Firwood Manufacturing Company, Inc. v. General Tire, Inc.

Court of Appeals for the Sixth Circuit
96 F.3d 163 (1996)

ELI5:

Rule of Law:

Under Michigan's Uniform Commercial Code (UCC), interest representing the lost use of money from a buyer's breach is considered a consequential damage, not an incidental damage. Therefore, a seller cannot recover such interest as a component of damages.

Facts:

Firwood Manufacturing Company, Inc. and General Tire, Inc. negotiated for the sale of specialized machines called post-cure inflators (PCIs).
On October 9, 1989, Firwood sent an offer letter to General Tire proposing quantity pricing based on a minimum purchase of 55 PCIs.
Representatives from both companies reached an agreement for General Tire to purchase 55 units.
In February 1990, General Tire sent a letter of intent to Firwood confirming its commitment to purchase "approximately fifty five" PCIs.
Relying on the agreement, Firwood began ordering parts and manufacturing the 55 PCIs for General Tire.
General Tire purchased and accepted delivery of 22 PCIs but subsequently refused to purchase the remaining 33 units.
Over the next three years, Firwood made good-faith efforts to find alternative buyers, eventually selling the remaining PCIs at a price below the contract price.
During the period it was seeking new buyers, Firwood took some fungible parts from the unsold PCIs for its spare parts business and later replaced them with identical parts before the final resale.

Procedural Posture:

Firwood Manufacturing Company, Inc. sued General Tire, Inc. in U.S. District Court for breach of contract.
Following a trial, the jury returned a verdict for Firwood, awarding damages for the resale price difference and for interest.
General Tire filed post-trial motions for judgment as a matter of law, a new trial, or remittitur to reduce the damages award.
The District Court denied all of General Tire's motions.
General Tire, as the appellant, appealed the District Court's judgment to the U.S. Court of Appeals for the Sixth Circuit.

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Issue:

Under Michigan's Uniform Commercial Code, does a seller's 'incidental damages' for a buyer's breach of contract include interest for the lost use of money that the seller would have received if the contract had been fully performed?

Opinions:

Majority - Kennedy, J.

No. Under Michigan's UCC, a seller's incidental damages for a buyer's breach do not include interest for the lost use of money, as this is a form of consequential damage which is not recoverable by a seller. The court reasoned that Michigan law, particularly S.C. Gray, Inc. v. Ford Motor Co., classifies interest paid on loans taken to maintain a business due to a breach as a consequential damage. The court found no meaningful economic distinction between interest paid on a loan and the lost use of funds (potential interest income), deeming them economic equivalents. It aligned with the Seventh Circuit's view in Afram Export Corp. v. Metallurgiki Halyps, S.A. that a foregone profit from the use of money fits more comfortably as a consequential damage. While reversing the jury's award of interest as damages, the court noted that Firwood was still entitled to statutory pre-judgment interest calculated from the date the suit was filed.

Concurring in part and dissenting in part - Wellford, J.

Yes. A seller should be able to recover some level of interest as incidental damages to be made whole following a buyer's breach. This opinion argues for a broader interpretation of incidental damages, suggesting that the majority misread Afram Export Corp., which it claims supports allowing sellers to recover additional interest expenses. The dissent posits that a contract-breaking buyer should bear the risk of the seller's interest costs, which are an obvious and unavoidable consequence of the breach. It suggests Michigan law is not settled and might permit recovery of interest incurred due to a breach in addition to statutory pre-judgment interest. The dissent would have remanded the issue for the district court to determine if Firwood could demonstrate a right to specific interest or finance charges incurred as a result of the breach.

Analysis:

This decision solidifies the distinction between incidental and consequential damages for sellers under Michigan's interpretation of the UCC. It establishes a firm precedent that interest for the lost use of money is a consequential damage, preventing sellers from recovering it as part of their direct breach of contract damages. This ruling limits the scope of a seller's recovery, aligning Michigan with jurisdictions that narrowly define incidental damages, though it preserves the separate remedy of statutory pre-judgment interest. Additionally, the court's holding on the resale issue provides important guidance on the 'commercially reasonable' standard, affirming that a multi-year delay can be reasonable for highly specialized goods with no active market, provided the seller makes continuous, good-faith efforts to resell.

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