Citation. 126 F.Supp. 442 (S.D.N.Y. 1954)
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Brief Fact Summary.
Party 1 agreed to manufacture Christmas cards for Party 2. Party 2 was granted "exclusive sale and distribution rights" to the cards. Party 2 failed to perform its obligations.
Synopsis of Rule of Law.
When calculating damages, tf a litigant cannot demonstrate their expectation of profits, a court can consider the Plaintiff's expenditures made in "essential reliance" upon the Defendant's promise.
The Plaintiffs, Gruber and others (the "Plaintiffs"), entered into a contract with the Defendant, S-M News Co. (the "Defendant"), on about September 10, 1945. The Plaintiffs promised to produce, based on the Defendant's specifications, 90,000 sets of Christmas cards. The cost was 84 cents per set. The cards were to arrive at the Defendant's place of business no later than the second week in October, and the Defendant was to have "exclusive sale and distribution rights to these sets." The Defendant was supposed to use their marketing resources to sell the cards. They had to do so with "reasonable diligence." The Defendant was also granted a credit by the Plaintiff for all sets it could not sell. On October 2, 1945, the Plaintiff notified the Defendant the cards were ready, but the Defendant refused to perform. The plaintiff filed suit requesting $101,800 in damages. This court found the Defendant did not act with "reasonable diligence" and its damage calculation ensued.
What is the proper damage calculation for breach of a contract of "exclusive distribution and return"?
The court found that the Plaintiffs damages should be measured by "the difference between what they actually obtained for their cards and what they would have obtained had the defendant exercised its promised reasonable diligence." Based on the facts before it, the court could not come to a specific damage calculation based on the above formula. The court then addressed whether the Plaintiff's could at least receive their out-of-pocket expenses. Instead of concentrating on the parties' expectation of profits, this damage calculation considers the Plaintiff's expenditures made in "essential reliance" upon the Defendant's promise. The court then concluded based on the Restatement and certain case law, that the Plaintiff's recovery for out-of-pocket expenses "must be diminished by any loss that would result from defendant's full performance." The court then finds that the Defendant did not establish the Plaintiff would have suffered a loss if the Defendant fully performed. The court then concluded that "[o]nly the amount of plaintiffs' expenditures reasonably made in performance of the contract or in necessary preparation therefor, may be recovered." The Plaintiff was awarded $17,854.44 in damages.
This case illustrates how lawyers and their clients have more than one damage remedy, depending on the facts before the court.