Vitex Manufacturing Corp. v. Caribtex Corp.

• Decision Date: 26 April 1967
• Docket Number: No. 16064.,16064.
• Citation: 377 F.2d 795
• Parties: VITEX MANUFACTURING CORPORATION, Ltd. v. CARIBTEX CORPORATION, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

377 F.2d 795 (1967)

VITEX MANUFACTURING CORPORATION, Ltd. v. CARIBTEX CORPORATION, Appellant.

No. 16064.

United States Court of Appeals Third Circuit.

Argued February 2, 1967.

Decided April 26, 1967.

Leon S. Forman, Philadelphia, Pa. (M. E. Maurer, Wexler, Mulder & Weisman, Philadelphia, Pa., on the brief), for appellant.

William Bailey, Charlotte Amalie, St. Thomas, V. I., for appellee.

Before STALEY, Chief Judge, and MARIS and COFFIN,^* Circuit Judges.

Argued at Christiansted February 2, 1967.

OPINION OF THE COURT

STALEY, Chief Judge.

This is an appeal by Caribtex Corporation from a judgment of the District Court of the Virgin Islands finding Caribtex in breach of a contract entered into with Vitex Manufacturing Company, Ltd., and awarding $21,114 plus interest to Vitex for loss of profits. The only substantial question raised by Caribtex is whether it was error for the district court, sitting without a jury, not to consider overhead as part of Vitex's costs in determining the amount of profits lost. We conclude that under the facts presented, the district court was not compelled to consider Vitex's overhead costs, and we will affirm the judgment.

Before discussing the details of the controversy between the parties, it will be helpful to briefly describe the peculiar legal setting in which this suit arose. At the time of the events in question, there were high tariff barriers to the importation of foreign wool products. However, under § 301 of the Tariff Act of 1930, 19 U.S.C.A. § 1301a, repealed but the provision continued under Revised Tariff Schedules, 19 U.S.C.A. § 1202, note 3(a) (i) (ii) (1965), if such goods were imported into the Virgin Islands and were processed in some manner so that their finished value exceeded their importation value by at least 50%, then the high tariffs to importation into the continental United States would be avoided. Even after the processing, the foreign wool enjoyed a price advantage over domestic products so that the business flourished. However, to keep the volume of this business at such levels that Congress would not be stirred to change the law, the Virgin Islands Legislature imposed "quotas" on persons engaging in processing, limiting their output. 33 V.I.C. § 504 (Supp.1966).

Vitex was engaged in the business of chemically shower-proofing imported cloth so that it could be imported duty-free into the United States. For this purpose, Vitex maintained a plant in the Virgin Islands and was entitled to process a specific quantity of material under the Virgin Islands quota system. Caribtex was in the business of importing cloth into the islands, securing its processing, and exporting it to the United States.

In the fall of 1963, Vitex found itself with an unused portion of its quota but no customers, and Vitex closed its plant. Caribtex acquired some Italian wool and subsequently negotiations for a processing contract were conducted between the principals of the respective companies in New York City. Though the record below is clouded with differing versions of the negotiations and the alleged final terms, the trial court found upon substantial evidence in the record that the parties did enter into a contract in which Vitex agreed to process 125,000 yards of Caribtex's woolen material at a price of 26 cents per yard.

Vitex proceeded to re-open its Virgin Islands plant, ordered the necessary chemicals, recalled its work force and made all the necessary preparations to perform its end of the bargain. However, no goods were forthcoming from Caribtex, despite repeated demands by Vitex, apparently because Caribtex was unsure that the processed wool would be entitled to duty-free treatment by the customs officials. Vitex subsequently brought this suit to recover the profits lost through Caribtex's breach.

Vitex alleged, and the trial court found, that its gross profits for processing said material under the contract would have been $31,250 and that its costs would have been $10,136, leaving Vitex's damages for loss of profits at $21,114. On appeal, Caribtex asserted numerous objections to the detailed computation of lost profits.¹ While the record below is sometimes confusing, we conclude that the trial court had substantial evidence to support its findings on damages. It must be remembered that the difficulty in exactly ascertaining Vitex's costs is due to Caribtex's wrongful conduct in repudiating the contract before performance by Vitex. Caribtex will not be permitted to benefit by the uncertainty it has caused. Thus, since there was a sufficient basis in the record to support the trial court's determination of substantial damages, we will not set aside its judgment. Stentor Elec. Mfg. Co. v. Klaxon Co., 115 F.2d 268 (C.A.3, 1940), rev'd other grounds 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941); 5 Williston, Contracts § 1345 (rev. ed. 1937).

Caribtex first raised the issue at the oral argument of this appeal that the trial court erred by disregarding Vitex's overhead expenses in determining lost profits. In general, overhead "* * * may be said to include broadly the continuous expenses of the business, irrespective of the outlay on a particular contract." Grand Trunk W. R. R. Co. v. H. W. Nelson Co., 116 F.2d 823, 839 (C.A. 6, 1941). Such expenses would include executive and clerical salaries, property taxes, general administration expenses, etc.² Although Vitex did not expressly seek recovery for overhead, if a portion of these fixed expenses should be allocated as costs to the Caribtex contract, then under the judgment of the district court Vitex tacitly recovered these expenses as part of its damages for lost profits, and the damages should be reduced accordingly. Presumably, the portion to be allocated to costs would be a pro rata share of Vitex's annual overhead according to the volume of business Vitex would have done over the year if Caribtex had not breached the contract.

Although there is authority to the contrary, we feel that the better view is that normally, in a claim for lost profits, overhead should be treated as a part of gross profits and recoverable as damages, and should not be considered as part of the seller's costs. A number of cases hold that since overhead expenses are not affected by the performance of the particular contract, there should be no need to deduct them in computing lost profits. E. g., Oakland California Towel Co. v. Sivils, 52 Cal.App.2d 517, 520, 126 P.2d 651, 652 (1942); Jessup & Moore Paper Co. v. Bryant Paper Co., 297 Pa. 483, 147 A. 519, 524 (1929); Annot., 3 A.L.R.3d 689 (1965) (collecting cases on both sides of the controversy). The theory of these cases is that the seller is entitled to recover losses incurred and gains prevented in excess of savings made possible, Restatement, Contracts § 329 (made part of the law of the Virgin Islands, 1 V.I.C. § 4); since overhead is fixed and non-performance of the contract produced no overhead cost savings, no deduction from profits should result.

The soundness of the rule is exemplified by this case. Before negotiations began between Vitex and Caribtex, Vitex had reached a lull in...