Contracts for the Sale and Purchase of Goods
Written by John C. Becker Professor, Agricultural Economics and Law
The following case involves a commonly faced question of contract law namely, “What did the parties mean when they chose particular language to be part of their agreement?”
Glenn is a purchaser and reseller of merchandise. Carlisle manufactures goods and sells them to wholesale and retail customers, including Glenn. Glenn and Carlisle have had a business relationship since at least 1995. On June 5, 1997, Carlisle faxed Glenn a list of merchandise that Carlisle had available for sale. That list specified several types and quantities of goods.
The phrase, "all quantities subject to change," or "quantities subject to change " appeared at the bottom of each of the five pages comprising the June 5 list. The president of Glenn responded to the fax on June 12, 1997 by sending Purchase Order No. 10354 to Carlisle. The Purchase Order was for all of the goods on the June 5 list. The Purchase Order specifically referenced that list stating: "QUANTITIES ARE PER FAXED LIST FROM CARLISLE ON JUNE 5, 1997[.]" The Purchase Order contained columns labeled: "Quantity," "Prod. #," "Description," "Pack," "Price," and "Amount." Several quantities were listed in the "quantity" column, and descriptions and prices were entered under the corresponding columns in rows reflecting the quantities that were listed for given items and prices. Id. The Purchase Order also contained a handwritten entry asking Carlisle to "PLEASE SIGN AND FAX BACK AND CALL FOR DELIVERY APPTS.”
On June 13, 1997, Carlisle responded to the Purchase Order by sending Glenn a letter thanking him for the order he had placed for "the goods" The letter also informed Glenn that Carlisle "had to enter the orders with a per case price so that if the quantities change Carlisle had a way to bill you for only what you have received." The June 13 letter also offered additional merchandise for sale. Sometime thereafter, Glenn faxed the letter back to Carlisle accepting the additional merchandise. Glenn offered to pay Carlisle a total amount of approximately $ 990,000.
Between June and September 1997, Glenn sent Carlisle a total of $ 750,000 in eight separate payments, beginning with a $100,000 payment on June 12, 1997. Carlisle began shipping goods shortly after June 12, and continued shipping through August 1997. During that period, Carlisle shipped approximately $ 736,000 worth of goods to Glenn. However, some of the goods that Glenn ordered from the June 5 list were never delivered. Carlisle sold them to other customers.
On May 1, 1998, Glenn filed a lawsuit against Carlisle charging, that Carlisle's failure to deliver all of the goods listed in the June 5 fax was a breach of contract. Glenn claimed damages in the amount of $14,000 for payments it had made to Carlisle for goods that Carlisle never shipped, and lost profits in the amount of approximately $230,000. The latter sum represented the profit Glenn claimed it would have realized from the resale of the goods that Carlisle never shipped.
Carlisle claimed that the undisputed facts established as a matter of law that it was not under any binding obligation to sell any given quantity of goods. Glenn claimed it was entitled to judgment in its favor as there was no dispute that Carlisle did not ship all of the items ordered by Glenn that were listed in the original fax.
The question, therefore, is whether Glenn could establish a binding contractual obligation on the part of Carlisle to sell a given quantity of merchandise to Glenn. If it could, we must then consider if Glenn presented sufficient evidence to prove consequential damages in the form of lost profits that resulted from Carlisle's breach.
Under Pennsylvania contract law the meaning of a clear and unambiguous written contract and the intent of the contracting parties must be determined from the four corners of the contract. However, if the written contract is ambiguous, a court may look to extrinsic evidence to resolve the ambiguity and determine the intent of the parties. We have explained that a contract is ambiguous under Pennsylvania law:
If, and only if, it is reasonably or fairly susceptible of different constructions and is capable of being understood in more senses than one and is obscure in meaning through indefiniteness of expression or has a double meaning. A contract is not ambiguous if the court can determine its meaning without any guide other than a knowledge [*12] of the simple facts on which, from the nature of the language in general, its meaning depends. A contract is not rendered ambiguous by the mere fact that the parties do not agree on the proper construction.
The June 5 fax from Carlisle to Glenn clearly and unambiguously set forth specified quantities for each description of merchandise offered for sale to Glenn. However, as noted, the fax also stated: "quantities subject to change" and "quantities per faxed list." Carlisle's specification of precise quantities while at the same time informing the buyer that the quantities were "subject to change" creates an ambiguity as to the intent of the parties regarding the quantity Carlisle intended to sell, and the quantity Glenn intended to buy from the faxed list. What did the parties intend when the June 5 fax was sent?
The Purchase Order specifically stated that Glenn wanted to buy the "quantities . . . per faxed list . . . on June 5, 1997." Moreover, as noted above, the Purchase Order stated the specific quantities of each item Glenn was agreeing to buy, and those quantities were taken directly from Carlisle's June 5 fax. Given this scenario, Carlisle may have intended the notification that "quantities were subject to change" to inform Glenn that Carlisle was not promising any specific quantity and that the quantities on the list were only illustrative of the quantities Carlisle might have available for sale. However, Glenn did not interpret the fax in this manner as Glenn took some care to specify the quantities it wanted to purchase, and the specific price for each of the types of merchandise it wanted. Moreover, Glenn thereafter began paying Carlisle based upon the quantities specified in the Purchase Order.
Carlisle may also have intended the reservation of quantities listed in the June 5 fax to inform Glenn that, although Carlisle may have been offering the specific quantities set forth therein, Carlisle's obligation to sell them was contingent upon availability. This would have allowed Carlisle room to adjust for problems in manufacturing the items listed, and offered flexibility in the event of inventory error.
One of Carlisle’s employees who was involved with this transaction testified at trial to establish the meaning of the reservation as to quantity. The explanation that she offered was that the reservation on the June 5 fax was intended to allow for any discrepancies in inventory. However, she also admitted that the merchandise that had been offered to Glenn on June 5 had been sold to other customers. She testified that the "'quantities subject to change' on there allowed [Carlisle] to be able to ship all, none or some of a particular item." When questioned more closely, "All, none or some?" she confirmed, "Yes.". In this earlier testimony this witness stated the reservation was intended to guard against "some inaccurate number in the computer inventory report[,]" She specifically denied that the qualification as to quantities was intended to allow Carlisle to ignore an offer from a buyer in the event that a better deal came along. The credibility of this witness was affected by her inconsistent statements
A buyer of goods under contract who does not receive the goods may recover lost profits, if the seller knows that the buyer intended to resell the goods and the loss was not reasonably avoidable. Accordingly, Pennsylvania imposes a duty of mitigation or "cover." That duty is defined as making "in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller." Carlisle argues that Glenn did not establish that it tried to obtain the merchandise elsewhere. Therefore, it is not entitled to recover the lost profits, be cause it failed to take the necessary steps to avoid the losses.
Carlisle, not Glenn, has the burden of proof as to Glenn's efforts to “cover” his potential losses. It is a familiar rule that a party who suffers a loss due to a breach of contract has a duty to make reasonable efforts to lessen his losses. Put another way, the amount recoverable by the damaged party must be reduced by the amount of losses that could have been avoided by that party's reasonable efforts to avoid them. Furthermore, the party who has breached the contract or caused the loss has the burden of showing the losses could have been avoided through the reasonable efforts of the damaged party.
The burden of proving that losses could have been avoided by reasonable effort and expense must be borne by the party who has broken the contract. Therefore, Pennsylvania law requires that the plaintiff attempt reasonable efforts to cover in order to mitigate damages. The failure to do so is an affirmative defense to be proven by the seller.
The cover rules are an expression of the general duty to lessen damages. The burden of proving that losses could have been avoided by reasonable effort and expense must be borne by the party who has broken the contract. It was up to Carlisle to establish that reasonably similar items were available and that it would have been reasonable for Glenn to acquire them. Inasmuch as Carlisle did not introduce sufficient evidence to prevail on what should have been an affirmative defense, the record supports the jury's award of lost profits of $230,003 on the resale of the undelivered goods. In addition, Glenn is entitled to $14,000 in payments made over the value of what was delivered to Glenn.
Carlisle argues that Glenn's evidence as to the $ 230,003.00 in lost profits is nothing more than unsubstantiated speculation. Proof of lost profits need not be mathematically precise, but the evidence must establish the fact with a fair degree of probability. In evaluating Glenn’s testimony regarding the lost profits, the court meticulously set forth the evidence Glenn presented in support of its claim for lost profits, and the methodology Glenn Segal used in calculating the figure that the jury awarded. Citation: Glenn Distributors Corp. v. Carlisle Plastics, Inc. No 00-2710, No. 00-2790, (3rd. Cir). 2002 U.S. App. Lexis 14851, July 24, 2002.
Questions to Consider from this situation:
Is it reasonable for a seller of goods to offer them to a buyer under terms that permit the seller to sell “all some or none” of the goods that are described in the agreement? What advantage did the seller gain by using this language? Why would a buyer agree to such terms? If you consider the seller’s strategy to have a worthwhile goal, what alternatives would be available to the seller to achieve some or all of this result?