AM/PM Franchise Ass'n v. Atlantic Richfield Co.

• Decision Date: 28 December 1990
• Docket Number: No. 95,95
• Parties: , 14 UCC Rep.Serv.2d 11 AM/PM FRANCHISE ASSOCIATION, Salvatore Miluzzo, Robert J. Williams, Robert E. Recotta, Paul Hastings and Thomas E. Doyle, Appellants, v. ATLANTIC RICHFIELD COMPANY, Appellee. E.D. 1989.
• Court: Pennsylvania Supreme Court

Page 915

584 A.2d 915

526 Pa. 110, 14 UCC Rep.Serv.2d 11

AM/PM FRANCHISE ASSOCIATION, Salvatore Miluzzo, Robert J Williams, Robert E. Recotta, Paul Hastings and Thomas E. Doyle, Appellants, v. ATLANTIC RICHFIELD COMPANY, Appellee.

No. 95 E.D. 1989.

Supreme Court of Pennsylvania.

Argued Jan. 25, 1990.

Decided Dec. 28, 1990.

Sol H. Weiss, Bryn Mawr, Nancy L. Goldstein, Philadelphia, for appellants.

Charles I. Thompson, James D. Coleman, Philadelphia, for appellee.

Before NIX, C.J., and LARSEN, FLAHERTY, McDERMOTT, ZAPPALA, PAPADAKOS and CAPPY, JJ.

OPINION OF THE COURT

CAPPY, Justice.

Before us is an appeal by members of a franchisee association from an order of the Superior Court of Pennsylvania at No. 01958 Philadelphia 1987, issued April 14, 1988, affirming the order of the Court of Common Pleas at No. 157 November Term 1986, dated June 16, 1987, sustaining defendant's preliminary objections in the nature of a demurrer and dismissing the action.

We granted allocatur to determine whether the named appellants ("plaintiffs") have alleged sufficient facts to sustain a cause of action when they aver that the gasoline they purchased from the appellee ("ARCO") was not in conformance with the warranties made and resulted in their suffering economic harm. In making such a determination, we address the question of whether such damages constitute a "loss of

good will," and whether good will damages are too speculative as a matter of law to permit recovery. For the reasons set forth herein, we find that the plaintiffs have alleged sufficient facts to entitle them to proceed with their claim and that the damages claimed are not good will nor so speculative as to deny them an attempt at recovery. We reverse the decision of the Superior Court in part and affirm in part.

PROCEDURAL HISTORY

ARCO filed preliminary objections in the nature of a demurrer to Appellants' complaint, claiming that the damages sought by Appellants stemmed from a loss of good will, which are speculative and not recoverable as a matter of law. Additionally, the defendants claim that the plaintiffs should not be entitled to recover under a tort theory.

The trial court sustained ARCO's preliminary objections and dismissed Appellants' complaint.

The Superior Court affirmed the ruling of the trial court, holding that under current Pennsylvania law, damages sought for the breach of warranty claims due to a loss of good will are not recoverable as they have traditionally been considered to be too speculative. Additionally, the Superior Court held that the plaintiff was not entitled to recover in tort, finding that the duty of the parties to act in good faith arises under contract and not tort principles.

In the dissent to the opinion of the Superior Court, Judge Brosky remarked that the majority characterizes the claim as one for loss of good will, while he "view[s] appellants' claim as a request for lost profits occasioned by appellee's delivery of an unmerchantable product." 373 Pa.Super. 572, 580, 542 A.2d 90, 94 (1988). Additionally, Judge Brosky disagreed with the characterization of the loss as speculative, stating "[a]lthough calculating damages may have been a problem in the past, and in certain cases, may still be a problem, I cannot see that it presents a problem here.... Further, a comparison of the business profits before and after the delivery of the unmerchantable gasoline should prove to be enlightening." Id. at 581, 542 A.2d at 94-95.

FACTUAL HISTORY

The Plaintiffs claim to represent a class of over 150 franchisees of ARCO that operated AM/PM Mini Markets in Pennsylvania and New York during a three and one-half year period.

ARCO entered into franchise agreements with the plaintiffs which were comprised of a premises lease, a lessee dealer gasoline agreement, and an AM/PM mini-market agreement. The products agreement mandated that the franchisees sell only ARCO petroleum products. ¹

The complaint sets forth the following facts: ARCO began experimenting with its formula for unleaded gasoline and provided its franchisees with an unleaded gasoline blended with oxinol, consisting of 4.5% methanol and 4.5% gasoline grade tertiary butyl alcohol (hereinafter "the oxinol blend") from early 1982 through September 30, 1985.

During this three and a half year period, the franchisees were required to sell the oxinol blend to their clients who desired unleaded gasoline. The franchisees were given no opportunity to buy regular unleaded gasoline from ARCO during that period.

Plaintiffs claim that numerous purchasers of the oxinol blend gasoline experienced poor engine performance and physical damage to fuel system components. Specifically, plaintiffs claim that the oxinol gasoline permitted an excess accumulation of alcohol and/or water which interfered with the efficiency of gasoline engines and, in certain vehicles, caused swelling of plastic or rubber components in the fuel delivery system and resulted in engine damage. The As the problems with the oxinol blend became known, the plaintiffs claim to have suffered a precipitous drop in the volume of their business and an attendant loss of profits. Specifically, plaintiffs point to the rise in sales from 1973 until 1982, when sales began to fall dramatically; allegedly due to defective oxinol blend gasoline.

plaintiffs claim that the gasoline did not conform to ARCO's warranties about the product.

In their complaint, plaintiffs allege three counts of Breach of Warranty, Breach of Implied Duty, Misrepresentation, and Exemplary Damages. They request damages for "lost profits, consequential and incidental damages."

DISCUSSION

The point at which we start our inquiry is the Uniform Commercial Code ("the U.C.C."), codified at 13 Pa.C.S. § 1101 et seq. Section 2714, entitled "Damages of buyer for breach in regard to accepted goods" is one of the governing provisions in the case before us, ² and provides, in pertinent part:

(b) Measure of damages for breach of warranty.--The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.

(c) Incidental and consequential damages.--In a proper case any incidental and consequential damages under section 2715 (relating to incidental and consequential damages of buyer) may also be recovered.

Section 2715 is entitled "Incidental and Consequential Damages of Buyer" and provides, in pertinent part:

(a) Incidental damages.--Incidental damages resulting from the breach of the seller include:

(3) any other reasonable expenses incident to the delay or other breach. ³

(b) Consequential damages.--Consequential damages resulting from the breach of the seller include:

(1) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise. ⁴

Pursuant to the provisions of the U.C.C., plaintiffs are entitled to seek "general" damages, so-called, under section 2714(b), and consequential damages as provided by section 2714(c).

There has been substantial confusion in the courts and among litigants about what consequential damages actually are and what types of consequential damages are available in a breach of warranty case. Where a buyer in the business of reselling goods can prove that a breach by the seller has caused him to lose profitable resales, the buyer's lost profits constitute a form of consequential damages. ⁵ We now hold that in addition to general damages, there are three types of lost profit recoverable as consequential damages that may flow from a breach of warranty: (1) loss of primary profits; (2) loss of secondary profits; and (3) a loss of good will damages (or prospective damages, as they are sometimes termed).

In order to alleviate the confusion that has developed concerning the various damages General damages in the case of accepted goods (such as occurred here) are the actual difference in value between the goods as promised and the goods as received. Thus, suppose a buyer bought five hundred tires from a wholesaler that were to be delivered in good condition, and in that condition would be worth $2,500. The tires were delivered with holes in them which rendered them worthless. The buyer would be entitled to $2,500 from the seller--the difference between the value of the tires as warranted and the value of the tires as received; those would be the general damages.

we use an example to help illustrate the different types.

Consequential damages are generally understood to be other damages which naturally and proximately flow from the breach and include three types of lost profit damages: (1) lost primary profits; (2) lost secondary profits; and (3) loss of prospective profits, also commonly referred to as good will damages.

Lost primary profits are the difference between what the buyer would have earned from reselling the goods in question had there been no breach and what was earned after the breach occurred. Thus, if the buyer of the tires proved that he would have resold the tires for $5,000, he would be able to claim an additional $2,500 for loss of tire profits; the difference between what he would have earned from the sale of the tires and what he actually did earn from the sale (or lack of sales) from the tires.

If the buyer of the tires also sold, for example, hubcaps with every set of tires, he would also suffer a loss of hubcap profits. These types of damages are what we term "loss of secondary profits."

If the buyer's regular customers were so disgruntled about the defective tires that they no longer frequented the buyer's business and began to patronize a competitor's business, the buyer would have suffered a "loss of good will" beyond the direct loss of profits from the...