National Controls, Inc. v. Commodore Business Machines, Inc.

Brief Fact Summary. A manufacturer of a product entered into a contract to sell a certain amount of that product to a customer.  The manufacturer had the capacity to manufacture much more of the product than sold to the customer.  The customer breached the contract and the manufacturer had to sell the product to another customer.

Synopsis of Rule of Law. UCC §2-708, subdivision (2) applies "to the seller who establishes that he is a 'lost volume seller,' i.e., one who proves that even though he resold the contract goods, that sale to the third party would have been made regardless of the buyer's breach."  It must be established that, "had the breaching buyer performed, the seller would have realized profits from two sales."

Facts. The Respondent, National Controls, Inc. (the "Respondent"), commenced a breach of contract action against the Appellant, Commodore Business Machines, Inc. (the "Appellant").  The Respondent is a manufacturer of electronic weighting and measuring devices.  The Respondent sells certain of their products, model 3221 electronic microprocessor technology load cell scale (the "3221") to cash register manufacturers.  Otherwise known as original equipment manufacturers ("O.E.M.").  The 3221 is not in inventory, but built specific to order based on the needs of the O.E.M.  In November 1989, the Appellant by telephone agreed to purchase one 3221.  In December 1980, the Appellant ordered and paid for four more scales by telephone.  In March 1981, an employee of the Appellant, Terry Rogers, order thirty more 3221 scales from one of the Respondent's employees, Wiggins.  For these three transactions, the Respondent never received purchase orders, only a purchase order number on the phone.  On March 31, 1981, Terry Rogers placed a firm order for 900 more 3221 scales.  The delivery schedule was as follows:  "50 to be delivered in May, 150 in June, 300 in July, and 400 in August."  For the March 31, 1981 Order, Wiggins sent the Appellant a sale order.  This sale order was also sent to the Respondent's Florida manufacturing facility, which began constructing the units. The Appellant received delivery of the first 200 units, and in June of 1981, 300 more units were ready to ship.  Also around June of 1981, the manufacturer had almost completed the final 400 units.  However, the Appellant only accepted delivery of the first 50 scales and "did not [accept] or pay for the remaining 850 units." The remaining 850 units were sold to an existing O.E.M customer.  Testimony showed that the Respondent had the capability to "more than double its output of 3221's".

Issue. Does §2-708 subdivision 2 of Uniform Commercial Code ("UCC"), the lost volume seller section, apply here?
•    If UCC §2-708, subdivision 2 applies, is the Respondent entitled to "a credit for the proceeds of the resale."

Held. Pursuant to §2-706 of the UCC "[d]amages caused by a buyer's breach or repudiation of a sales contract are usually measured by the difference between the resale price of the goods and the contract price."  If this calculation is unacceptable "the seller's measure of damages is the difference between the market and the contract prices as provided in Uniform Commercial Code section 2-708, subdivision (1)."  This calculation may be unacceptable when "the goods have not been resold in a commercially reasonable manner."  Sometimes this calculation is not sufficient and UCC §2-708, subdivision (2) must be resorted to.  This section allows a seller to recover "his loss of expected profits on the contract."  Various courts have construed UCC §2-708, subdivision (2) "to permit the award of lost profits under the contract to the seller who establishes that he is a 'lost volume seller,' i.e., one who proves that even though he resold the contract goods, that sale to the third party would have been made regardless of the buyer's breach."  It must be established that, "had the breaching buyer performed, the seller would have realized profits from two sales."  The lost volume rule applies to both retailers and manufacturers. Here, the Respondent's manufacturing plant had the capability "to supply both Commodore and National Semiconductor, and that had there been no breach by Commodore, NCI would have had the benefit of both the original contract and the resale contract."
•    No.  "Logically, lost volume status, which entitles the seller to the § 2-708(2) formula rather than the formula found in § 2-708(1), is inconsistent with a credit for the proceeds of resale. The whole concept of lost volume status is that the sale of the goods to the resale purchaser could have been made with other goods had there been no breach. In essence, the original sale and the second sale are independent events, becoming related only after breach, as the original sale goods are applied to the second sale. To require a credit for the proceeds of resale is to deny the essential element that entitles the lost volume seller to § 2-708(2) in the first place-the mutual independence of the contract and the resale."

Discussion. This case offers an interesting discussion about the "lost volume" seller.