L. Albert & Son v. Armstrong Rubber Co.
178 F.2d 182 (1949)
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Rule of Law:
A non-breaching party may recover reliance damages for expenses incurred in preparation for performance, but the breaching party may reduce this amount by proving how much the non-breaching party would have lost had the contract been fully performed.
Facts:
- In December 1942, Albert Co. (Seller) contracted to sell four 'Refiners,' machines for reconditioning rubber, to Armstrong Co. (Buyer).
- Albert Co. delivered the first two machines in August 1943 but delayed delivery of the final two.
- On February 23, 1945, Armstrong Co. demanded that Albert Co. ship the two remaining machines at once.
- In preparation for using the machines, Armstrong Co. spent $3,000 to construct a foundation for them.
- Albert Co. did not deliver the final two machines until late August or early September 1945, five months after the demand and around the time WWII ended, causing the market for reclaimed rubber to decline significantly.
- In October 1945, Armstrong Co. rejected all four machines due to the excessive delay in delivery.
- In February 1946, approximately four months after rejecting the machines, Armstrong Co. began using a motor and its accessories that had been delivered as part of the order.
Procedural Posture:
- Albert Co. (Seller) sued Armstrong Co. (Buyer) in federal trial court to recover the contract price for the four machines.
- Armstrong Co. counterclaimed for damages arising from Albert Co.'s breach due to late delivery.
- The trial court judge dismissed both the Seller's complaint and the Buyer's counterclaim.
- The trial judge did, however, enter a judgment for the Seller for the value of a motor and accessories that the Buyer had put into use, but denied interest on that amount.
- Both the Seller and the Buyer appealed the trial court's judgment to the U.S. Court of Appeals for the Second Circuit.
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Issue:
When a seller breaches a contract by late delivery, may the buyer recover its expenses incurred in preparation for performance, and if so, may the seller reduce those damages by showing the buyer would have entered into a losing contract even if the contract had been performed on time?
Opinions:
Majority - L. Hand
Yes. A buyer may recover reliance damages for expenses made in preparation for performance, but the seller has the privilege to reduce that recovery by the amount it can prove the buyer would have lost if the contract had been completed. The court reasoned that the seller's five-month delay was a breach that justified the buyer's rejection of the goods. The buyer's later use of a single motor did not constitute an acceptance of the entire order, as this would impose a harsh penalty; instead, it was a conversion for which the buyer owed the fair market value of the motor. Regarding the buyer's counterclaim for damages, the court established a rule for reliance damages on a potentially losing contract. While a non-breaching party can recover outlays made in preparation for performance (like the $3,000 foundation), the breaching party should not be made an insurer of the other party's venture. Therefore, the most just solution is to allow recovery of reliance expenses, but to shift the burden of proof to the breaching party to show that the contract would have been unprofitable. If the breaching party can prove the non-breaching party would have suffered a loss, the reliance damages are to be reduced by that amount.
Analysis:
This case is a landmark decision in contract law, establishing a foundational rule for the calculation of reliance damages, particularly in the context of a losing contract. Judge Hand's opinion articulates a burden-shifting framework that has been highly influential and was adopted by the Restatement (Second) of Contracts. Instead of forcing the non-breaching party to prove hypothetical profits (expectation damages), it allows them to recover their expenses, placing the onus on the breaching party to prove the venture was unprofitable. This approach balances the goal of compensating the injured party for their reliance against the principle that contract damages should not put the plaintiff in a better position than full performance would have.
