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Omni Electromotive, Inc. v. R.A. Johnson, Inc.

A-0187-05T5 (N.J. Super. App. Div. 2006) (Unpublished)

CONTRACTS; UCC; DAMAGES — Where a supplier knows that its contract with its buyer was a long-term requirements contract with known potential consequences for failing to make timely delivery of goods and damages are foreseeable, then an award for incidental and consequential damages is appropriate, and the concept of cover is inapplicable to offset consequential damages for goods which have not been delivered.

A manufacturer of machine parts failed to timely deliver certain parts to a distributor. The distributor accepted some goods, but the manufacturer failed to deliver other goods. The ultimate consumer of the parts assessed penalties against the distributor for failing to timely deliver the parts and cancelled its purchase orders. A default judgment was entered against the manufacturer in favor of the distributor. The manufacturer they claimed: (1) the lower court erred in awarding consequential damages because the distributor did not demonstrate an attempt to mitigate its damages and that the damages were not foreseeable; (2) the award of damages placed the distributor in a better position than it would have been had the manufacturer had fully performed the contract; and (3) the lower court erred in failing to reduce the award by amounts the distributor owed to the manufacturer, and by the amount seized by the distributor from the manufacturer’s bank account. Because the manufacturer did not raise any of these issues at trial, the Appellate Division only reviewed the record for plain errors. Errors at trial are to be disregarded by an appellate court unless they are clearly capable of producing an unjust result.

Because the distributor accepted some nonconforming deliveries, its remedies were limited with respect to the accepted goods, and it became obligated to pay for the accepted goods. However, acceptance does not impair any other remedy for nonconformity. When a seller fails to make delivery, a buyer has the option, at its sole discretion, to procure similar goods from other buyers (“cover”). Contrary to the manufacturer’s argument, the distributor had the right to elect to recover damages rather than cover. As to non-delivered goods, a buyer may recover the difference between the market price and the contract price. In this case, the distributor properly elected not to recover such damages and was entitled to recover incidental and consequential damages. Incidental and consequential damages are available to a buyer as to both accepted goods and non-delivered goods. Further, the concept of cover is inapplicable to offset consequential damages for goods which have not been delivered.

The manufacturer had the burden at trial of proving the amount by which consequential damages could have been reduced by cover. Because a default was entered, and no trial held, the manufacturer could not determine the amount by which the consequential damages should have been reduced. Further, an award of consequential damages is available if, at the time of contracting, the seller had reason to know of the possible loss. The Appellate Division affirmed the lower court’s finding that the manufacturer knew the contract with the distributor was a long-term requirements contract with known potential consequences for failing to make timely delivery of goods. Therefore, the damages were foreseeable. Therefore, the awards of incidental and consequential damages is affirmed. Whether the award of damages places the distributor in a better position than it would have occupied had the contract been performed was irrelevant. The manufacturer had an obligation to meet the distributor’s requirements.

As to those parts retained by the distributor but for which it did not pay, the Court ruled it was plain error for the trial court not to determine if correspondence between the manufacturer and distributor was an election by the distributor to deduct damages in the amount of the value of the retained goods from the part of the price still due under the contract. Thus, the Appellate Division concludeed that the value of the retained goods should have been deducted from the amount of the distributors’ lost profits. The manufacturer was entitled to a credit for the amounts seized from its bank account. For those reasons, the lower court’s ruling was affirmed in part, reversed in part, and remanded for entry of a modified judgment.


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