R.E. Davis Chemical Corp. v. Diasonics Inc.
826 F.2d 678 (1987)
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Rule of Law:
A lost volume seller is not limited to the contract-resale price differential remedy under UCC § 2-706 but may recover lost profits under UCC § 2-708(2), provided the seller can prove it had the capacity to make both the breached sale and the resale, and that both sales would have been profitable.
Facts:
- Diasonics, Inc. manufactures and sells medical diagnostic equipment.
- R.E. Davis Chemical Corp. contracted with doctors Glen D. Dobbin and Galdino Valvassori to establish a new medical facility.
- On February 23, 1984, Davis entered a contract to purchase a piece of medical equipment from Diasonics for the facility.
- Davis paid Diasonics a $300,000 deposit for the equipment on February 29, 1984.
- Subsequently, doctors Dobbin and Valvassori breached their contract with Davis.
- As a result of the doctors' breach, Davis breached its contract with Diasonics, refusing to take delivery of the equipment or pay the remaining balance.
- Diasonics later resold the specific piece of equipment to another buyer for the same price it had contracted with Davis.
- The doctors were aware of the contract between Davis and Diasonics and knew their breach was substantially certain to cause Davis to breach its contract with Diasonics.
Procedural Posture:
- Davis sued Diasonics in the U.S. District Court for the Northern District of Illinois, seeking restitution of its $300,000 down payment under UCC § 2-718(2).
- Diasonics filed a counterclaim, arguing it was a 'lost volume seller' entitled to an offset for its lost profits under UCC § 2-708(2).
- Diasonics also filed a third-party complaint against Drs. Dobbin and Valvassori for tortious interference with its contract with Davis.
- The district court dismissed Diasonics' third-party complaint against the doctors for failure to state a claim upon which relief could be granted.
- The district court granted summary judgment in favor of Davis on the main claim, holding that a lost volume seller's damages are limited to the remedy under UCC § 2-706 (contract price minus resale price).
- Diasonics appealed both the grant of summary judgment for Davis 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 as adopted in Illinois, is a 'lost volume seller' who resells the breached goods for the same price entitled to recover lost profits under § 2-708(2), even though the standard resale remedy under § 2-706 would result in zero damages?
Opinions:
Majority - Cudahy, Circuit Judge.
Yes. A 'lost volume seller' may recover lost profits under UCC § 2-708(2) because the remedies in UCC Article 2 are cumulative, and damages calculated under the standard resale (§ 2-706) or market price (§ 2-708(1)) formulas are inadequate to put such a seller in the position it would have occupied had the buyer performed. The court predicted that the Illinois Supreme Court would align with the unanimous view of other jurisdictions allowing lost volume sellers to recover lost profits. The court reasoned that UCC remedies are cumulative, meaning a seller who resells goods is not forced to use the § 2-706 remedy and may elect to use § 2-708 if its conditions are met. For a lost volume seller—one who would have made the resale regardless of the initial buyer's breach—the breach results in one lost sale from its total volume. Therefore, a remedy based on the difference between contract and resale price is inadequate because it fails to compensate for the profit lost on that one sale. The court also held that the 'due credit for ... proceeds of resale' language in § 2-708(2) should be interpreted narrowly to apply only to resales of scrap or unfinished goods, not to completed goods resold in the ordinary course of business.
Analysis:
This case is a landmark decision clarifying the rights of 'lost volume sellers' under the Uniform Commercial Code. It aligns Illinois law with the majority of jurisdictions by confirming that lost profit damages under § 2-708(2) are available even when a seller resells the goods. Crucially, the court moves beyond the traditional 'capacity' test for lost volume status by introducing a stricter, more economically-grounded profitability requirement. This refinement makes it more difficult for sellers to claim lost volume status by requiring them to present concrete evidence that making the additional sale would have been profitable, thus preventing potential overcompensation.
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