majority lies only in its conclusion that the Appellate Division erred by offsetting Fertico's damage award against the profit Fertico obtained on the resale of Phoschem's goods. I agree completely with the majority's conclusion concerning the proper application of the $20.50 per ton additional reimbursement that Fertico obtained from Altawreed.
I begin with the premise that an aggrieved buyer who has purchased substitute goods and sued for "cover" damages under UCC 2-712 has impliedly rejected the seller's nonconforming performance and, consequently, holds the seller's goods only as security for any prepayments made to the seller (see, UCC 2-706; 2-711 [3]). I find the contrary position — that an aggrieved buyer may compatibly resort to cover and also retain and resell the nonconforming goods for its own account — to be legally insupportable and economically unsound. The "cover" remedy represents a recognition by the Code's drafters that a buyer aggrieved by a breach or repudiation "may not be made whole by the mere recovery of damages, because he is left, thereby, in a position in which he does not have the goods he wants" (3 Hawkland, Uniform Commercial Code Series § 2-712:01, at 360). The Code's "cover" provision, which authorizes the buyer to purchase equivalent goods in the open market and then sue the breaching seller for any price differential (see, UCC 2-712), was intended as a practical method of furnishing the buyer with a fair substitute for the goods it bargained for but did not receive. Thus, from an economic standpoint, the buyer receives the full benefit of his bargain when he obtains cover damages under UCC 2-712. Allowing the buyer to retain and resell the goods in addition obviously leads to a windfall, since the buyer is receiving more than the benefit of the transaction it bargained for.
Moreover, the language of the Code makes clear that the buyer cannot both sue for cover and accept the goods. UCC 2-712 (1) defines "cover" as a purchase of goods "in substitution for those due from the seller" (emphasis supplied) and authorizes an aggrieved buyer to resort to cover only "[a]fter a breach within [UCC 2-711 (1)]," which specifically states that cover "under [UCC 2-712 (1)]" is available when "the seller fails to make delivery * * * or the buyer rightfully rejects or justifiably revokes acceptance" (UCC 2-711). Finally, any doubt about the applicability of the cover remedy referred to in UCC 2-711 is dispelled by comment 1: "The remedies listed here are those available to a buyer who has not accepted the goods or who has justifiably revoked his acceptance" (emphasis supplied).
In short, consistent with its purpose, the cover remedy is, by its terms, available only in situations where the buyer either does not have the needed goods because of nondelivery or cannot use the goods that were delivered because of a defect in the seller's performance. In all other situations, the aggrieved buyer must resort to the remedies provided in UCC 2-714, which concerns nonconforming goods that have been accepted (see, UCC 2-711, comment 1). While there are instances in which an accepting buyer may also seek cover damages under UCC 2-714 (1), even the commentary the majority cites makes clear that the cover remedy is not intended to be used with respect to those nonconforming goods that the buyer has received and accepted; rather, the remedy is properly used only to replace the portion of needed goods the buyer either does not have or does not take (3 Hawkland, op. cit. § 2-714:05, at 384-385).
The commentary cited by the majority states, in pertinent part:
"Where the buyer accepts goods that are nonconforming because of a deficiency in quantity or a late delivery, subsection 2-714 (1) gives him the right to damages for `the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.'
" In the case of a shortage of quantity, the buyer usually will establish his damages by covering. That is to say, he will go into the market and buy goods to substitute for those that the seller wrongfully failed to deliver * * * In the case of a late shipment that otherwise conforms to the contract, the accepting buyer has no need to cover" (3 Hawkland, Uniform Commercial Code Series § 2-714:05, at 384-385 [emphasis supplied]).
In other words, while cover is not precluded when there has been a partial acceptance of a nonconforming shipment, it is used only to replace goods that were either not delivered or not accepted.
Viewed within the framework of these basic principles, cases such as this one involving late delivery are not difficult to resolve. As in cases where there has been a total failure to deliver, the buyer in late-delivery cases may reject the untimely performance and cover with substitute goods. Additionally, unlike the buyer aggrieved by a total failure to deliver, the buyer aggrieved by a late delivery has the alternative option of accepting the belatedly delivered goods and retaining for itself any profit realized on resale. However, contrary to Fertico's claims, the aggrieved buyer may not pursue both courses simultaneously, since it would then benefit twice from what was a single bargain — a result that is unacceptable under UCC 1-106 (see, Melby v Hawkins Pontiac, 13 Wn. App. 745, 537 P.2d 807 [alternative remedies may be pursued under UCC, but not where double recovery would result]).
The majority has attempted to rationalize that result here by relying on a damages rule that has previously been applied only to aggrieved sellers. The rule permits a seller who regularly deals in goods of a particular type to sue the breaching buyer for lost profit even though the wrongfully rejected goods have been sold to another buyer without loss. The rule applies only where the seller has an unlimited supply of standard-price goods (see, Neri v Retail Mar. Corp., 30 N.Y.2d 393, 399-400; 3 Hawkland, op. cit. § 2-708:04, at 331-332). In those situations, "it may safely be assumed that" the seller would have made two sales instead of one if the buyer had not breached, and, consequently, it can fairly be said that the buyer's breach deprived the seller of an opportunity for additional profit (3 Hawkland, op. cit., at 332). Thus, traditional remedies such as resale or market price differential are "inadequate to put the seller in as good a position as performance would have done", and the seller may sue for the lost profit (UCC 2-708).
The Code, however, does not contain an analogous provision allowing aggrieved buyers to recover profits from lost sales, and there is good reason for that omission, since neither of the conditions necessary for application of the sellers' lost-profit remedy may be satisfied in the case of an aggrieved buyer. First, a party in the position of a buyer cannot, by definition, be said to have an unlimited supply of the goods at his disposal for resale; even where the goods are fungible, the buyer who intends to resell must go into the marketplace to acquire the goods in the first instance. Second, a buyer who must go into the market to obtain goods will ordinarily not be able to rely on the availability of a "standard price"; rather, unlike the seller who has an unlimited supply of standard-price goods in its inventory, the reselling buyer remains at the mercy of the wholesale market's price fluctuations. Because of these differences, it cannot "be safely assumed" that the aggrieved buyer-dealer would have made a second sale at a particular profit were it not for the seller's breach. To the contrary, the occurrence of and profit on a second transaction would depend on such other, unrelated variables as the availability and wholesale market price of the goods at the time the buyer-dealer went into the market to acquire them. Thus, the rationale for the seller-dealer's lost-profit remedy is simply inapplicable to buyer-dealers.
Indeed, it seems somewhat ironic to recognize, on the one hand, the buyer's right to go into the marketplace and acquire "cover" goods at an increased cost and, on the other hand, treat the buyer as a party in the position of a seller with an unlimited supply of goods at its disposal.
Indeed, this case illustrates the difficulty of applying the seller's lost-profit remedy to aggrieved buyers. Were it not for Phoschem's breach, Fertico would have delivered the 15,000 tons of fertilizer it had purchased from Phoschem to Altawreed and would have had to go into the marketplace again to acquire an additional 15,000 tons if it wished to make a second sale to Janssens. In this respect, Fertico's position here is really no different in principle from that of an aggrieved seller which had only one set of goods at its immediate disposal. In both instances, the breach of a prior agreement is what has made the goods available for a second sale (cf., 5 Corbin, Contracts § 1041, at 256). And, while a second sale may have been theoretically possible even without the breach, the uncertainties occasioned by the buyer/seller's need to return to the marketplace for more goods of the same kind preclude the assumption, implicit in the majority's holding (see also, Neri v Retail Mar. Corp., supra), that the second sale and its accompanying profit would have been made on the same terms even if no breach had occurred.
Finally, I cannot agree with the majority's reliance on the supposedly "exceptional" circumstance that Fertico both "met its subsale obligations with the cover fertilizer and * * * acquired title and control over the late-delivered fertilizer" (majority opn, at 83). First, the basis for and significance of the majority's conclusion that Fertico acquired title to the goods is left unclear. Certainly, the fact that Fertico had already paid for the goods cannot be controlling, since the Code clearly does not equate payment and receipt of the goods with passage of title. To the contrary, the Code expressly contemplates and accounts for these situations by permitting a wronged buyer who has rejected to retain and resell the goods in its possession to recover any down payment (UCC 2-706; 2-711 [3]). The Code also requires in these situations, however, that the buyer account to the breaching seller for any additional profit it has made on the resale (UCC 2-706). Nothing in the majority opinion satisfactorily explains why this remedy is insufficient.
That retention and resale of Phoschem's goods was the most "commercially reasonable alternative" (majority opn, at 79) does not alter Fertico's obligation under the Code to hold any profits made on the resale for Phoschem's account (UCC 2-706[6]; 2-711[3]).
Furthermore, the majority's emphasis on the asserted "exceptional facts" is unpersuasive because under the terms of the majority's holding the outcome in a given case would turn, in large measure, on the fortuity of which party had possession of the goods after the breach. In the case of a simple late delivery the buyer will ordinarily have possession after the breach. Under the majority's holding, that buyer may both obtain cover damages and resell the seller's goods, retaining any profit for itself. In the case of a complete failure to deliver, however, the seller will ordinarily have possession of the goods after the breach. Under the Code, the buyer in such a case may obtain either cover damages or the goods (if they have been specifically identified to the contract), but not both (UCC 2-716). Thus, the buyer aggrieved by a late delivery is placed in a substantially better position than a buyer aggrieved by a complete failure to deliver, although there is no apparent legal or commercial justification for the distinction. Even more seriously, a seller who completely repudiates is placed in a more advantageous position than one who merely delivers late. While both must pay cover damages, the repudiating seller may resell the undelivered goods in its possession for its own account — an option unavailable to the seller who has delivered, albeit late. Since I cannot agree with a rule of law that ultimately imposes a greater penalty on the less serious of two similar breaches, I dissent and vote to affirm.