Delchi Carrier SpA v. Rotorex Corp.
71 F.3d 1024 (1995)
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Rule of Law:
Under the U.N. Convention on Contracts for the International Sale of Goods (CISG), damages for a breach of contract include foreseeable lost profits, calculated by subtracting only variable costs from sales revenue. An aggrieved party may also recover separate consequential and incidental damages, such as shipping and material costs, that do not constitute a double recovery of the lost profits award.
Facts:
- In January 1988, Rotorex Corporation, a New York company, agreed to sell 10,800 compressors to Delchi Carrier SpA, an Italian company, for use in its portable air conditioners.
- The contract was based on a sample compressor and written performance specifications provided by Rotorex.
- Rotorex sent a first shipment of compressors which arrived at Delchi's factory in Italy on April 20, 1988.
- While a second shipment was en route, Delchi discovered that the compressors from the first shipment were nonconforming, having lower cooling capacity and consuming more power than the sample and specifications.
- On May 13, 1988, Delchi informed Rotorex that 93% of the compressors were being rejected in quality control.
- After Rotorex's attempts to cure the defects failed, Rotorex refused to supply conforming compressors, claiming the original specifications were sent in error.
- On May 23, 1988, Delchi cancelled the contract.
- Delchi was unable to obtain a sufficient quantity of substitute compressors in time for the 1988 selling season, resulting in a loss of sales.
Procedural Posture:
- Delchi Carrier SpA sued Rotorex Corporation in the U.S. District Court for breach of contract under the CISG.
- The district court granted Delchi's motion for partial summary judgment, finding Rotorex liable for a fundamental breach of contract.
- Following a bench trial on the issue of damages, the district court awarded Delchi over $1.2 million in damages, which included lost profits.
- The district court denied Delchi's claim for certain incidental and consequential damages, including shipping, customs, and obsolete materials costs, on the grounds that it would constitute a double recovery.
- Rotorex, the defendant, appealed the damages award to the U.S. Court of Appeals for the Second Circuit.
- Delchi, the plaintiff, filed a cross-appeal challenging the district court's denial of its claims for additional incidental and consequential damages.
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Issue:
Under the U.N. Convention on Contracts for the International Sale of Goods (CISG), are lost profits properly calculated by subtracting only variable costs from revenue, and may the aggrieved party also recover foreseeable incidental and consequential damages that do not duplicate the lost profits award?
Opinions:
Majority - Winter, Circuit Judge
Yes. Under the CISG, lost profits are calculated by deducting only variable costs from sales revenue, and an injured party is also entitled to recover other foreseeable consequential and incidental damages that are not duplicative. The court affirmed the district court's method for calculating lost profits, reasoning that the CISG does not specify a formula, so it is appropriate to use the standard American rule of deducting only variable costs, as fixed costs would have been incurred regardless of the breach. The court reversed the denial of other damages, holding that expenses such as shipping, customs, and the cost of now-obsolete materials purchased specifically for the nonconforming compressors are not accounted for in a lost profits calculation. Awarding these damages is necessary to place the aggrieved party in the position it would have been in had the contract been performed, consistent with CISG Article 74, and does not constitute a double recovery.
Analysis:
This is a foundational U.S. case interpreting the damages provisions of the U.N. Convention on Contracts for the International Sale of Goods (CISG). The decision establishes that U.S. courts will look to analogous principles in domestic law, such as the UCC, to fill gaps and interpret the CISG, thereby promoting uniformity and predictability in international commercial law. It clarifies that the standard American method for calculating lost profits (subtracting only variable costs) is applicable under the CISG for an ongoing business. Crucially, the case distinguishes between recovery for lost profits (a hypothetical figure) and recovery for actual, wasted expenditures, setting a precedent that an injured party can recover both to be made whole.
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