ANOTHER TRIP AROUND ARTICLE 2 REMEDIES: WHY THE U.C.C. PRECLUDES SELLERS FROM RECOVERING MARKET PRICE DAMAGES IN EXCESS OF RESALE DAMAGES.

• Author: Fleetham, Eric

INTRODUCTION

The Uniform Commercial Code (the "U.C.C." or the "Code") was a collaborative effort of the National Conference of Commissioners on Uniform State Laws and the American Law Institute and was enacted by the states to bring uniformity to commercial transactions and confidence to those engaged in interstate commerce. (1) Consequently, the U.C.C. "allows businesses to grow and the American economy to thrive." (2) Yet, despite its long history of serving the American commercial landscape, the U.C.C. is not without controversy. The purpose of this article is to address one particular controversy--whether an aggrieved seller, after reselling the goods, can obtain higher market price damages.

The problem may best be understood through a simple illustration. (3) On January 1, Seller (S) contracted to sell goods to Buyer (B) for $10,000 with delivery to Buyer (B) on February 1. However, Buyer (B) wrongfully rejected the goods on delivery. The market price for the goods then dropped. Accordingly, when Seller resold the same goods to a Third Party (TP) on February 15, it only received $8,000. (4)

Under resale damages, Seller receives the difference between the contract price and resale price or $2,000. (5) Accordingly, Seller's damages place Seller in the same position it would have been had Buyer performed, which is the goal of Code remedies, as Section 1-305 proclaims: the end of remedies is to put the aggrieved party "in as good a position as if the other party had fully performed . . . ." (6)

However, what happens if the market price of the goods falls below the resale amount, say $6,000 for this illustration? Pursuant to the market price calculation, Seller would be entitled to an award of $4,000, which is the difference between market price and contract price. (7) Accordingly, if Seller is able to recover market price damages, it would receive a higher award from Buyer than it would obtain under resale damages.

Figure 3. Market Price vs. Resale Calculations Market Price Damages 2-708(1) Contract Price minus Market Price = Damages $10,000-$6,000 = $4,000 Seller receives S4.000 Resale Damages 2-706(1) Contract Price minus Resale Price = Damages $10,000 - $8.000 = $2.000 Seller receives $2,000 The illustration may leave the impression that the difference between market price and resale damages is minimal so that this should not be a matter of concern. However, in real-life situations, the difference can be significant--to the tune of thousands of dollars, if not more. For example, in Coast Trading Co. v. Cudahy Co., the windfall (8) to the seller was over $32,000. (9) Yet, in Tesoro Petroleum Corp. v. Holborn Oil Co., the windfall was approximately $3,000,000. (10) These examples simply serve to make the point that this issue matters because significant dollars can be at stake.

Admittedly, the situation posed here is rare. For example, if the seller is a lost volume seller, then damages are based on the seller's lost profit under Section 2-708(2), and the problem identified here is averted. Moreover, if buyer breached after acceptance, then seller gets its contract price. (11) As one commentator noted, "Article: 2 is thus structured to leave little necessary work for the market price remedy to do." (12) Furthermore, this problem is unique to sellers. If the tables were turned and the seller was the breaching party, then Article 2 would not permit the buyer to choose between market price damages or cover damages after buyer covered.

Although not many courts have grappled with this issue, the topic has garnered debate from scholars over the years. Interest in this issue resurfaced after the Oregon Supreme Court ruled that an aggrieved seller may obtain market price damages, even when those damages exceeded resale damages. (13) In this article, I seek to take another trip around Article 2 damages to add my views to the controversy. (14) Part II provides an overview of the remedies available to buyers and sellers. Part III criticizes the approach adopted by the most recent case on this issue, Peace River Seed Co-Operative, Ltd. v. Proseeds Marketing, Inc., from the Oregon Supreme Court. Part IV advocates that the solution to this problem is found within the provisions of the Code itself.

1. OVERVIEW OF BUYER AND SELLER REMEDIES UNDER ARTICLE 2

   Before addressing the problem presented in the Introduction, it is worthwhile to review the manner in which the Code treats damages for buyers and sellers.

   First, as for a buyer, the Code presents two alternatives: cover damages (15) or market price damages. (16) Section 2-711 presents the list of possible recoveries for the aggrieved buyer. (17) Included in that list is damage calculations based on cover or market price. The Code also specifies the relationship between the two remedies--when a buyer covers, (18) the buyer is limited to cover damages and may not seek market price damages. This result is clearly articulated in Official Comment 5 to Section 2-713: "The present section [2-713] provides a remedy which is completely alternative to cover under the preceding section [2-712] and applies only when and to the extent that the buyer has not covered." (19) As a result, while the Code provides buyer with the right to seek a market price award, such a recovery is precluded in the event of cover.

   As for sellers, Section 2-703 is the parallel section to Section 2-711, as it presents the seller with a list of remedies. (20) In addition to allowing the seller to withhold delivery, stop delivery, or even cancel the contract, Section 2-703 permits resale damages as well as market price damages. (21) Resale damages are presented under Section 2-706, and like buyer's right to cover, seller's right to resell is optional. (22) As for market price damages, that calculation is found in Section 2-708(1).

   Does the Code preclude a seller from seeking market price damages after a resale? As stated above, the Code precludes a buyer from seeking market price damages after it covered. The Official Comments provide that clarification. However, unlike buyer remedies, no parallel limitation exists for sellers. (23) And, therein lies the problem. Without a parallel seller limitation, the door is open for "a greedy seller [to] seek a windfall in the form of a larger 2-708(1) recovery." (24)

2. PEACE RIVER: A CASE IN POINT

   While scholars can debate whether sellers should be permitted to recover market price damages in excess of resale damages, the issue has real-life implications. A case in point is the decision in Peace River Seed Co-Operative, Ltd. v. Proseeds Marketing, Inc. from the Oregon Supreme Court. (25) The purpose of this part of the article is to (1) offer context for the opinion by providing a brief overview of the case and (2) criticize the approach taken by the court in permitting the seller to recover market price damages that exceeded resale damages.

   1. A Brief Review of the Case

      Interestingly, the case involved a contract for grass seed, and lots of it--over one million pounds. (26) The case is also interesting for the fact that it involved an international transaction; as the seller, Peace River, was a Canadian company, and the buyer, Proseeds, was an Oregon corporation. (27) When the parties entered into the contract, the agreed price was below the current market price for seed and, thus, was "very favorable" to the buyer, Proseeds. (28) However, overproduction of grass seed in the global market caused the price to plummet by the time that Proseeds was to take delivery. (29) Accordingly, Proseeds refused to purchase most of the seed because it could buy on the open market for substantially lower prices. (30) Peace River stored the seed that Proseeds had agreed to buy and was able to sell it to other purchasers. (31)

      At the trial court level, the court found Proseeds to be in breach of the agreement. (32) As for damages, the parties disputed the appropriate damage calculation, with Peace River (seller) seeking damages under market price and Proseeds (buyer) arguing for resale damages. (33) Finding that Peace River would receive a smaller award under resale damages, the trial court rejected Peace River's argument for market price damages and awarded Peace River its resale damages. (34) The Oregon Court of Appeals reversed the trial court's decision, finding that the Code lacks any restriction against a reseller obtaining market price damages. (35) The Oregon Supreme Court affirmed, holding that a seller is "entitled to recover its market price damages, even if those damages exceeded [seller's] resale price damages." (36)

   2. The Oregon Supreme Court's Flawed Approach

      Before articulating its analysis, the court acknowledged that commentators "have taken two different approaches to this issue." (37) On the one side, commentators argue that sellers have a choice between market price or resale damages. However, on the other side of the debate, commentators advocate that a seller cannot recover more in market price than it could obtain in resale price damages. (38) The court resolved the issue by agreeing with the commentators which advocate for market price damages, "even if market price damages lead to a larger recovery." (39)

      The court based its conclusion on three points: (1) the text and context of the U.C.C.'s damages provisions; (2) the legislative history of the Code's damages provisions; and (3) the court's understanding as to seller expectations. In this next section, I will examine the Oregon Supreme Court's analysis and demonstrate the flaws in its approach.

      1. Text and Context

         The court began its analysis by considering "the statute's text and context to determine the legislature's intent regarding a seller's remedies under the UCC." (40) In doing so, the court made three observations about seller damages: (1) the Code rejects election of remedies for sellers; (2) no limitation appeared in the list of seller's damages, unlike the list for buyers; and (3)...