Sales and Leases | 229
Due Allowance for Resale Proceeds and the Lost-Volume Seller As mentioned, the damages formula for lost profits normally requires due credit for payments or proceeds of resale. To avoid absurd results, courts hold that this rule generally does not apply to a lost-volume seller. Thus, ordinarily, proceeds of resale are not deducted from a lost-volume seller’s lost profits. But there is an exception. Resale proceeds are deducted from a lost-volume seller’s profit if (1) the goods are unfinished at the time of the breach and (2) the seller elects not to finish the goods and, instead, sells them for scrap. Thus, if the lost-volume seller sells unfinished goods for scrap, then resale proceeds are deducted from lost-profit damages. [ See R.E. Davis Chemical Corp. v. Diasonics, Inc. , 826 F.2d 678 (7th Cir. 1987); Trienco, Inc. v. Applied Theory, Inc. , 794 P.2d 1239 (Or. Ct. App. 1990).] Note : The breaching buyer’s entitlement to credit for any payment toward the contract price is governed by the rules discussed in Breaching Buyer’s Restitution, supra . [ See 2 Hawkland UCC Series § 2-708:2, Westlaw (database updated June 2021).] Example : A manufacturer contracted to sell a completed x-ray machine to a physician for $10,000. The physician breached the contract before the manufacturer started work on or incurred any costs relative to the machine. In the ensuing lawsuit, the court properly awarded the manufacturer lost profits, having correctly found that the manufacturer was a lost-volume seller. The manufacturer’s variable costs to manufacture the machine were $6,000, and the manufacturer managed to resell the machine to a different purchaser for $10,000. The manufacturer had no incidental damages. Here, damages total $4,000, consisting of: $10,000 (contract price) - $6,000 (variable costs to produce the machine). Because the manufacturer is a lost-volume seller, the resale proceeds of $10,000 are ignored. [ See 2 Hawkland UCC Series § 2-708:2, Westlaw (database updated June 2021).] Compare : A manufacturer contracted to sell an x-ray machine to a physician for $10,000. When the physician breached the contract, the manufacturer had spent $1,000 to acquire components to manufacture the machine, but the machine was not yet finished. Had the manufacturer completed the machine, variable costs to produce it would have totaled $6,000. In the ensuing lawsuit, the court properly awarded the manufacturer lost profits, having correctly found that the manufacturer was a lost-volume seller. The manufacturer did not finish the machine, but rather resold the components for $700, incurring $50 in resale expenses. Here, the manufacturer’s damages total $4,350, consisting of: $10,000 (contract price) - $6,000 (variable costs of manufacture) - $700
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