Neri v. Retail Marine Corp.
30 N.Y.2d 393, 334 N.Y.S.2d 165, 285 N.E.2d 311.
Facts: Neri and the other plaintiffs made a contract with the defendant to buy a boat. Neri repudiated the contract when he got sick and couldn’t pay. The defendant sold the boat to someone else, but held on to the plaintiffs’ deposit. The plaintiffs sued to recover the deposit. The defendants countersued, claiming that if the contract had been performed, they would have sold two boats instead of one, and therefore the plaintiffs were liable for their lost profit.
Issue: Can the seller recover loss of profits when the buyer repudiates a contract?
Rule: The UCC says that if the difference between the market price and the contract price at time of performance is not sufficient to put the seller in as good a position as performance would have done (c.f. UCC § 2-708(1)), then the seller can get the profit he or she would have made from full performance (UCC § 2-708(2)).
Analysis: The court basically says that UCC § 2-708 (2) is novel enough that the trial court sort of overlooked it and applied the old rule (exemplified by § 2-708(1)) appropriately. The court says that UCC § 2-708 (2) is the right rule here.
The court mentions that, of course, the plaintiffs get restitution, but these damages are reduced by the losses to the defendants. The court finds that the defendants proved sufficiently in trial court that they lost profits and also incurred expenses in storing and keeping up the boat while they were waiting to sell it to somebody else.
Conclusion: The court ordered the appellate court’s judgment modified such that the plaintiffs get back their down payment less the loss of profit by the defendant and the defendant’s incidental damages.
In R.E. Davis Chemical Corp. v. Diasonics, the court found that for a lost-volume seller, they can skip directly from § 2-706 (the possibility of reselling the stuff that was repudiated upon) to § 2-708 (getting your basic damages or lost profits). As always, the standard is that we want to put the injured party in as good a position as performance would have done.
The court in R.E. Davis takes issue with the definition of “lost-volume seller” used by other courts. It is claimed that other courts failed to take into account the economic principle of diminishing returns or increasing marginal costs. That is to say: sure, the seller could have produced another unit if the buyer hadn’t breached, but would it have been worth it? Then the idea is that you shouldn’t reward the seller with lost profit, because that’s profit that they wouldn’t have chosen to take advantage of anyway.
The court concluded that the plaintiff had to show that it was in their interest to actually produce and sell the extra unit in order for them to collect as damages the profit they would have made from that extra unit.
The UCC is going to be revised based on this idea. It makes more explicit that § 2-708(1) (regular old market price minus contract price) and § 2-706 (resell the thing) take precedence over § 2-708 (2) (you get your lost profits). They don’t say how you should calculate those lost profits, though, because it can vary from case to case.