2-713 and allied and victor and forward contract and hypothetical cover

I am writing this essay and the next essay because the casebook's summary of excluded facts introduces numbers that confuse the issue. One of the numbers introduced by our editor doesn't even appear in the case. I think our casebook editor is "math-challenged."

A Few Basic Facts

Though knowledge of raisin sales might be useful, it isn't strictly necessary here. You need to know that there are four kinds of parties in the case. The first, RAC (Raising Administrative Committee) arranged for the sale of raisins to Victor (packer and processor) for 22 cents per pound. Victor (the second party) then contracted to sell the raisins to Allied (third party), an exporter of dry, canned and frozen food, for 29.75 cents per pound. The case mentions that the terms of further contracts between Allied and two Japanese firms (fourth parties), who would buy the grapes, are "not entirely clear." In any case, the court concludes that Allied was only to net 29.75 cents on the raisins (which itself is a little confusing, because you don't tend to make a forward contract for the same price as your contract with your supplier). Therefore, disregard our editor's putting a higher price as the resale price to the Japanese.

The contract between Victor and Allied is the crucial one. Victor promised to sell raisins to Allied for 29.75 cents per pound. The contract also allowed a 4% "discount" for Allied. How many pounds are at issue? It is crucial question, but the casebook doesn't mention it. Victor was to sell 5 containers of 37,500 pounds each to Allied. Allied then ordered another 5 containers, making the total contract between Victor and Allied for 375,000 pounds (10 loads X 37,500 pounds per container). If you multiply 375,000 pounds X 29.75 cents per pound, you get $111,562.50. Thus, the contract was for that amount. When Allied gets a 4% discount from the contract price, then, it receives a discount of $4,462.50. This is the origin of that amount in the case.

Ok. Things should be coming into focus. Allied will "save" $4462.50 off the contract price by contracting with Victor. Then, Allied, since it is an exporter, turned around to sell to two Japanese firms. One ordered 3 loads and the other ordered 7 loads. We will return to these contracts presently.

Contract Breach

The contract between Victor and Allied called for delivery in early September 1976. But heavy rains on September 9 destroyed much of the raisin crop near Fresno (where the raisins were drying on the ground), thus making RAC unwilling to supply the raisins to Victor. Victor then informed Allied it could not supply raisins to Allied. By the time that Allied could have "covered" (under 2-712), the price of raisins was in the vicinity of 80 to 87 cents per pound. The interesting factual twist in this case is that the Japanese firms, with contracts with Allied, decided not to sue. More precisely, one of them, who had contracts for 3 containers, agreed to rescind the contract, while the other, Shoei (contract for 7 containers) said it would hold off suing until the current action was completed. Yet, five years had gone by (1976-1981), and the underlying action still hadn't been resolved, and by this time Shoei's breach of contract suit would be untimely under the California Code of Civil Procedure (sec. 337). The point is, therefore, that Allied now could not be sued successfully on the forward contracts. The only two parties of interest, therefore, are Allied and Victor. When Victor breached its contract to Allied by nondelivery, what are Allied's damages?

Thinking About Damages

The casebook mentions that Allied sought damages from Victor of around $150,000, but it never mentions how Allied arrived at that number. Thus, if you try to calculate numbers simply from those supplied in the case, you go crazy. But the method of arriving at the number is crucial. So, here it is. As I mentioned, Allied had two forward contracts with Japanese firms. One of them rescinded, and one (Shoei) threatened to sue after the underlying case concluded. Shoei contracted to buy 7 containers, which is 262,500 pounds of grapes. Since the market price was 87 cents per pound (these are Allied's numbers) at the time when cover would have been effected (October 1976), Allied used the "hypothetical cover" provision of the Code (2-713) to calculate its damages.

That section (old 2-713) provides, in relevant part:

"Subject to the provisions of this Article with respect to proof of market price (Section 2-723), the measure of damages for non-delivery or repudiation by the seller is the difference between the market price at the time when the buyer learned of the breach and teh contract price together with any incidental and consequential damages provided in this Article (Section 2-715), but less expenses saved in consequence of the seller's breach."

Now if you do the calculations you have the following:

87 cents/pound (market price) - 29.75 cents/pound (court-assumed contract price between Allied and Shoei) with no incidental or consequential damages. Since only 7 loads are implicated (7 X 37,500 pounds per load), we have 262,500 pounds of grapes. If you multiply 57.25 cents per pound times 262,500 pounds, you should get an amount of $150,281.75.

This number, $150,281.75, then, represents the amount of damages Allied sought from Victor. Phew. Sometimes you just have to go real slowly to understand what is happening.

The next essay explains the relevant legal issues.

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