Allied Canners II
Prof. Bill Long 3/21/06
I am taking so much time with this case because it almost perfectly illustrates the tension between 2-712 and 2-713, a tension which the Code drafters didn't really explore in the drafting process. As we have seen, 2-712, on "cover," provides that the measure of damages when a buyer has to purchase substitute goods is the difference between the price of the substitute goods and the original contract price (which contract was breached by the seller), along with consequential and incidental damages, but less expenses saved as a result of the breach. This makes sense and is intuitively fair. You should be able to get from the breaching seller the "extra" amount you have to pay to get the goods from someone else. Simple.
But 2-713 brings in a dimension of potential confusion. It is meant to deal with the situation of what happens when a buyer does not cover after the seller breaches contract. Sellers breach for a number of reasons, many of which relate to the fact that goods have dramatically increased in price, thus making them losers if they fulfill the contract terms. Buyers don't cover for a lot of reasons--they may not need the goods; their market might disappear; they go into other products. But often they are on the hook to forward contracts, and so they will also be sued. Thus, the Code provided for damages in this hypothetical case. It is, as said before, the difference between the market price when the buyer learned of the breach minus original contract price (new 2-713 speaks about the market price at the time for tender of the original contract).
If the buyer doesn't cover, however, and the market price skyrockets, you have the situation in Allied. Under the original contract, Allied would have made a profit of $4400+. That is, its profit, as found by the court, would amount to a 4% discount on the price of the raisins bought from Victor. This would, the court concludes, also have been its profit in the sale to the Japanese firms. Thus, Allied's expectation damages (an important term in contract law) were only $4400. It never expected really to make more than that amount of money. The only "problem" for them (and it is a "happy" problem) is that they didn't cover, which means that they have 2-713 to calculate their damages. As a matter of fact 2-713 is the only relevant section of the Code which applies directly to their situation. When you "plug in the numbers," you get $150,000 in damages. Thus, if you apply the language of the Code, Allied stands ready to get a windfall of nearly $146,000 in the contract. It only expected $4400. Now the Code appears, in quite express language, to give it $150,000 from Victor.
Sorting Through the Issues
So, what does a court do when there a provision which entitles Allied to an inequitable recovery? That is the problem faced by the court and the purpose of the legal discussion in the case. It really is quite a simple discussion, despite the copious footnotes and ponderous language that is quoted. It comes down to the following consideration. The court can't see itself granting an inequitable recovery to Allied despite the clear language of the Code.
Before getting to the court's decision (the court will go through the possible reasons for the drafting of 2-713, which are really not that important for our consideration, before resolving the case), we might pause on this point. We live in an era of judicial review that is quite different from that of even 20 years ago. The 1970s and early 1980s in this culture saw a greater role for judges in working out "equitable" solutions to legal problems. They developed a host of doctrines which would allow them the privilege even of undoing the express words of a contract if it would be "fair" to do so (such as with the doctrine of "reasonable expectations" in insurance law). But today, judges are people who see themselves as having a rather limited role--to interpret the language of statutes narrowly. Thus we can understand the judge's interest in this case (from 1984) in probing further than simply the language of the Code in order to come up with what he considered to be an equitable solution. How does he do it?
Referring to Article 1
The judge used a section of Article 1 in order to help him resolve the issue. Old 1-106 provided:
"(1): "The remedies provided by this code 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 but neither consequential or special nor penal damages may be had except as specifically provided in this code or by other rule of law."
The "liberal administration" of remedies means that the UCC was trying to carve out a large role for itself in American law. Whenever the UCC can be applied, apply it. That is the meaning of "liberally administered." But, it is the rest of the text that is important for the court--"that the aggrieved party may be put in as good a position as if the other party had fully performed..." This part of the sentence provides all the fodder the court then needs to "solve" the problem. As litigators say, 'when the statute is against you, plead values or purposes of the statute; when the statute is for you, plead the text of the statute.' Here, the statute was "against" what the judge considered to be the equitable result, but the "values" of the Code, captured in 1-106, state the basic approach he desired. The basic principle of the Code, with respect to remedies, is that an aggrieved party should be placed in the position it would have been in had the breaching party performed. The Code is not a means for securing windfalls.
Thus, even though the court is aware that it is plowing fresh ground with its decision, it concludes:
"that in the circumstances of this case--in which the seller knew that the buyer had a resale contract (necessarily so because raisins would not be released by RAC unless Allied provided it with the name of the buyer in its forward contract), the buyer has not been able to show that it will be liable in damages to the buyer on its forward contract, and there has been no finding of bad faith on the part of the seller--the policy of section 1-106, subdivision (1), that the aggrieved party be put in as good a position as if the other party had performed requires that the award of damages to the buyer be limited to its actual loss, the amount it expected to make on the transaction."
The result? Recovery for Allied against Victor to the tune of $4,400+.
Copyright © 2004-2007 William R. Long