Gerwin v. Southeastern California Ass'n of Seventh Day Adventists
14 Cal.App.3d 209, 8 U.C.C. Rep. Serv. (West) 643, 92 Cal. Rptr. 111 (1971)
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Rule of Law:
A buyer may recover consequential damages for lost profits under the Uniform Commercial Code only if the seller had reason to know of the buyer's particular needs at the time of contracting and the loss could not reasonably have been prevented; furthermore, anticipated profits for a new business must be proven with reasonable certainty, not mere speculation, and only net profits are recoverable.
Facts:
- In October 1964, defendant Southeastern California Association of Seventh Day Adventists purchased the Azure Hills Country Club and agreed that Grand Terrace Country Club would sell specific bar equipment and furniture from it, with Mr. Harty managing the sale.
- In late November 1964, plaintiff Henry J. Gerwin, who needed equipment for a hotel he recently acquired, learned of the Azure Hills Country Club equipment's availability and viewed the items.
- On December 18, 1964, Mr. Gerwin submitted a handwritten bid for $3,501 through "Bud Turner" and, after learning a higher bid was required, directed Mr. Cunningham to submit a $4,126 written bid on December 21, 1964, in the name of "Richard Cunningham and Associates."
- In early January 1965, defendant accepted Mr. Cunningham's bid, and Mrs. Cunningham made a $500 deposit to defendant's treasurer, Mr. Shepard, receiving a signed confirmation of acceptance.
- Defendant later sent proposed option agreements that omitted some items from Mr. Cunningham's bid, including cash registers; Mr. Gerwin pointed out the discrepancies, and neither he nor Mr. Cunningham signed the options.
- On July 9, 1965, Mr. Gerwin paid the remaining balance of $3,625 to defendant and received a receipt acknowledging payment for merchandise sold to both Mr. Cunningham and Mr. Gerwin as per the December 21, 1964, bid.
- On July 12, 1965, a dispute arose when Mr. Gerwin and Mr. Cunningham attempted to pick up the equipment, leading defendant to refuse delivery.
Procedural Posture:
- Plaintiff Henry J. Gerwin brought an action against defendant Southeastern California Association of Seventh Day Adventists in state trial court seeking specific performance and damages for breach of contract.
- Following a nonjury trial, the trial court found in favor of plaintiff Gerwin.
- The trial court entered a judgment that decreed specific performance, or $25,000 damages in lieu thereof, and awarded plaintiff consequential damages of $20,000 for loss of anticipated profits.
- Defendant moved for a new trial.
- The trial court denied the motion but amended the judgment by reducing the award in lieu of specific performance from $25,000 to $15,000.
- Defendant appealed from the amended judgment to the Court of Appeal of California, Fourth Appellate District.
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Issue:
Can a buyer recover consequential damages for loss of anticipated profits from a new business venture if the seller was unaware of the buyer's specific business intentions at the time the contract was formed, and the buyer's evidence of such profits lacks reasonable certainty?
Opinions:
Majority - Tamura, J.
No, a buyer cannot recover consequential damages for loss of anticipated profits from a new business venture when the seller was unaware of the buyer's specific business intentions at the time the contract was formed, and the evidence of anticipated profits is speculative. The court affirmed the trial court's finding that a contract was formed, supported by substantial evidence including the December 21, 1964 bid and the July 9, 1965 receipt explicitly referencing it, despite conflicting testimony and later proposed option agreements. The court also affirmed the $15,000 direct damages award, representing the difference between market price and contract price under Commercial Code § 2713, noting that plaintiff's uncontradicted testimony regarding equipment cost supported the valuation. Plaintiff's failure to 'cover' did not bar these direct damages. However, the court reversed the $20,000 award for consequential damages for loss of anticipated profits on two grounds: 1) Foreseeability: Under Commercial Code § 2715 (which codifies the rule from Hadley v. Baxendale), consequential damages are recoverable only if the seller had reason to know of the buyer's particular requirements at the time of contracting. Defendant was unaware of Mr. Gerwin's interest in the bid or his specific plans to use the equipment for a hotel, bar, and restaurant at the time the bid was accepted, partly because Mr. Gerwin deliberately concealed his identity. Knowledge at the time of breach is insufficient. 2) Certainty of Proof: The evidence for anticipated profits for Mr. Gerwin's new business venture was too speculative. A new business lacks operating history, and plaintiff failed to provide evidence of comparable businesses' performance. Furthermore, the claim for $1,500 monthly rental income constituted gross revenue, not net profits, which legally requires deduction of costs like amortization, interest, taxes, and maintenance to be recoverable. While plaintiff's financial inability or difficulty in obtaining substitute goods could excuse failure to 'cover' for purposes of avoiding mitigation issues, it does not bypass the fundamental requirements of foreseeability and certainty for consequential damages.
Analysis:
This case is significant for clarifying the application of Uniform Commercial Code (UCC) § 2-715 regarding consequential damages, particularly lost profits from new businesses. It reinforces the long-standing Hadley v. Baxendale foreseeability rule, requiring sellers to have actual or constructive knowledge of a buyer's specific needs and intended use at the time of contracting to be liable for such losses. Additionally, the decision sets a high bar for proving lost profits from a new venture, demanding reasonable certainty in demonstrating both the occurrence and extent of net profits. This ruling serves as a critical reminder for buyers to clearly communicate their intentions to sellers and for litigants to present robust, non-speculative evidence of damages.
