Brief Fact Summary. This breach of contract action arose between two oil companies over the delivery of certain amounts of oil. Both companies alleged that the other breached the contract, and the issue of damages was addressed by the court.
Synopsis of Rule of Law. "The purpose of the cover provision in UCC §2-702 is not to allow buyers to obtain damages when they have not been hurt, but to provide a market measure of the hurt."
This case concerns an alleged breach of contract between the Plaintiff, Chronister Oil Company (the "Plaintiff"), and the Defendant, Unocal Refining and Marketing (the "Defendant"). This matter was governed by the Uniform Commercial Code ("UCC"), as construed by the Illinois courts. The contract, which was agreed to on February 9, 1990, required that the Plaintiff, an oil trader deliver 25,000 barrels of oil to Colonial Pipeline ("Colonial") for shipment to the Defendant. The contract was to be on the "front seventh cycle" and provided for a fixed price of 60.4 cents per gallon. The term "front cycle" means "for the first half of what is normally a ten-day period for shipping a particular grade of product in a petroleum pipeline." "The cycles begin on January 1, so the "front seventh cycle" would be approximately the first five days of March–apparently no effort is made to pin down the dates of the cycles and half cycles more precisely." In order to fulfill the contract, the Plaintiff made an agreement with another oil trader, who made an agreement with another oil trader to deliver the oil to Colonial for subsequent transport to the Defendant. However, when the gas arrived at the Colonial on March 5, 1990 it included too much water, and Colonial refused to take it. The Defendant learned of this on March 6, 1990, still within the front seventh cycle, and immediately contacted the Defendant. The Plaintiff contacted another oil trader, Enron, and they agreed to provide the Defendant 25,000 barrels later in March (back seventh cycle product), but the Defendant was not interested. Instead, the Defendant diverted 25,000 barrels of oil it owned that were in transit to a storage facility as a "provisional cover" and gave the Plaintiff until March 7, 1990 to come up with the conforming product. For some reason, the Plaintiff accepted Enron's offer to substitute performance, but the Defendant refused to take it because they only wanted front seventh cycle product. The oil the Plaintiff acquired from Enron was sold to Aectra Refining at 55.3 cents per gallon. The Plaintiff filed this suit claiming that the Defendant broke the contract and claimed damages "based on the difference between the contract price and the lower price at which it sold the 25,000 barrels to Aectra." The Defendant counterclaimed and argued, the Plaintiff had "broken the contract and seeking damages equal to the difference between the contract price and the average cost of its inventory (63.14¢), from which it had made up the loss of the 25,000 barrels promised by [the Plaintiff]."
Issue. What is the purpose of UCC §2-712 in this context?
Held. Cover is defined in §2-712 of the UCC "as purchasing or making a contract to purchase a substitute good." Here, the Defendant, "did not purchase any gasoline to take the place of the lost 25,000 barrels. It decided not to purchase a substitute good but instead to use a good that it already owned. You can't 'purchase,' whether in ordinary language or UCC speak [ ], what you already own. The purpose of the cover provision is not to allow buyers to obtain damages when they have not been hurt, but to provide a market measure of the hurt. Taking a good out of your inventory and selling it is not a purchase in a market." "The point of an award of damages, whether it is for a breach of contract or for a tort, is, so far as possible, to put the victim where he would have been had the breach or tort not taken place." A damage award is not to "compensate him for a loss that he would have avoided had the violation not occurred." "By diverting the gasoline in order to protect itself against Chronister's breach of contract, Unocal gave up the opportunity either to sell the gasoline on the market (in order to lighten its inventory), which we know would have yielded it substantially less than the average cost of its inventory because the market price was much lower than that cost, or to have a larger–an unnecessarily and, it would soon prove, unusably larger–inventory."
Discussion. This case provides an interesting discussion of the purpose of the UCC's cover provision.