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R.E. Davis Chemical Corporation v. Diasonics, Inc.

United States Court of Appeals, Seventh Circuit
826 F.2d 678 (1987)
ELI5:

Rule of Law:

Under the Uniform Commercial Code, a 'lost volume seller' is not limited to the damages formula in § 2-706 (contract price minus resale price) and may recover lost profits under § 2-708(2). To do so, the seller must prove not only that it had the capacity to make both the breached and resale contracts but also that it would have been profitable for it to perform both.


Facts:

  • Diasonics, Inc. manufactures and sells medical diagnostic equipment.
  • R.E. Davis Chemical Corp. had a contract with doctors Glen Dobbin and Galdino Valvassori to establish a medical facility.
  • On February 23, 1984, Davis entered into a written contract to purchase medical equipment from Diasonics for use in the new facility.
  • Pursuant to the agreement, Davis paid Diasonics a $300,000 deposit.
  • Subsequently, Dobbin and Valvassori breached their contract with Davis.
  • Davis then breached its contract with Diasonics, refusing to take delivery of the equipment or pay the balance due.
  • Diasonics later resold the specific equipment intended for Davis to a third party for the same price.

Procedural Posture:

  • R.E. Davis Chemical Corp. sued Diasonics, Inc. in federal district court seeking restitution of its $300,000 down payment.
  • Diasonics filed a counterclaim to recover its lost profit on the sale, arguing it was a 'lost volume seller'.
  • Diasonics also filed a third-party complaint against doctors Dobbin and Valvassori for tortious interference with its contract with Davis.
  • The district court dismissed Diasonics' third-party complaint for failure to state a claim.
  • On cross-motions for summary judgment, the district court granted summary judgment in favor of Davis.
  • The district court held that Diasonics' damages were limited to the formula in UCC § 2-706, and since the resale price equaled the contract price, Diasonics suffered no damages.
  • Diasonics, the defendant and third-party plaintiff, appealed the summary judgment and the dismissal of its third-party complaint to the U.S. Court of Appeals for the Seventh Circuit.

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Issue:

Under the Uniform Commercial Code, does a seller's resale of goods following a buyer's breach preclude the seller from recovering lost profits as a 'lost volume seller' under UCC § 2-708(2)?


Opinions:

Majority - Cudahy, Circuit Judge

No. A seller's resale of goods does not preclude recovery of lost profits as a 'lost volume seller' under UCC § 2-708(2). The court predicted that the Illinois Supreme Court would find that the remedies in the UCC are cumulative, not hierarchical, and thus a seller who resells goods is not forced to use the remedy in § 2-706. For a lost volume seller—one who could have made both the original sale and the resale—the damages calculated under § 2-706 (contract price minus resale price, which is zero here) or § 2-708(1) (contract price minus market price) are inadequate to put the seller in as good a position as performance would have, because the breach still resulted in the loss of one sale's worth of profit. Therefore, § 2-708(2) is the appropriate remedy. However, the court established a new test: to qualify for lost profits, the seller must prove not only that it had the production capacity to make both sales but also that it would have been profitable to make both sales. The court also held that the 'due credit for payments or proceeds of resale' language in § 2-708(2) should be narrowly interpreted to apply only to resales of scrap or unfinished goods, not to standard resales by a lost volume seller.



Analysis:

This case significantly clarifies the 'lost volume seller' doctrine under the UCC. It establishes that § 2-706 is not the exclusive remedy for a seller who resells goods after a breach, allowing them to elect the more favorable lost profits remedy under § 2-708(2). Crucially, the decision refines the standard for proving lost volume status by adding a profitability requirement to the existing capacity requirement. This new test introduces an economic reality check, making it more difficult for sellers to claim lost profits and preventing potential overcompensation by forcing them to account for the law of diminishing returns and increasing marginal costs.

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