KGM Harvesting Co. v. Fresh Network

• Decision Date: 30 June 1995
• Docket Number: No. H011702,H011702
• Citation: 42 Cal.Rptr.2d 286,36 Cal.App.4th 376
• Court: California Court of Appeals Court of Appeals
• Parties: , 26 UCC Rep.Serv.2d 1028, 95 Cal. Daily Op. Serv. 5194, 95 Daily Journal D.A.R. 8718 KGM HARVESTING COMPANY, Plaintiff, Cross-defendant, and Appellant, v. FRESH NETWORK, Defendant, Cross-complainant, and Appellant.

Page 286

42 Cal.Rptr.2d 286

36 Cal.App.4th 376, 26 UCC Rep.Serv.2d 1028,

95 Cal. Daily Op. Serv. 5194,

95 Daily Journal D.A.R. 8718

KGM HARVESTING COMPANY, Plaintiff, Cross-defendant, and Appellant, v. FRESH NETWORK, Defendant, Cross-complainant, and Appellant.

No. H011702.

Court of Appeal, Sixth District, California.

June 30, 1995.

Russell J. Hanlon, San Jose, Lawrence E. Biegel, Vicki Schermer-Kleinkopf, Cominos & Biegel, Salinas, for plaintiff and appellant.

Charles R. Keller, Fenton & Keller, Monterey, for respondent.

COTTLE, Presiding Justice.

California lettuce grower and distributor KGM Harvesting Company (hereafter seller) had a contract to deliver 14 loads of lettuce each week to Ohio lettuce broker Fresh Network (hereafter buyer). When the price of lettuce rose dramatically in May and June 1991, seller refused to deliver the required quantity of lettuce to buyer. Buyer then purchased lettuce on the open market in order to fulfill its contractual obligations to third parties. After a trial, the jury awarded buyer damages in an amount equal to the difference between the contract price and the

price buyer was forced to pay for substitute lettuce on the open market. On appeal, seller argues that the damage award is excessive. We disagree and shall affirm the judgment. In a cross-appeal, buyer argues it was entitled to prejudgment interest from August 1, 1991, as its damages were readily ascertainable from that date. We agree and reverse the trial court's order awarding prejudgment interest from 30 days prior to trial.

FACTS

In July 1989 buyer and seller entered into an agreement for the sale and purchase of lettuce. Over the years, the terms of the agreement were modified. By May 1991 the terms were that seller would sell to buyer 14 loads of lettuce each week and that buyer would pay seller 9 cents a pound for the lettuce. (A load of lettuce consists of 40 bins, each of which weighs 1,000 to 1,200 pounds. Assuming an average bin weight of 1,100 pounds, one load would equal 44,000 pounds, and the 14 loads called for in the contract would weigh 616,000 pounds. At 9 cents per pound, the cost would approximate $55,440 per week.)

Buyer sold all of the lettuce it received from seller to a lettuce broker named Castellini Company who in turn sold it to Club Chef, a company that chops and shreds lettuce for the fast food industry (specifically, Burger King, Taco Bell, and Pizza Hut). Castellini Company bought lettuce from buyer on a "cost plus" basis, meaning it would pay buyer its actual cost plus a small commission. Club Chef, in turn, bought lettuce from Castellini Company on a cost plus basis.

Seller had numerous lettuce customers other than buyer, including seller's subsidiaries Coronet East and West. Coronet East supplied all the lettuce for the McDonald's fast food chain.

In May and June 1991, when the price of lettuce went up dramatically, seller refused to supply buyer with lettuce at the contract price of nine cents per pound. Instead, it sold the lettuce to others at a profit of between $800,000 and $1,100,000. Buyer, angry at seller's breach, refused to pay seller for lettuce it had already received. Buyer then went out on the open market and purchased lettuce to satisfy its obligations to Castellini Company. Castellini covered all of buyer's extra expense except for $70,000. Castellini in turn passed on its extra costs to Club Chef which passed on at least part of its additional costs to its fast food customers.

In July 1991 buyer and seller each filed complaints under the Perishable Agricultural Commodities Act (PACA). Seller sought the balance due on its outstanding invoices ($233,000), while buyer sought damages for the difference between what it was forced to spend to buy replacement lettuce and the contract price of nine cents a pound (approximately $700,000).

Subsequently, seller filed suit for the balance due on its invoices, and buyer cross-complained for the additional cost it incurred to obtain substitute lettuce after seller's breach. At trial, the parties stipulated that seller was entitled to a directed verdict on its complaint for $233,000, the amount owing on the invoices. Accordingly, only the cross-complaint went to the jury, whose task was to determine whether buyer was entitled to damages from seller for the cost of obtaining substitute lettuce and, if so, in what amount. The jury determined that seller breached the contract, that its performance was not excused, and that buyer was entitled to $655,960.22, which represented the difference between the contract price of nine cents a pound and what it cost buyer to cover by purchasing lettuce in substitution in May and June 1991. It also determined that such an award would not result in a windfall to buyer and that buyer was obligated to the Castellini Company for the additional costs. The court subtracted from buyer's award of $655,960.22 the $233,000 buyer owed to seller on its invoices, leaving a net award in favor of buyer in the amount of $422,960.22. The court also awarded buyer prejudgment interest commencing 30 days before trial.

DISCUSSION

A. Seller's Appeal

Section 2711 of the California Uniform In the instant case, buyer "covered" as defined in section 2712 in order to fulfill its own contractual obligations to the Castellini Company. Accordingly, it was awarded the damages called for in cover cases--the difference between the contract price and the cover price. (§ 2712.)

                Commercial Code 1 provides a buyer with several alternative remedies for a seller's breach of contract.  The [36 Cal.App.4th 381] buyer can " 'cover' by making in good faith and without unreasonable delay any reasonable purchase of ... goods in substitution for those due from the seller."  (§ 2712, subd.  (1).)  In that case, the buyer "may recover from the seller as damages the difference between the cost of cover and the contract price...."  (§ 2712, subd.  (2).)  If the buyer is unable to cover or chooses not to cover, the measure of damages is the difference between the market price and the contract price.  (§ 2713.)  Under either alternative, the buyer may also recover incidental and consequential damages.  (§§ 2711, 2715.)   In addition, in certain cases the buyer may secure specific performance or replevin "where the goods are unique" (§ 2716) or may recover goods identified to a contract (§ 2502)
                

In appeals from judgments rendered pursuant to section 2712, the dispute typically centers on whether the buyer acted in "good faith," whether the "goods in substitution" differed substantially from the contracted for goods, whether the buyer unreasonably delayed in purchasing substitute goods in the mistaken belief that the price would go down, or whether the buyer paid too much for the substitute goods. (See generally White & Summers, Uniform Commercial Code (3d ed. 1988) Buyer's Remedies, Cover, § 6-3, pp. 284-292 [hereafter White & Summers], and cases cited therein.)

In this case, however, none of these typical issues is in dispute. Seller does not contend that buyer paid too much for the substitute lettuce or that buyer was guilty of "unreasonable delay" or a lack of "good faith" in its attempt to obtain substitute lettuce. Nor does seller contend that the lettuce purchased was of a higher quality or grade and therefore not a reasonable substitute.

Instead, seller takes issue with section 2712 itself, contending that despite the unequivocal language of section 2712, a buyer who covers should not necessarily recover the difference between the cover price and the contract price. Seller points out that because of buyer's "cost plus" contract with Castellini Company, buyer was eventually able to pass on the extra expenses (except for $70,000) occasioned by seller's breach and buyer's consequent purchase of substitute lettuce on the open market. It urges this court under these circumstances not to allow buyer to obtain a "windfall." ²

The basic premise of contract law is to effectuate the expectations of the parties to " 'The basic object of damages is compensation, and in the law of contracts the theory is that the party injured by breach should receive as nearly as possible the equivalent of the benefits of performance. [Citations.]' " (Lisec v. United Airlines, Inc. (1992) 10 Cal.App.4th 1500, 1503, 11 Cal.Rptr.2d 689.) A compensation system that gives the aggrieved party the benefit of the bargain, and no more, furthers the goal of "predictability about the cost of contractual relationships ... in our commercial system." (Foley v. Interactive Data Corp., supra, 47 Cal.3d at p. 683, 254 Cal.Rptr. 211, 765 P.2d 373; Putz & Klippen, Commercial Bad Faith: Attorney Fees--Not Tort Liability--Is the Remedy for "Stonewalling" (1987) 21 U.S.F.L.Rev. 419, 432.)

the agreement, to give them the "benefit of the bargain" they struck when they entered into the agreement. In its basic premise, contract law therefore differs significantly from tort law. As the California Supreme Court explained in Foley v. Interactive Data Corp. (1988) 47 Cal.3d 654, 254 Cal.Rptr. 211, 765 P.2d 373, "contract actions are created to enforce the intentions of the parties to the agreement [while] tort law is primarily designed to vindicate 'social policy.' " (Id. at p. 683, 254 Cal.Rptr. 211, 765 P.2d 373, citing Prosser, Law of Torts (4th ed. 1971) p. 613.)

With these rules in mind, we examine the contract at issue in this case to ascertain the reasonable expectations of the parties. The contract recited that its purpose was "to supply [buyer] with a consistent quality raw product at a fair price to [seller], which also allows [buyer] profitability for his finished product." Seller promised to supply the designated quantity even if the price of lettuce went up ("We agree to supply said product and amount at stated price regardless of the market price or conditions") and buyer promised to purchase the designated quantity even if the price went down ("[B...