KGM Harvesting Co. v. Fresh Network
36 Cal. App. 4th 376 (1995)
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Rule of Law:
Under the Uniform Commercial Code, a buyer who makes a good faith purchase of substitute goods after a seller's breach is entitled to recover the full difference between the cost of cover and the contract price. This recovery is not reduced even if the buyer is able to pass on the increased costs to a third party.
Facts:
- KGM Harvesting Company (seller) and Fresh Network (buyer) had a contract for KGM to sell Fresh Network 14 loads of lettuce per week at a fixed price of 9 cents per pound.
- Fresh Network had a 'cost plus' contract to resell all the lettuce it received from KGM to a third party, the Castellini Company.
- KGM was aware of Fresh Network's resale contract, as it shipped the lettuce directly to Castellini's designated recipient each week.
- In May and June of 1991, the market price of lettuce increased dramatically.
- KGM refused to deliver lettuce to Fresh Network at the 9-cent contract price, instead selling it to other customers for a profit of over $800,000.
- To fulfill its own contractual obligation to Castellini, Fresh Network purchased substitute lettuce on the open market at the higher prevailing prices.
- Pursuant to their 'cost plus' agreement, Castellini Company reimbursed Fresh Network for all but $70,000 of the extra expense incurred to purchase the substitute lettuce.
Procedural Posture:
- KGM Harvesting Company (Seller) and Fresh Network (Buyer) each filed complaints against the other under the Perishable Agricultural Commodities Act (PACA).
- Subsequently, Seller sued Buyer in a California trial court for the balance due on past invoices.
- Buyer filed a cross-complaint against Seller for breach of contract, seeking damages for the additional cost it incurred to obtain substitute lettuce.
- At trial, the parties agreed to a directed verdict for Seller on its complaint for $233,000.
- The cross-complaint was tried before a jury, which returned a verdict for Buyer, awarding $655,960.22 in damages for the cost of cover.
- The trial court offset the two awards, resulting in a net judgment for Buyer, and also awarded prejudgment interest.
- Seller appealed the damage award to the California Court of Appeal, arguing it was excessive. Buyer cross-appealed the trial court's calculation of the start date for prejudgment interest.
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Issue:
Does a buyer's ability to pass on the increased cost of substitute goods to a third party limit the buyer's right to recover the full difference between the cost of cover and the contract price under California Uniform Commercial Code section 2712?
Opinions:
Majority - Cottle, P. J.
No. A buyer who covers following a seller's breach is entitled to the full difference between the cost of cover and the contract price, regardless of whether the buyer was able to pass those costs on to another party. The plain language of section 2712 of the California Uniform Commercial Code provides this measure of damages to give the aggrieved party the 'benefit of the bargain' and put them in the same economic position as if the seller had fully performed. The court reasoned that what the buyer chooses to do with its bargain is irrelevant to the calculation of damages owed by the breaching seller. The court distinguished cases that limited damages under section 2713 (market-contract differential), arguing that the cover-contract differential of section 2712 perfectly achieves the UCC's goal of placing the aggrieved party in the position of full performance, making any further limitation inappropriate.
Analysis:
This decision solidifies the strength and straightforward application of the UCC's 'cover' remedy under § 2-712. It establishes a clear precedent that a buyer's downstream, 'cost-plus' contracts do not limit recovery from a breaching seller, thereby preventing the breaching seller from benefiting from the buyer's separate business arrangements. The ruling provides certainty for commercial actors, confirming that the cover remedy is a direct calculation of damages and is not subject to complex inquiries into the buyer's ultimate financial position. This discourages sellers from opportunistically breaching fixed-price contracts during periods of high market volatility, as they cannot later argue that the buyer suffered no 'real' loss.
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