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| An Italian buyer and a US seller entered into a contract for the sale of 10,800 compressors to be delivered in three installments. The buyer informed the seller that the compressors would be used in the production of the buyer's line of portable room air conditioners to be sold some months later. The seller sent a first shipment of compressors and received the related payment. While the second shipment of compressors was en route to Italy, the buyer discovered that the compressors from the first lot were non-conforming, and so rejected the compressors and cancelled the contract. The buyer started a legal action to recover damages suffered because of the seller's breach.
At first instance the Court (U.S. District Court, N.D., New York, 09-09-1994, in UNILEX) upheld the main part of the buyer's action and granted an award for lost profits. However, the Court did not grant the buyer, inter alia, consequential and incidental damages consisting in shipping and manufacturing expenses sustained in relation with the seller's rejected and returned compressors, on the ground that they had been accounted for in the lost profit damages and therefore an award would constitute a double recovery. On appeal by the seller, the buyer counterclaimed an action for recovering, inter alia, the aforesaid consequential and incidental damages. After recalling the rules on interpretation set forth in Art. 7(1) and (2) CISG the appellate Court stated that in interpreting CISG, Uniform Commercial Code (UCC) case law is not per se applicable. Case law interpreting analogous provisions of Art. 2 UCC may exceptionally be taken into account to the extent that the language of the relevant CISG provisions tracks that of the UCC. The Court confirmed the finding against the seller on the ground that the delivered compressors did not possess the qualities of the sample provided by the seller, and did not comply with the contractual specifications regarding cooling capacity and power consumption (Arts. 35 and 36 CISG). Particularly, the seller's breach was to be considered fundamental (Art. 25 CISG), because cooling capacity and power consumption are important determinants of the value of air conditioner compressors, so that the buyer did not actually receive what it was entitled to expect under the contract. As to the calculation of the lost profits awarded to the buyer, the Court noticed that CISG does not contain a specific provision to this effect and particularly, does not expressly state whether only variable costs or both fixed and variable costs are to be subtracted from the sales revenues. Consequently, the Court was correct in the first instance in applying domestic law rules which determined that only variable costs are to be deducted from sales revenues to establish lost profits. Turning to the buyer's counter-claim, the Court pointed out that under Art. 74 CISG the injured party may recover damages compensating the full loss incurred which includes, but it is not limited to, lost profits, provided that damages are foreseeable. The problem with the case at hand consisted in calculating the lost profits. The Court stated that, 'lost profits are determined by calculating the hypothetical revenues to be derived from unmade sales less the hypothetical variable costs that would have been, but were not, incurred.' This figure, however, does not compensate for costs actually incurred but which did not lead to sales. As a consequence, the award of damages for costs actually incurred does not create a double recovery and instead accomplishes the purpose of giving the injured party damages 'equal to the loss' in compliance with Art. 74 CISG, provided that the costs actually incurred were foreseeable. The buyer was thus entitled to recover consequential and incidental damages deriving from: i) shipping, customs and incidentals relating to the first and the second shipments - rejected and returned - of compressors; ii) obsolete insulation materials and tubing purchased for use only with the seller's compressors; iii) obsolete tooling purchased exclusively for the production of units of seller's compressors; iv) labor expenses incurred by buyer as a result of the production line shutdown due to the seller's delivery of non- conforming compressors for installation in air conditioners. All these costs were in fact reasonably foreseeable results of the delivering of non-conforming goods, except for labor expenses connected to the production line shutdown, which were recoverable to the limited extent they were to be included in variable costs. Since the District Court had not explained whether the buyer would have paid the wages regardless of how much it produced, the appellate Court remanded to the former Court on this issue. |