National Controls, Inc. v. Commodore Business MacHines, Inc.
163 Cal.App.3d 688, 209 Cal. Rptr. 636, 40 U.C.C. Rep. Serv. (West) 12 (1985)
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Rule of Law:
Under the California Uniform Commercial Code, an additional term in a confirmatory memorandum that materially alters an existing oral agreement between merchants does not become part of the contract; furthermore, a seller with sufficient capacity to make an additional sale qualifies as a "lost volume seller" and may recover lost profits from a breaching buyer without offsetting proceeds from reselling the goods.
Facts:
- National Controls, Inc. (NCI) manufactures electronic weighing and measuring devices (Model 3221 scales) customized for Original Equipment Manufacturers (OEMs) and builds them to specific order rather than maintaining inventory.
- In November and December 1980, Commodore Business Machines, Inc. (Commodore) began discussions with NCI to become an OEM customer and purchased five scales by telephone, providing purchase order numbers to NCI.
- In March 1981, Terry Rogers, representing Commodore, placed a telephone order with Wiggins of NCI for an additional 30 scales, again providing only a purchase order number over the phone.
- On March 31, 1981, Rogers placed a firm telephone order with Wiggins for 900 scales at a specific price and delivery schedule (50 in May, 150 in June, 300 in July, 400 in August); Wiggins then prepared NCI's sales order with the given purchase order number, mailed a copy to Commodore, and NCI's manufacturing facility began production.
- After this oral agreement, Commodore mailed its own purchase order to NCI, which included a paragraph 19 limiting damages for breach by disclaiming liability for incidental or consequential damages.
- NCI's Wiggins did not recall seeing Commodore's purchase order, and neither Wiggins nor Rogers discussed the limitation of damages provision during their phone conversations.
- Commodore accepted only the first 50 scales in May but failed to accept or pay for the remaining 850 units from the 900-unit order.
- NCI subsequently resold all 850 units to National Semiconductor, an existing OEM customer, and NCI's plant had sufficient production capacity in 1980-1981 to more than double its output of 3221s.
Procedural Posture:
- National Controls, Inc. (NCI) brought an action for breach of contract against Commodore Business Machines, Inc. (Commodore) in a trial court.
- After a court trial, judgment was entered in favor of NCI, awarding damages exceeding $280,000.
- Commodore appealed the judgment to the California Court of Appeal.
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Issue:
1. Does a clause limiting damages in a buyer's subsequent written purchase order become part of a contract for the sale of goods under Uniform Commercial Code section 2-207 when the parties have already formed an oral agreement and the clause materially alters that agreement? 2. Is a seller, who had sufficient production capacity to fulfill both the breaching buyer's order and a subsequent resale, entitled to lost profits under Uniform Commercial Code section 2-708(2) without crediting the proceeds from the resale?
Opinions:
Majority - Scott, J.
No, a clause limiting damages in a buyer's subsequent written purchase order does not become part of a contract under Uniform Commercial Code section 2-207 when the parties have already formed an oral agreement and the clause materially alters that agreement. The court found that the parties had reached a binding agreement and entered into a contract during their telephone discussions on March 31, 1981, when they agreed on quantity, price, and delivery schedule. Commodore's subsequent mailed purchase order, containing the damage limitation clause, was a "formal memoranda embodying the terms so far as agreed upon and adding terms not discussed." Under UCC section 2207, subdivision (2)(b), such additional terms between merchants do not become part of the contract if they "materially alter" it. The court noted that Commodore waived any argument that the damage limitation was not a material alteration by focusing solely on its claim that the purchase order was a prerequisite to contract formation. Precedent suggests that disclaimers of consequential damages are material alterations because they would result in surprise or hardship if incorporated without express awareness. Yes, a seller with sufficient production capacity to fulfill both the breaching buyer's order and a subsequent resale is entitled to lost profits under Uniform Commercial Code section 2-708(2) without crediting the proceeds from the resale. The court affirmed that NCI was a "lost volume seller" because the undisputed evidence showed NCI's manufacturing plant was operating at approximately 40 percent capacity and could have easily supplied both Commodore and National Semiconductor. This meant that had Commodore performed, NCI would have made profits from two sales, not just one. Therefore, the standard measure of damages (contract price minus market price) under UCC section 2-708, subdivision (1), was inadequate to put NCI in as good a position as if the contract had been performed. The court followed the uniform interpretation from other jurisdictions that the "due credit for payments or proceeds of resale" language in UCC section 2-708, subdivision (2), does not apply to a lost volume seller. Applying this credit would negate the purpose of the lost profits calculation and deny the essential independence of the original and resale contracts, effectively rendering the lost profits measure nugatory.
Analysis:
This case provides important clarification on contract formation and damages under the California Uniform Commercial Code. It affirms that an oral agreement can establish a binding contract, and subsequent written forms between merchants are treated as confirmatory memoranda whose additional terms, if materially altering, will not automatically become part of the contract. Crucially, the decision officially adopts the "lost volume seller" doctrine in California, establishing that a seller with excess capacity who resells goods after a breach is entitled to recover lost profits from the original contract without offsetting the proceeds of the resale. This interpretation of UCC 2-708(2) is vital for manufacturers and high-volume retailers, ensuring they are made whole for lost sales when they could have made multiple sales.
