Creative International, L.L.C., an Arizona limited liability company,
Sheila Paper Corp., d.b.a Newbrook Paper, a New Jersey corporation,
1- CA-CV 12-0192
APPELLANT’S OPENING BRIEF
ON APPEAL FROM THE MARICOPA COUNTY SUPERIOR COURT
HON. EILEEN S. WILLETT, JUDGE
SUPERIOR COURT CASE NUMBER: CV 2008-000172
Law Offices of
Donald W. Hudspeth, P.C.
Brian K. Stanley, of counsel
Attorneys for Defendant-Appellant
Sheila Paper Corporation
June 18, 2012
Arizona Court of Appeals
Creative International, L.L.C., Plaintiff-Appellee,
– vs. –
Sheila Paper Corp., Defendant-Appellant.
No. 1 CA-CV 12-0192
APPELLANT’S OPENING BRIEF
TABLE OF AUTHORITIES CITED…………………………………. iii
I. STATEMENT OF THE CASE…………………………………………… 1
II. STATEMENT OF FACTS…………………………………………………. 2
III. QUESTIONS PRESENTED………………………………………………… 8
V. CONCLUSION………………………………………………………………… 40
APPENDICES……………………………………………………. following 41
CERTIFICATES……………………………………. following Appendix B
TABLE OF AUTHORITIES CITED
Altfillisch Construction Co. v. Torgerson Construction Corp., 120 ARIZ. 438, 586 P.2D 999 (App. Div. 2 1978)………………………………………………………………………………………………………………. 14
Bockman Printing & Services, Inc. v. Baldwin-Gregg, Inc., 213 ILL.APP.3D 516, 572 N.E.2D 1094 (1991)…………………………………………………………………………………………………………….. 29
Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F. SUPP. 1051 (S.D.N.Y. 1996)…. 29
Custom Harvesting Oregon, Inc. v. Smith Truck & Tractor, Inc., 75 OR.APP. 274, 706 P.2D 186 (1985) 20
Enterprise Leasing Co. v. Ehmke, 1068, 197 ARIZ. 144, 3 P.3D 1064 (App. Div. 1 1999).. 11
Flagstaff Affordable Housing L.P. v. Design Alliance, Inc., 223 ARIZ. 320, 223 P.3D 664 (2010) 13, 14
Godwin v. Farmers Insurance Co. of America, 129 ARIZ. 416, 419, 631 P.2D 571 (App. Div. 1 1981)………………………………………………………………………………………………………………………. 37
Hadley v. Baxendale, 9 EXCH. 341, 156 ENG. REP. 145 (1854)……………………….. 13, 14
Halliburton Co. v. Eastern Cement Corp., 672 SO.2D 844 (Fla. App. 1996)……………… 29
Higgins v. Arizona Savings & Loan Ass’n, 90 ARIZ. 55, 365 P.2D 476…………………….. 13
In re Estate of Zee, ____ ARIZ. ____ , 265 P.3D 439 (2011)………………………………….. 32
In re Indian Palms Associates, Ltd., 61 F.3D 197 (3d Cir. 1995)………………………………. 31
Industrial Graphics, Inc. v. Asahi Corp., 485 F.SUPP. 793 (D.Minn. 1980)………………. 21
Jorgensen Co. v. Tesmer Mfg. Co., 10 ARIZ.APP. 445, 459 P.2D 533 (Div. 1 1969)….. 29
Lewis v. Mobil Oil Corporation, 438 F.2D 500 (8th Cir. 1971)………………………………… 19
McAlister v. Citibank (Arizona) N.A., 171 ARIZ. 207, 829 P.2D 1253 (App. Div. 1 1992).. 14
McDowell v. Davis, 104 ARIZ. 69, 448 P.2D 869 (1968)………………………………………… 20
Morey v. Brown Milling Company, 220 GA.APP. 256, 469 S.E.2D 387 (1996)…………. 30
Murphy v. National Iron & Metal Co., 71 ARIZ. 323, 227 P.2D 219 (1951)……………… 32
Nyquist v. Randall, 819 F.2D 1014 (11th Cir. 1987)………………………………………………… 15
Ocean West Contractors, Inc. v. Halec Constr. Co., 123 ARIZ. 470, 600 P.2D 1102 (1979) 40
Ohoud Establishment v. Tri-State Contracting, 523 F.SUPP. 249 (D.N.J. 1981)………… 27
Pace v. Sagebrush Sales Co., 114 ARIZ. 271, 560 P.2D 789 (1977)……………………. 32, 33
Rancho Pescado, Inc. v. Northwestern Mutual Life Ins. Co., 140 ARIZ. 174, 680 P.2D 1235 (App. Div. 1 1984)………………………………………………………………………………………………………………. 29
Schuldes v. National Surety Corp., 27 ARIZ.APP. 611, 557 P.2D 543 (1976)……………. 29
SDR Assoc. v. ARG Enterprises., Inc., 170 ARIZ. 1, 821 P.2D 268 (App. Div. 2 1991). 11
Stallworth Timber Co. v. Triad Building Supply, Inc., 968 F.SUPP. 279, (D.V.I. 1997)…… 31
Sullivan Industries, Inc., v. Double Seal Glass Co., Inc., 192 MICH.APP. 333, 480 N.W.2D 623 (Mich. App. 1991)………………………………………………………………………………………………………. 31
Winter v. Coor, 144 ARIZ. 56, 695 P.2D 1094 (1985)…………………………………………….. 41
Woliansky v. Miller, 135 ARIZ. 444, 661 P.2D 1145 (App. Div. 2 1983)………………….. 14
Yancy v. Jeffreys, 39 ARIZ. 563, 8 P.2D 774 (1932)……………………………………………….. 32
A.R.S. § 12-341.01 (A)……………………………………………………………………………………….. 40
A.R.S. § 12-2101………………………………………………………………………………………………….. 2
A.R.S. § 44-1201(A)…………………………………………………………………………………………… 34
A.R.S. § 47-2207 (B)…………………………………………………………………………………….. 34, 40
A.R.S. § 47-2313 (B)(1)………………………………………………………………………………………. 19
A.R.S. § 47-2513 (A)………………………………………………………………………………………….. 17
A.R.S. § 47-2606 (A)(3)…………………………………………………………………………… 32, 33, 36
A.R.S. § 47-2607……………………………………………………………………………………….. 7, 33, 36
A.R.S. § 47-2709………………………………………………………………………………………………… 33
A.R.S. § 47-2714……………………………………………………………………………………… 12, 13, 19
A.R.S. § 47-2714 (B)……………………………………………………………………………….. 10, 19, 20
A.R.S. § 47-2714 (C)……………………………………………………………………………………………. 9
A.R.S. § 47-2715………………………………………………………………………………………………… 12
A.R.S. § 47-2715 (B)(1)………………………………………………………………………… 9, 13, 17, 18
A.R.S. § 47-2717……………………………………………………………………………………………. 36-40
A.R.Civ.A.P. 21(c)……………………………………………………………………………………………… 40
A.R.Evid. 201…………………………………………………………………………………………………….. 31
25 C.J.S. Damages § 2 (1966)………………………………………………………………………………. 16
11 S. Williston, CONTRACTS § 1353 (Jaeger 3d ed. 1968)……………………………………. 19
Comm. on Uniform State Laws, Official Comments, U.C.C. § 2-607 Comment 3……… 33
Comm. on Uniform State Laws, Official Comments, U.C.C. § 2-715 Comment 1……… 13
WEBSTER’S NEW WORLD DICTIONARY (3rd college ed., 1991)……………………….. 14
http://www.nber.org/cycles.html#navDiv=6 [National Bureau of Econ. Research]……. 31
Arizona Court of Appeals
Creative International, L.L.C., Plaintiff-Appellee,
– vs. –
Sheila Paper Corp., Defendant-Appellant.
No. 1 CA-CV 12-0192
I. STATEMENT OF THE CASE.
Plaintiff-Counterdefendant-Appellee Creative International, L.L.C., an Arizona limited liability company (“Creative”) brought suit against Defendant-Counterclaimant-Appellant Sheila Paper Corp., d.b.a. Newbrook Paper, a New Jersey corporation (“Sheila”) in Maricopa County Superior Court, alleging breach of a contract for the sale of goods made on or about December 7, 2007. C.I. 1. Creative agreed to purchase approximately $86,000 worth of gloss-finish paper from Sheila. (RT 1 at 30). However, Sheila accidentally shipped matte rather than gloss paper, and Creative accepted these goods. (RT 1 at 42-43; “accident” conceded at RT 1 6:19). Creative re-sold all the matte paper and brought suit claiming incidental and consequential damages caused by Sheila’s shipment of non-conforming goods. RT 1 at 98; C.I. 1. Sheila counterclaimed for the contract price, no part of which had been paid by Creative. C.I. 5.
After denial of Sheila’s motion for summary judgment (C.I. 11 and 23) a two-day bench trial ensued. C.I. 53 and 54. In its verdict, the Court found in favor of Plaintiff on Plaintiff’s Complaint for breach of contract, awarding Plaintiff damages in the amount of $17,858.40. On Defendant’s Counterclaim against Plaintiff, the Court found in favor of the Plaintiff on all claims. C.I. 55.
After entry of formal judgment, Sheila filed a timely motion for a new trial on November 23, 2011. C.I. 68-74. That motion was denied by the court in a formal written order entered on February 3, 2012. C.I. 79. On February 10, 2012, Sheila filed timely notice of appeal from both the judgment and the order denying its motion for a new trial. C.I. 82. This Court has jurisdiction over Sheila’s appeal from the superior court’s judgment and from the denial of its motion for new trial pursuant to A.R.S. § 12-2101(B) and (F)(1).
II. STATEMENT OF FACTS.
Sheila is in the business of selling “seconds” or “job lot” paper. RT 1 at 132:17-21. Creative is a paper house, buying and reselling paper, hopefully at a profit. RT 1 at 24:13-19. On or around December 7, 2007, Marty Minison (“Minison”), a salesperson with Sheila, called Art Desautels (“Desautels”), president of Creative, offering to sell Creative approximately 5 truckloads of #4 coated web gloss paper (the “Paper”) at a price of $41.90 per cwt. RT 1 at 25:16-20. After two or three phone calls between the parties (RT 1 at 27:5-7), Creative sent Sheila a purchase order (Exh. 1) detailing the sale proposed per the phone conversation. RT 1 at 28-29. Subsequently, Sheila advised Creative that the weight of the Paper was 207,214 lbs., prompting Creative to send a revised purchase order (Exh. 18), reflecting the revised weight and purchase price (at the same rate of $41.90/cwt.) of $86,822.67. RT 1 at 30:3-4.
It is undisputed that when Creative and Sheila made this contract, Creative did not have any particular contract or arrangement for the resale of the Paper and did not know whether, to whom or at what price it would be able to re-sell the Paper. RT 1 at 36:3-6, 38:7-12, 38:21-24, 68:7-10, 68:17-25, 69:1-5, and 167:15-25. At the time of contracting, therefore, Creative did not have any “particular requirements [or] needs” pertaining to or resulting from any contract to sell all or part of the Paper to any particular customer or customers. A fortiori, Creative could not have made any such particular requirement or need known to Sheila.
It was agreed that the paper would be shipped directly from the mill to Creative’s chosen warehouse, Midwest. RT 1 at 30:25-31:1-3. After confirming that Sheila had shipped the Paper, Creative began soliciting prospective customers in an effort to re-sell it. RT 1 at 38:7-24. For that purpose, it contacted Transcontinental Printing (“Transcontinental”) and Hiney Printing Company (“Hiney”), and eventually entered into contracts with these two buyers. RT 1 at 21-25 and 38:14-16. The Transcontinental purchase order, dated December 17, 2007, indicates a purchase of approximately 140,000 pounds at 49.50/cwt. for a total price of $69,300. RT 1 at 39:11-23 and Exh. 23. Transcontinental received 144,295 pounds of paper for a total projected price of $71,426.03. RT 1 at 48. The Hiney purchase order, dated December 27, 2007 (Exh. 24), shows a purchase of 43,808 lbs. at 47.75/cwt. for a total sale of $20,918.32. RT 1 at 49:10-19. The remaining 18,769 pounds of the Paper were not sold until after Hiney had rejected the matte paper shipped to it and Creative had retrieved it. RT 1 at 50:8-10.
Neither party is certain exactly when the Paper was received at the warehouse Creative had designated as the place of delivery, but it was on or about December 26, 2007. RT 1 at 31:22-23 and 78:7-19. It was also on or about this date that Sheila sent five invoices to Creative reflecting the five truckloads of Paper shipped, at an exact shipped weight of 206,872 pounds and a final price of $86,679.37. RT 1 at 69:24-25, 70-71 and 72:17-24; Exhs. 2, 3, 4, and 50. Sometime after the Paper was delivered, Sheila’s salesman Martin Minison received notice from other customers who had been sold paper from the same wholesale batch that some of the paper they were receiving was matte and not gloss. RT 1 at 169-170 and RT2 at 24-25. Minison promptly called Creative’s president Arthur Desautels, informing him of the potential that the Paper was matte. RT 1 at 42:3-8. Creative had already shipped most of the Paper out, without inspecting it or, indeed, even reading the labels affixed to the paper rolls (RT 1 at 74:12-75:21; Exh. 11 and 34) to Transcontinental and Hiney. RT 1 at 42:9-12, 23 and 43:1-2. Desautels called Transcontinental and Hiney who confirmed their receipt of matte paper. RT 1 at 43:13-25, 44:1-12 and 76:1-17. Desautels did not get any samples of the paper and did not know how many paper rolls were actually checked. RT 1 at 76:15-17.
Creative negotiated with Transcontinental, which agreed to keep the matte paper at a discount, paying $41.95/cwt. RT 1 at 44:5-25, 45, and 80:9-17. There is some discrepancy as to what the precise discounted rate was. RT 1 at 80-91. But it is undisputed that Transcontinental actually paid $60,531.84, excluding taxes. RT 1 at 49. This was $10,894.28 less than the price under the original Creative-Transcontinental contract – which as, as previously noted, was made not only after the Creative-Sheila contract of sale had been made but even after Sheila had shipped the Paper. RT 1 at 49:2-5. Hiney could not use the paper and rejected it; Creative retrieved the paper from Hiney, incurring additional shipping charges and warehouse fees in the total amount of $1,801.51. RT 1 at 54:7-10, RT 2 at 48:6-9.
While Creative was negotiating with Transcontinental and Hiney over the failure of the paper Creative sold them to conform to the “gloss” description, Sheila was trying to negotiate with Creative regarding the same failure of the Paper as sold by Sheila, in hopes of arriving at an amicable compromise. Around April 9, 2008, after speaking with Sheila president Jay Minsky, Minison called Desautels, offering him a discount of $6/cwt. if Creative would keep the Paper and pay the discounted price. RT 1 at 96:10-23. Creative refused the discount. On January 10, 2008, Sheila offered to pick up all of the remaining paper from Creative at no charge and issue a credit against its account. RT 1 at 98:4-14. Creative refused to return the paper and refused to pay Sheila anything for the delivered and accepted Paper. RT 1 at 98:13-14 and 150:7-10.
During these negotiations, Creative neither asked Sheila to fix the problem nor proposed any settlement. RT 1 at 161:10-18. After refusing Sheila’s discounts, refusing to pay Sheila for the Paper, and neither accepting nor proposing a compromise solution, Creative filed the present lawsuit on January 22, 2008. C.I. 1. On or around February 1, 2008, Creative sold the Paper returned from Hiney plus the remaining 18,769 pounds of the Paper to Semper Exeter Paper Co. for $39.50/cwt. for a total of $24,858.93. RT 1 at 50:5-15, 98:15-18, 101:9-15 and RT2 at 48:4. Semper Exeter promptly paid Creative for the paper. RT 1 at 102:3-8 and Exh. 14. A full six weeks after Transcontinental and Hiney received the matte paper, they sent complaint e-mails to Creative; the Hiney e-mail details their displeasure with the stock mix-up but states that Hiney is still doing business with Creative. RT 1 at 105:21 – 106:10; Exh. 11. The Transcontinental e-mail also details irritation with the stock mix-up, reports that Transcontinental had been obliged to discount its price to its customer whose job had been printed on the matte paper, asks Creative for a discount and also asks Creative to “understand that until we are compensated for the lost revenue with this customer, we will not be forwarding any new orders to” Creative. Exh. 12.
As a final effort to show good faith, Minison sent Desautels an e-mail asking if there was anything Sheila could do to resolve the issue amicably; again Creative refused. Exh. 10 and RT1 at 91:7-25 and 92:1-2.
In total, Creative obtained $85,390.77 by reselling the Paper, for which it has never paid. RT 2 at 49:22. Nonetheless, Creative contends it is entitled to additional damages – namely, incidental damages of $1,801.51 (extra shipping and storage costs) and consequential damages consisting of lost profits. Creative claims profits lost not only on the resales of portions of the Paper that it negotiated, after confirming Sheila had shipped the Paper, with Transcontinental and Hiney, but profits it contends it would have derived from business it probably would have done with Transcontinental and Hiney but for its shipment to them of matte paper when gloss had been ordered, which in turn resulted from Sheila’s shipment to it of matte paper when gloss had been ordered. “Direct” or “general” damages, e.g., the difference in market price, at the time and place specified for delivery, between the specified quantity of gloss paper and a like quantity of matte paper, formed no part of Creative’s proof.
Sheila counterclaimed, simply seeking the contract price for the accepted Paper, with interest. In its closing, Creative argued that its lost profits and incidental damages amounted to $85,874.54. RT 2 at 49:7. Despite the testimony of its president, owner, founder and sole witness Art Desautels to the effect that the $86,000+ price invoiced by Sheila would be the fair amount to offset against Creative’s damages (RT 1 at 64:18-65:3), Creative’s attorneys argued for a lesser amount. Noting that Creative had resold the Paper for $85,390, and that Desautels had testified to an average gross (profit) margin of 10% on Creative’s resales, they argued that “the reasonable price for the matte paper that Creative actually sold was $77,500, which is simply taking the price that [Creative] sold it for, [and] reducing it by ten percent.”  RT 2 at 49:18-50:9. They concluded by submitting that the court “should award [Creative] on [its] claim, $85,874.54 … and should award Sheila $77,500 on its counterclaim” (RT 2 at 50:10-13), equivalent to a net judgment of $8,374.54 in favor of Creative.
Mysteriously, the trial court’s verdict was for $17,858.40 to Plaintiff Creative on its Complaint, while on the Counterclaim of Defendant Sheila, the court found “in favor of the Plaintiff on all claims.” C.I. 55
III. QUESTIONS PRESENTED.
and the (first) buyer claims as damages for the first seller’s breach of implied warranty the profits the (first) buyer estimates it would otherwise have made (a.) on its resale of the goods to secondary buyer and (b.) on other prospective sales to the secondary buyer during the no-sales period, are such claimed “lost profits” damages “collateral damages” within the meaning of U.C.C. § 2-714 (3), A.R.S. § 47-2714 (C) and U.C.C. § 2-715 (2)(a), A.R.S. § 47-2715 (B)(1)?
More particularly, would such knowledge on first seller’s part constitute sufficient notice as to profits the first buyer would lose:
More particularly, were the profits the first buyer was to lose:
“proximate damages” within the meaning of said sub-section?
Appellant Sheila Paper Corp. would answer Questions Nos. 1, 2 , 3, 5, 7, 8 and 9 in the affirmative, and Questions Nos. 4 (both sub-parts) and 6 (both sub-parts) in the negative.
“Whether the trial court applied the correct measure of damages is a mixed question of fact and law reviewed de novo.” SDR Associates v. ARG Enterprises., Inc., 170 ARIZ. 1, 2, 821 P.2D 268, 269 (App. Div. 2 1991). In such a case, this Court is “not constrained by the legal conclusions from facts found or inferred in the judgment of the trial court nor by findings of the trial court in … mixed questions of law and fact.” Enterprise Leasing Co. v. Ehmke, 1068, 197 ARIZ. 144, 148 ¶ 11, 3 P.3D 1064 (App. Div. 1 1999).
Our analysis must begin with the applicable statutes:
A.R.S. § 47-2714 (U.C.C. § 2-714).
Buyer’s damages for breach in regard to accepted goods.
A.R.S. § 47-2715 (U.C.C. § 2-715).
Buyer’s incidental and consequential damages.
Official Comment 3 on § 2-715 (2)(a) provides this observation concerning the words “needs of which the seller at the time of contracting had reason to know”: “The particular needs of the buyer must generally be made known to the seller, while general needs must rarely be made known.” For more detail concerning the application of this phrase, as well as the U.C.C. § 2-714 stricture that consequential damages may be assessed only “in a proper case,” we must turn to case law.
The requirement that special circumstances exposing the buyer to loss in the event of breach, or in the words of § 2-715 (2)(a) buyer’s “particular requirements and needs,” must be made known to the seller by the buyer at the time of contracting in order for consequential damages flowing from such special circumstances to be recoverable by the buyer in the event of breach has a long history in Anglo-American contract law, tracing back (at least) to Hadley v. Baxendale, 9 EXCH. 341, 156 ENG. REP. 145 (1854) – the rule of which case, somewhat surprisingly, was not expressly adopted as the law of Arizona until the 1961 decision in Higgins v. Arizona Savings & Loan Ass’n, 90 ARIZ. 55, 63-64, 365 P.2D 476, 482-83. But as recently as 2010, our Supreme Court has seen fit to refer to Hadley v. Baxendale in the course of maintaining the adequacy of common law contract remedies in the case then under review, on grounds they “allow recovery of … other damages reasonably foreseeable to the parties upon entering the contract.” Flagstaff Affordable Housing L.P. v. Design Alliance, Inc., 223 ARIZ. 320, 325 ¶ 26, 223 P.3D 664 (2010).
In the interim, Arizona appellate courts had cited Hadley v. Baxendale in denying consequential damages for breach of contract where the claimant’s special circumstances had not been made known to the other contracting party when the contract was made. Woliansky v. Miller, 135 ARIZ. 444, 446, 661 P.2D 1145 (App. Div. 2 1983) and Altfillisch Construction Co. v. Torgerson Construction Corp., 120 ARIZ. 438, 440, 586 P.2D 999 (App. Div. 2 1978); cf. McAlister v. Citibank (Arizona) N.A., 171 ARIZ. 207, 212, 829 P.2D 1253 (App. Div. 1 1992) (applying Hadley but holding that even though the defendant in fact did have sufficient notice of plaintiff’s special circumstances, “this exception … does not apply here when the plaintiff could procure the loan from another source”).
Given Arizona courts’ record of endorsement of the rule of Hadley v. Baxendale, including the Supreme Court’s recent reference to it as an appropriate gauge of “reasonable foreseeability” in the contract setting (Flagstaff Affordable Housing, supra), it is not easy to explain the trial court’s apparent disregard of that rule in this case. It could scarcely be denied that any “requirements and needs” of Creative arising out of or in connection with its contracts with Transcontinental and Hiney, including its “need” to supply them with gloss paper, and moreover the “need” to fulfill these two future customer orders accurately in order to preserve future income streams to be derived from these customers, were “particular” requirements, while it is undisputed that Creative did not even solicit these orders until after confirming the Paper had been shipped pursuant to the Sheila-Creative contract. Transcontinental and Hiney ordered the paper for particular printing jobs, the parameters of which determined the kinds and quantities of paper, ink, personnel and equipment needed to complete each job. And any other future Transcontinental and/or Hiney orders as well as the revenue (and a fortiori any future profits) that Creative might derive from such orders would obviously depend upon the future “particularities” of the businesses of Transcontinental, Hiney and Creative.
To the extent it can be coherently classified, Creative’s argument to the trial court was essentially that its claimed lost profits were not special or consequential damages at all, but merely part of its U.C.C. 2-714 (1) “loss resulting in the ordinary course of events from the seller’s breach as determined in any manner which is reasonable.” But if circumstances surrounding but extrinsic to the transaction, such as the nature of the buyer’s business, buyer’s business plans or expectations, or contracts the buyer has or may sooner or later make are somehow incorporated into the § 2-714 (1) “ordinary course of events,” any distinction between general and special damages would be obliterated. Clearly, the 2-714 (a) “ordinary course of events” is meant to express a general standard, referring to loss which could ordinarily be expected to result from the breach itself. See Nyquist v. Randall, 819 F.2D 1014, 1017 (11th Cir. 1987) (U.C.C. § 2-714 (1) “plainly applies to so called ‘direct’ damages. The ‘ordinary course of events’ does not include special leasing arrangements or other contracts at a premium that the buyer may have”).
Creative argued that Sheila knew that Creative is a paper merchant, and was buying approximately 100 tons of paper with a view to reselling such merchandise at a profit. This much Sheila concedes. But then Creative argued that therefore it was, at the time the Sheila-Creative contract was made, foreseeable that Creative would succeed in selling the paper at a profit. Because it may be foreseen that a merchant will try, however, is it therefore also foreseeable that the merchant will succeed? If so, what is the measure of such “foreseeable” success? It is surely foreseeable that if the merchant makes a sale at all, he will make as much profit on the sale as he can – but how much might that be? Pity the pet shop that sold Dick Whittington his cat, had the animal proved unseaworthy!
What is too preposterous to relate in this solemn tribunal without feeling deeply embarrassed for the persons involved, Creative contended not only that the particular contracts it would make to resell portions of the Paper to Transcontinental and to Hiney, and the profit Creative expected to make on each sale, were foreseeable to Sheila when it sold the Paper to Creative, but that the nature and extent of Creative’s future “relationships” with these customers, and profitable sales Creative would make to each by virtue of such relationships, months and years into the future, should these relationships remain unimpaired, were also foreseeable (C.I. 75 at 6:18) – and worse, such contention was apparently found persuasive by the trial court.
U.C.C. § 2-715 (2), A.R.S. § 47-2715 (B), where other conditions are satisfied, allows recovery of consequential damages “which could not reasonably be prevented by cover or otherwise.” Creative claims it lost both immediate and prospective future profits because Sheila shipped it matte paper. But it was Creative that accepted the matte paper by re-selling it to its own customers, to whom it had agreed to ship gloss paper. Creative was not a puppet controlled by Sheila. It was an independent and effective paper merchant that had been in the paper industry for more than forty years. RT 1 at 24:20-21. And the fact that the paper delivered to the designated warehouse was matte and not gloss was clearly shown by the labels affixed to the rolls of paper delivered. RT 1 at 74:12-75:21; Exh. 11 and 34. Under U.C.C. § 2-513 (1), A.R.S. § 47-2513 (A), before accepting tendered goods a buyer has a right of inspection to ensure conformity. Creative did not have to accept the matte paper, and having accepted it Creative did not have to ship it to Transcontinental and Hiney in disregard of the terms of its contracts with those customers.
Creative claims that it did not “take possession” of the paper until its truckers picked the rolls of paper up at the warehouse, at which point the paper was already on its way to Creative’s customers Transcontinental and Hiney. But nothing Sheila did compelled Creative to conduct its business in this way. Creative elected, undoubtedly on the basis of its own economic calculations, to sell large quantities of paper of which it had not made even the most cursory and superficial inspection.
Creative offered no evidence of its own efforts to “cover” by obtaining gloss paper for Transcontinental and/or Hiney from other sources, even though it might reasonably have charged the costs of such an operation to Sheila by virtue of Sheila’s breach of contract. In fact, Creative offered no evidence of any attempt on its part to mitigate the effects of Sheila’s mistake.
The U.C.C. § 2-715 (2) exclusion of recovery for consequential damages which could reasonably be prevented by buyer has been said to be a codification of the broader principle that “[d]amages which the plaintiff might have avoided with reasonable effort without undue risk, expense, or humiliation are either not caused by the defendant’s wrong or need not have been, and, therefore, are not to be charged against him. The principle has wide application and frequently involves the establishment of a standard of reasonable conduct.” Lewis v. Mobil Oil Corporation, 438 F.2D 500, 508 (8th Cir. 1971) (quoting 11 S. Williston, CONTRACTS § 1353 (Jaeger 3d ed. 1968)).
Mention of the “non-conformity” of the goods delivered and accepted is really a shorthand allusion to a three-step analysis under the U.C.C. Under § 2-313 (2)(b), A.R.S. § 47-2313 (B)(2) , “[a]ny description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.” First, Sheila has not denied that the description of the paper to be sold as “gloss,” meaning coated paper with a gloss finish, formed part of the basis of its bargain with Creative. Second, Sheila concedes that, through accident, it actually delivered matte-finish paper instead. Third, Sheila admits that it thereby breached the warranty implied by virtue of U.C.C. § 2-313 (2)(b).
The goods having been accepted, the damages buyer Creative may recover for this breach of warranty are governed by U.C.C. § 2-714 (2), A.R.S. § 47-2714 (B):
The measure of damages for breach of warranty is the difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted, unless special circumstances show proximate damages of a different amount.
Creative did not offer evidence of the difference in value of gloss paper vs. matte paper at the time and place of acceptance. Therefore, it could be awarded damages only if, and to the extent, that it established special circumstances showing proximate damages of a different amount.
When § 2-714 (2) speaks of “proximate damages,” it undoubtedly means damage of which the breach of warranty was the proximate cause. Our supreme court has defined the “proximate cause” of a claimant’s loss or injury as “that which, in a natural and continuous sequence, unbroken by any efficient intervening cause, produces an injury, and without which the injury would not have occurred.” McDowell v. Davis, 104 ARIZ. 69, 71, 448 P.2D 869, 871 (1968). Before that analysis became relevant, however, it would be necessary for Creative to establish “special circumstances.” When the Sheila-Creative contract was made and when the Paper was shipped by Sheila, no special circumstance pertaining to or involving any particular sale of all or part of the Paper, to Transcontinental or to Hiney or to any other buyer, existed. Sheila maintains that no circumstance arising after the contract of sale has been made and after seller has performed can properly be considered a § 2-714 (2) “special circumstance,” and in that connection would re-emphasize that when it contracted with Creative, Creative had no contract with Transcontinental or with Hiney. Cf. Custom Harvesting Oregon, Inc. v. Smith Truck & Tractor, Inc., 75 OR.APP. 274, 706 P.2D 186, 191 (1985) (harvesting service claimed lost profits on harvesting jobs it could not complete because defects rendered combines unusable; held, lost profits would be disallowed as to jobs for which “plaintiff failed to prove that there was a binding agreement for the work”).
As for the circumstances that Creative was a paper merchant and that Sheila must be held to have known that Creative was buying the Paper in the hope of reselling it at a profit (if such be held to have been the circumstances), Sheila would ask, “What’s ‘special’ about that?” Anytime a business firm purchases goods, it is presumably doing so with a view to promoting some business purpose, and thus in the end contributing in some way toward achieving the goal of making the firm profitable. Whether it involves buyer’s inventory, supplies or equipment, every business-to-business sale of goods is attended by a risk that, if the buyer does not receive exactly what it bargained for, its business plans may be upset and thus its business prospects impaired to a greater or lesser extent. This universal characteristic of commercial sales transactions cannot constitute “special circumstances” within the meaning of Article 2 of the Code.
Assuming arguendo that a showing of “special circumstances” was made, the question of proximate causation would be reached. Here it becomes necessary to discuss the chain of causation which, Creative contends, links the breach of warranty with its claimed damages. Appellant Sheila would first observe, however, that it discusses both the links and their purported causal connections hypothetically. Most if not all were never proven properly, and are really nothing more than speculative conjectures. Appellant Sheila addresses Creative’s failure to establish proximate causation in this section of its brief and the uncertainty of Creative’s proof of a loss and its amount in the following section, but asks the Court to recognize that the two issues a interrelated, since the requirement that a party claiming lost profits damages establish its loss with “reasonable certainty” applies to both causation and amount of loss.
Now Creative contends that Sheila’s undertaking to ship gloss paper caused Creative to assume it would receive gloss paper, and on the strength of that assumption to solicit orders for gloss paper from Transcontinental and Hiney, and as a result of such solicitation to receive orders and enter into contracts to sell gloss paper to Transcontinental and to Hiney. All these developments were results of Sheila’s warranty, not of its breach. The breach occurred when Creative tendered matte paper, rather than gloss, at the agreed time and place of delivery. Creative contends that Sheila’s tender of matte paper caused Creative to accept the goods tendered and its acceptance of such goods caused it to ship matte paper where it had agreed to ship gloss.
But here there are obviously efficient intervening causes. See Part IV.A.3, at pp. 18-20, above. Creative did not have to accept the matte paper, and having accepted it Creative did not have to ship it to Transcontinental and Hiney in disregard of the terms of its contracts with those customers.
Let us assume, for purposes of the present analysis, that the patent negligence Creative displayed, in accepting and shipping paper that no agent or representative of Creative had ever so much as glanced at, were not intervening causes. Creative contends further, that its shipment of matte paper put it in breach of its contracts with Transcontinental and Hiney, and that breach caused Hiney to reject the paper and Transcontinental to demand a discount. The discount it reasonably gave Transcontinental cost it $10,894. RT 1 at 48-49. The difference between a reasonable estimate of what it would have been able to sell the remaining paper for, had it been gloss-finish, and what it actually sold the remaining matte paper for, is $5,100. RT 1 at 51-53. Creative also incurred additional shipping and storage costs of $1,801 (RT 2 at 48:6-9).
For the moment forcing ourselves to accept the assumptions further that we have up to this point a natural and continuous sequence of cause and effect, unbroken by any intervening cause, from Sheila’s tender of non-conforming goods to Creative’s damages just recited, Creative would have total § 2-714 (2) “proximate damages” of $16,175. Assuming further Creative’s right to offset these damages against the contract price for the accepted goods (see Part IV.B.4, pp. 33-37, below), as of approximately February 14, 2008 (Exh. 14, p. 2) Creative would have owed Sheila $86,679.37 – 16,175 = $ 70,504.37.
But Creative’s demands in the trial court went much further. Based on past invoices and applying what he said was his firm’s “average margin,” Creative’s president and sole witness Desautels estimated that Creative had made profits on its sales to Hiney of about $800 to 850 a month during 2006-2007. RT 1 at 59-61. He stated that Hiney never gave Creative another order after February, 2008 (RT 1 at 59:25-60:5), and multiplying an “average” monthly figure of $833 per month times 24 months because “it seemed like a reasonable amount of time,” he said the product is $19,992. RT 1 at 61. He also testified to receiving an email from a Hiney representative in February, 2005. RT 1 at 58-59, Exh. 11.
In this interesting document (Exh. 11), the Hiney representative says he “can’t believe that something as simple as READ THE LABEL would keep me from getting the stock the mill said they had on the floor,” confirming that the labeling on the rolls of paper shipped by Sheila plainly disclosed that they consisted of matte-finish paper and also revealing that he thought Creative to be a paper mill and that it had the gloss paper which it offered to him “on the floor,” i.e., in inventory. He goes on to say:
The only reason I did not charge you back and am still doing business with you is that this is the first time there has been any issues with your shipments, and realize that you can’t control if a tow motor operator or CSR at the mill can’t read a computer screen, or a label and know what they have in stock and are shipping out on a truck. (Emphasis supplied.)
On the strength of this evidence, Creative argued that Sheila’s December, 2007 tender of matte paper in place of gloss had caused Creative to suffer additional “lost profits” damages of $19, 992.
Asked to explain Creative’s “relationship” with Transcontinental as of January, 2008 or December, 2007, Desautels answered:
[W]e acted somewhat as a safety valve, if you would. We did have small or trying to get established small pieces of business. But essentially, if they needed something quickly, they would call on someone like us to help them to obtain paper if they couldn’t get it anywhere else. Perhaps give them a competitive edge, if we could offer them paper that was more cost effective than the regular sources. That type of relationship. RT 1 at 61:8-62:10.
Desautels further testified that he “expected” Transcontinental to purchase “in [his] estimation, four truck[load]s a month” from Creative in 2008, representing approximately $80,000 in sales and $8,000 in profits monthly. He also said, “We [Creative] didn’t do business with them [Trans–continental] for about a six-month period” beginning in January, 2008. RT 1 at 62-63. On the strength of this evidence, Creative argued that Sheila’s December, 2007 tender of matte paper in place of gloss had caused Creative to suffer additional “lost profits” damages of $48,000.
For purposes of this analysis Creative’s case was so sketchy that we need to flesh out links in the chain of causation that Creative simply assumed sub silentio. As to Hiney, it is assumed that, but for Sheila’s December, 2007 non-conforming tender, Creative would have continued to make sales to Hiney yielding Creative an average profit of $833 per month from February, 2008 through January, 2010. Nothing other than Desaultels’ testimony as to the average monthly profits in 2006 and 2007, and the lack of further orders from Hiney after February, 2008 was offered in support of this contention, except Exhibit 11. But in that exhibit, a communication from an evidently responsible representative of Hiney to Desaultels, the Hiney representative expresses displeasure over the “stock mix-up” and exasperation that it evidently resulted from the failure of Creative personnel to even READ THE LABEL on the rolls shipped, but explicitly states “I [Hiney] did not charge you [Creative] back and am still doing business with you” – a statement which would certainly tend to vitiate Creative’s post hoc, ergo propter hoc assumption, which is, with or without the exhibit, an obvious logical fallacy, anyway.
Creative failed to offer any evidence showing that Hiney had paper-stock needs during the February, 2008 – January, 2010 period that Creative could have fulfilled by selling paper with a 10% mark-up, and also failed to offer any evidence showing that Hiney would have filled those needs by purchasing paper from Creative but for Sheila’s December, 2007 tender to Creative of matte paper where gloss paper had been ordered. Indeed, on the “but for Sheila’s non-conforming tender” issue, the only relevant evidence (Exh. 11) tends to disprove the proposition Creative should have been trying to prove.
Turning to Transcontinental, Creative’s case includes the tacit assumptions that, but for Sheila’s December, 2007 non-conforming tender, Creative would have made sales to Transcontinental yielding Creative a profit of $8,000 per month for the first six months of 2008. The sole basis was the testimony of Art Desaultels, who said, when asked to characterize Creative’s “relationship” with Transcontinental, “we acted somewhat as a safety valve … . We [were] trying to get established small pieces of business. … [I]f they needed something quickly, they would call on someone like us to help them to obtain paper if they couldn’t get it anywhere else.” He further said he would have “expected” Transcontinental to give Creative business generating $8,000 a month in profits during the first six months of 2008, but in fact Creative did no business with Transcontinental during that period. Exhibit 12 is a communication from a Transcontinental representative to John Buckingham of Creative, in which Transcontinental complains that it “had to go back and significantly discount the job to our customer” and asks Buckingham to “further understand that until we are compensated for the lost revenue with this customer. we will not be forwarding any new orders to you.” The mentions of “having to discount the job” and of being “compensated for the lost revenue” are obviously references to the discount of $10,894 Transcontinental demanded and was given on its purchase of most of the Paper. RT 1 48:13-49:5.
Creative failed to offer any evidence tending to show that Transcontinental “needed [anything] quickly” during the first six months of 2008, or that, if it had, that Creative is the “someone like” Creative upon whom Transcontinental would have called, “if they couldn’t get it anywhere else,” or that there was ever a time when Transcontinental couldn’t get it anywhere else. Creative also failed to offer any evidence that if Transcontinental did have such a need and couldn’t get the paper anywhere else it would have chosen Creative among all someones like Creative to buy the paper from but for Sheila’s December, 2007 tender to Creative of matte paper where gloss paper had been ordered. The document offered (Exh. 12) does not evidence causation, because its reference to “not forwarding any new orders” until Transcontinental had been compensated refers to the discount of slightly less than $11,000 that Transcontinental demanded and was given. And if that is not what Exhibit 12 refers to, Creative offered no evidence tending to show whether or not Transcontinental was “compensated for the lost revenue,” or if it was, when and how, or if it was not, whether or not providing such compensation would have cost Creative more than the $48,000 it is claiming in lost profits.
Even assuming, however, that all these imaginary links in the chains of causation Creative needed to forge were replaced with links of iron, the question of proximate causation would remain.
In Ohoud Establishment v. Tri-State Contracting, 523 F.SUPP. 249 (D.N.J. 1981) the court was confronted by a fact-pattern and lost profits claims very similar to that presented by this case. Granting summary judgment to the parties defending against the lost-profits claims, the court said:
The claimants argue that the issues herein presented must be resolved by a jury, and such argument presents a tempting method to avoid grappling with this difficult issue. But the issue of foreseeability is not always one which necessitates resolution by the fact finder. Although not authoritative, POOR RICHARDS ALMANAC (1758) is illustrative:
For want of a nail the shoe was lost;
For want of a shoe the horse was lost;
And for want of a horse the rider was lost;
For the want of a rider the battle was lost;
For the want of a battle the kingdom was lost;
And all for the want of a horseshoe-nail.
The court would have little difficulty in submitting the loss of the shoe, the horse, and probably the rider to a jury if caused by the sale of a defective nail or the failure to deliver the nail as agreed. The loss of the battle creates a doubtful question, but the loss of the kingdom is so remote as to bar its submission to a jury.
It is the loss of their respective kingdoms that the claimants seek herein. They do not seek damages arising from the defects in the direct sale or any specific or potential resale [of the goods that proved defective]. They seek damages for the loss of other future sales not yet in existence with the same and other customers.
* * *
… If the manufacturer of the nail becomes responsible for the loss of the kingdom, then we may not have any more nails. 523 F.SUPP. at 255, 257.
True, here Creative only seeks “damages for the loss of other future sales not yet in existence with the same customers,” and no others. And also true, the Ohoud Establishment court was here discussing foreseeability rather than “proximate damages.” But at least one court has cited Ohoud Establishment (and quoted its colorful “want of a nail” analogy) in denying lost-profits recovery on proximate causation grounds. Halliburton Co. v. Eastern Cement Corp., 672 SO.2D 844, 846-847 (Fla. App. 1996).
Lost-profit damages must be proven with reasonable certainty. Jorgensen Co. v. Tesmer Mfg. Co., 10 ARIZ.APP. 445, 451-52, 459 P.2D 533, 539-540 (Div. 1 1969) (merchant reselling farm equipment counterclaimed for lost profits damages resulting from defects in equipment delivered; held, neither fact nor amount of lost profits damages established by adequate evidence. “On its counterclaim defendant had the burden of proving the amount of its damages with reasonable certainty. All we have in this regard is an estimate made by defendant’s president. *** Conjecture or speculation cannot provide the basis” for such damages.) See also Rancho Pescado, Inc. v. Northwestern Mutual Life Ins. Co., 140 ARIZ. 174, 184, 680 P.2D 1235, 1245, (App. Div. 1 1984) (judgment n.o.v. disallowing plaintiff’s claim for lost profits sustained; deficiencies and gaps in plaintiff’s evidence as to probability and amount of profits led appellate court to “view the evidence as a whole as amounting to nothing more than conjecture and speculation”); and Schuldes v. National Surety Corp., 27 ARIZ.APP. 611, 616, 557 P.2D 543, 548 (1976) (“no damages can be allowed for the loss of profits which are determined to be uncertain, contingent, conjectural, or speculative”). Coastal Aviation, Inc. v. Commander Aircraft Co., 937 F. SUPP. 1051, 1064 (S.D.N.Y. 1996) (applying New York law); Bockman Printing & Services, Inc. v. Baldwin-Gregg, Inc., 213 ILL.APP.3D 516, 527-28, 572 N.E.2D 1094, 1102 (1991); Morey v. Brown Milling Company, 220 GA.APP. 256, 469 S.E.2D 387, 391 (1996) (“It is well settled that there can be no recovery on a claim for loss of expected profits except where such loss can be shown with reasonable certainty.”)
Apart from 11 invoices reflecting Creative’s sales to Hiney in 2006 and 2007 and the highly ambiguous Exhibit 11, Creative offered nothing but post hoc, ergo propter hoc reasoning based solely on the opinions, estimates and “expectations” of its president. No contracts, agreements or even informal understandings were alluded to, but only vague “relationships” inferred from undocumented or spottily documented past dealings. The projected business Creative claims it lost (even assuming Sheila’s December, 2007 non-conforming tender would be the proximate cause of the loss) was purely a matter of conjecture and speculation.
One of the most glaring deficiencies of Desaultels’ testimony about his estimations and expectations is the complete absence of any recognition that the period beginning with December, 2007 and running through 2009, during which Creative’s claimed lost profits were purportedly incurred, corresponds almost precisely with the Great Recession of 2008-2009. The gross domestic product of the United States contracted by more than 11%, and print advertising revenues (print advertising forming the basis for the bulk of Creative’s business – see RT 1 at 6:25-7:6) fell by almost 18%. Unfortunately, such detailed facts were never developed on the record now before the Court. However, Sheila asks the Court to take judicial notice that, as the National Bureau of Economic Research has reported, there was a business contraction (or “recession”) in the United States beginning in December, 2007 and ending in June 2009 the longest such contraction since the Great Depression of 1929-1933. http://www.nber.org/cycles.html#navDiv=6. Cf. Sullivan Industries, Inc., v. Double Seal Glass Co., Inc., 192 MICH.APP. 333, 480 N.W.2D 623, 632 (Mich. App. 1991) (proof of lost profits damages was defective because plaintiff “presented no evidence from which the court could distinguish sales lost because of the recession in the early 1980s from sales lost because of sealant failure”). “To sustain a damage award for lost profits, there must be sufficient proof that the lost profits were proximately caused by the defaulter’s breach. Where the loss cannot be allocated between those caused by the breach and those resulting from some other cause, the entire claim may be rejected.” Stallworth Timber Company v. Triad Building Supply, Inc., 968 F.SUPP. 279, 283 (D.V.I. 1997).
To the extent it is controlled by the interpretation and application of the U.C.C. as adopted in Arizona, the disposition of Sheila’s breach of contract claim involves only questions of law, the applicable standard for the review of which is the de novo standard, since our appellate courts “review de novo questions of law, including the interpretation of statutes.” In re Estate of Zee, ____ ARIZ. ____ , ¶ 8, 265 P.3D 439, ___ (2011).
It is undisputed that, after the Paper had been received at the warehouse designated for delivery by Creative, Creative sold all the Paper in two lots: the first, of 144,295 pounds, to Transcontinental and the second, consisting of the remaining 62,934 pounds, to Semper Exeter, and that Creative issued invoices for and received payment on account of these sales. Creative’s acts of re-selling the Paper for its own account clearly constituted conduct inconsistent with Sheila’s continuing ownership of the Paper. Cf. Pace v. Sagebrush Sales Co., 114 ARIZ. 271, 273, 560 P.2D 789, 791 (1977); Murphy v. National Iron & Metal Co., 71 ARIZ. 323, 328, 227 P.2D 219 (1951) (after performing actions constituting acceptance of goods, buyer was “in no position to … refuse to pay in accordance with the terms of the contract.”); Yancy v. Jeffreys, 39 ARIZ. 563, 566, 8 P.2D 774, 777 (1932) (buyer who retains the goods sold “cannot refuse to carry out his part of the agreement, although he may recover the damages caused him by the breach on the part of the seller”).
Under U.C.C. § 2-606 (1)(c), A.R.S. § 47-2606 (A)(3), “acceptance of goods occurs when the buyer … does any act inconsistent with the seller’s ownership.” Hence, it is clear as a matter of law that Creative accepted the Paper for U.C.C. purposes. In fact, Creative conceded its acceptance of the goods in its response to Sheila’s Motion for Summary Judgment. C.I. 14 at 5:1.
One effect of U.C.C. § 2-606 acceptance is declared in the unambiguous language of U.C.C. § 2-607 (1), A.R.S. § 47-2607: “Effect of Acceptance: (A) The buyer must pay at the contract rate for any goods accepted.” This requirement is echoed in Official Comment 1 on U.C.C. § 2-607, which states “once the buyer accepts tender the seller acquires a right to its price on the contract terms.” See also A.R.S. § 47-2709 (“When the buyer fails to pay the price as it becomes due the seller may recover … the price … of any goods accepted … .”); Pace v. Sagebrush Sales Co., 114 Ariz. 271, 273, 560 P.2d. 789, 791 (1977).
The only limitation on buyer’s obligation to pay at the contract rate for accepted goods is buyer’s option to deduct damages from the price. Under U.C.C. § 2-717, A.R.S. § 47-2717, a buyer “upon notifying the seller of his intention to do so may deduct all or any part of the damages resulting from any breach of the contract from any part of the price still due under the same contract.” The burden of establishing the right to legal setoff as contemplated in § 2-717 is on the buyer. Amerisourcebergen Corporation v. Dialysist West, Inc., 465 F.3D 946, 950 (9th Cir. 2006) (applying Arizona law). Hence, the buyer must establish that (1.) he notified the seller of his intention to deduct damages from the price due under the contract; and (2.) he has damages, resulting from seller’s breach of the same contract, to deduct.
Here, it is undisputed that the goods, though accepted, did not conform to the contract description. Creative claims damages allegedly resulting from such non-conformity. But as to fulfillment by Creative of the notification requirement of § 2-717, there was a total failure of proof. Not one word of testimony nor one line of any documentary exhibit reflects any attempt on the part of Creative to notify Sheila that Creative intended to deduct any damages from the never-paid purchase price for the 206,000+ pounds of paper that Creative received and resold.
The presence vel non of § 2-717 notification is significant only as it bears on the question of when Creative’s obligation to pay Sheila the contract price became a liquidated debt. If Creative did not have a right to deduct the damages claimed as resulting from the breach of the Sheila-Creative contract from the payment due under the terms of that contract, it would still have had the right to pursue its claim for damages. It would simply have been legally bound to satisfy its liquidated debt for the contract amount due, while remaining free to pursue its unliquidated damages claim in whatever available forum it might choose. Apart from the answer given to the if-and-when-liquidated question, and the sequellae of that answer, it would not matter at what point in time whatever damages Creative may have, if any, are subtracted from the purchase price it owes.
Leaving the issue of § 2-717 notification to one side and assuming arguendo that the issue of § 2-717 deduction is therefore reached, we observe first that subtraction is what deduction is all about. To perform an operation of subtraction, two given quantities or operands are required and their order is significant. The first operand, called the “diminuend,” is the number which is subtracted from, and the second operand, called the “subtrahend,” is the number subtracted. The operation of subtraction yields a number called the “difference.” The significance of the order of the operands (i.e., identification of each given number as diminuend or subtrahend) is that interchanging diminuend and subtrahend inverts the sign of the difference.
Appellant Sheila has presumed to provide this short lesson in arithmetic not because it fears that the Court’s elementary education may have been deficient, but because sleight-of-hand with regard to the operation of subtraction and identification of its two operands is the trick to which Appellee Creative resorted in making its argument on § 2-607 to the trial court. The Commissioners on Uniform State Laws did not aim to provide the American business community with the same kind of “two equations in two unknowns” merriment that may be derived from the trial court’s verdicts in this case (see below, p. 42 n. 14). In § 2-717, the “deduction,” if applicable, means subtraction of the damages resulting from seller’s breach of the contract of sale from any part of the price still due under the same contract. Since Creative never made any payment, the last expression may be simplified by omitting the words “any part of … still.” The price due under the sales contract is the diminuend, and the amount of damages resulting from any breach of the same contract – including, for example, damages resulting from a breach of the implied-in-law warranty that the goods will conform to the contract description – is the subtrahend. The first operand is a function of the contract of sale, and the second operand is a function of the claimed breach of that contract.
In simpler terms, assuming both the existence of damages and the right of Creative to deduct them, the figure that such damages are to be deducted from is, incontestably, the contract price of $86,679.37. That is the obvious and inescapable result of applying U.C.C. §§ 2-606 (1)(c) and 2-607 (1) to the undisputed facts of this case. The amount, if any, to be subtracted from this figure is then determined with reference to the damages of buyer Creative.
Though Creative made several attempts to establish, through argument rather than evidence, a lesser “fair value” for the accepted goods, it addressed § 2-607 only with the specious argument that, where § 2-717 deduction is applicable, breach-of-warranty damages are to be subtracted from the contract price twice – once before and once in the course of the § 2-717 deduction operation. In other words, Creative argued that breach-of-warranty damages should be “deducted” (where otherwise permitted by § 2-717) as the § 2-717 subtrahend after having been subtracted from the contract price in determining the § 2-717 diminuend. C.I. 75 at 10:21-11:5.
Creative never produced any evidence of a prevailing or market price for matte paper at the time and place of the goods’ acceptance that was less than the Sheila-Creative contract price. Nor, it must be said, did Creative ever come close to overcoming the testimony of its own president to the effect that the $86,000+ contract price is the fair amount to be credited to Sheila on account of its sale of the Paper to Creative. RT 1 at 64:18-65:3.
Godwin v. Farmers Insurance Co. of America, 129 ARIZ. 416, 419, 631 P.2D 571 (App. Div. 1 1981). Ordinarily, after fully analyzing the trial-court treatment of the claims presented in both Complaint and Counterclaim, it would be unnecessary if not inappropriate to discuss separately the verdicts on Complaint and Counterclaim upon which the judgment appealed from was based. The peculiarity of the verdicts announced in this case, however, makes such discussion necessary.
Of course, the “substantial evidence” standard of review applies only to so much of a verdict as may remain after errors of law are corrected.
The only way to make any sense of these verdicts is to assume that the trier of fact meant to allow Plaintiff an offset against the Counterclaim in an amount exceeding the amount that would otherwise have been awarded Defendant on the Counterclaim, resulting in a net verdict for $0 on the Counterclaim, which the trial court described, somewhat inartfully, as a “finding in favor of Plaintiff on all claims [stated in Defendant’s Counterclaim].” C.I. 55. Then the trier of fact (one must surmise) subtracted the amount credited to Defendant from the amount that would otherwise have been awarded Plaintiff to arrive at a verdict for Plaintiff in the amount of $17,858.40, presumably representing the remaining portion of Plaintiff’s damages after subtracting the amount applied Defendant’s Counterclaim damages.
One problem, of course, is that the presence of two “amounts that would otherwise have been” (two “unknowns,” in other words) in this explanation of the verdicts makes it mathematically impossible to ascertain what the trier of fact “really meant” to award on Complaint and Counterclaim before any netting out, since the set of all number pairs whose difference is 17,858.40 has an infinite number of members.
Taking the (presumed) “subtracting Plaintiff’s damages” approach as an implicit finding for Plaintiff on the issue of Plaintiff’s U.C.C. § 2-717 right of offset, such finding is not supported by substantial evidence. In fact, it is not supported by any evidence, since Plaintiff presented no evidence to show its satisfaction of the § 2-717 notification requirement. See Part IV.B.4 at pp. 37-38, above.
Presuming the amount the trier of fact “really meant” to subtract as Plaintiff’s damages from the amount that would otherwise have been awarded Defendant on its Counterclaim (even though all we know about this figure, on the explanation of the two verdicts given above, is that it is $17,858.40 more than the amount the trier of fact “really meant” to award Defendant on its Counterclaim) to be the amount Plaintiff asked for in its closing, viz., $85,874.54, it would follow that the amount the trier of fact “really meant” as the diminuend of this operation (the amount from which Plaintiff’s damages were subtracted) was equal to or less than $85,874.40. That would make the verdict contrary to law, since it is clear as a matter of law that Defendant should have been awarded $86,679.37 (exclusive of pre-trial interest) on its Counterclaim. See Parts IV.B.2 and Part IV.B.3 at pp 35-37, above.
Presuming the amount that the trier of fact “really meant” to award Plaintiff Creative on its Complaint (even though all we know about this figure, on the explanation of the two verdicts given above, is that it is $17,858.40 more than the amount the trier of fact “really meant” to award Defendant Sheila on its Counterclaim) to be the amount Plaintiff asked for in its closing, viz., $85,874.54, it would follow that the amount the trier of fact “really meant” to award Defendant on its Counterclaim was $68,016.14. That would make the verdict unsupported by substantial evidence and contrary to law, since the least amount even Plaintiff’s ingenious counsel could tease out of the evidence as the amount Defendant is owed for the paper Plaintiff received and resold for $85,390.77 was $74,267.05 (C.I. 75 at 6:4), while the amount Plaintiff submitted in its closing was $77,500. RT 2 at 50:5-9.
There are, as has been noted, an infinite number of other number pairs that would mathematically fit the verdicts, but any of these would render the verdicts arbitrary and thus, obviously, unsupported by the evidence.
As a matter of law Plaintiff should have been awarded nothing, or at most its incidental expenses of $1,801.50, since no “direct” or “general” damages were proven and its claimed “lost profits” damages, even assuming them to have been otherwise adequately supported by the evidence, are not recoverable, for lack of both foreseeability and proximate causation.
VI. CONCLUSION AND REQUEST FOR ATTORNEY’S FEES.
The judgment should be reversed and the case remanded with instructions to enter judgment for the Plaintiff on its Complaint in the amount $1,801.50 and judgment for the Defendant on its Counterclaim in the amount of $86,679.37 plus interest thereon at the statutory rate of 10% per annum from February 14, 2008 until paid, plus attorney’s fees.
Pursuant to A.R.Civ.A.P. 21(c), Sheila requests an award of reasonable attorney’s fees and costs incurred in pursuing this appeal as well and the fees and costs it incurred before the Superior Court. Sheila contends that its invoices became part of the contract pursuant to U.C.C. § 2-707 (2), A.R.S § 47-2207 (B). This would entitle Sheila to recovery of its attorneys’ fees. RT 1 at 141-44 and Exhs. 2, 3, 4 and 50, “Condition of Sale” ¶ 6. Even if not provided for in the contract, the award of attorney’s fees is authorized by A.R.S. § 12-341.01 (A). Ocean West Contractors, Inc. v. Halec Constr. Co., 123 ARIZ. 470, 473-74, 600 P.2D 1102, 1105-06 (1979) (fees may be awarded to a successful party under A.R.S. § 12-341.01 (A), and a party is successful if it receives a judgment in excess of any setoff or counterclaim allowed); Winter v. Coor, 144 ARIZ. 56, 64-65, 695 P.2D 1094, 1102-03 (1985) (if party unsuccessful in the trial court prevails on appeal, the appellate court may award attorney’s fees for both the trial and the appellate proceedings).
DATED: June 18, 2012.
of Donald W. Hudspeth, P.C.
By: /s/Brian K. Stanley
Brian K. Stanley, of counsel
And: /s/Rita J. Bustos
Rita J. Bustos
Attorneys for Defendant-Appellant Sheila Paper Corp.
PURSUANT TO ARIZ.R.CIV.APP.PROC. 14 (b), I certify that this brief: (1.) Uses proportionately spaced type of 14 points or more and is double-spaced using a roman font, except that a slightly smaller type may be used in tables and for footnotes and page footers and slightly larger type is used for certain headings; (2.) has a word count of approximately 11,500 words.
DATED: June 18, 2012.
/s/Brian K. Stanley
Brian K. Stanley
Attorney for Defendant-Appellant
CERTIFICATE OF SERVICE
THE UNDERSIGNED HEREBY CERTIFIES that two (2) copies of the foregoing Brief were served upon the following:
Ms. Maria C. Speth email@example.com
Jaburg & Wilk, P.C.
3200 N. Central Av., Suite 2000
Phoenix, Arizona 85012
Attorneys for Plaintiff-Appellee
by depositing the same, postage prepaid, enclosed within an envelope addressed as set forth above, in the United States Mails at Phoenix on June 18, 2010 except as to any of the above-named addressees who may have expressed a preference for receiving said document by email, in which case a copy was transmitted to the email address above listed, on the same date.
DATED: June 18, 2012.
/s/Brian K. Stanley
Brian K. Stanley
Attorney for Plaintiff -Appellant
. This brief will use the following abbreviations: “C.I.” for the clerk’s index of record on appeal; “Exh.” for trial exhibits; “RT 1” for the court reporter’s transcript of proceedings Day 1, July 12, 2011; and “RT 2” for the court reporter’s transcript of proceedings Day 2, July 13, 2011. All statutes cited are reproduced (in section-number order) in Appendix A, and all trial exhibits referred to are reproduced in Appendix B.
. “Cwt” is the standard commercial abbreviation for “hundredweight,” a unit of weight equal to 100 avoirdupois pounds.
. Even leaving U.C.C. § 2-607 (1), A.R.S. § 47-2607 (A), out of account, this argument was not only a way of counting the claimed lost profit on the resale to Transcontinental – which Creative’s attorneys had separately “chalked up” – over again, but it was also arithmetically inept. The correct answer to the question, “What is the wholesale price of goods with a resale price of $85,390, assuming a 10% margin?” is $77,627. 77,627+7,763 = 85,390, but 77,500+7,750 = 85,250.
. A.R.S. Title 47, §§ 47-1101 et seq. All Title 47 sections and other statutes cited are reproduced (in section-number order) in Appendix A.
. This and all subsequent Questions assume that the first seller’s shipment of non-conforming goods was inadvertent and not the result of malice or other improper motive.
. From WEBSTER’S NEW WORLD DICTIONARY (3rd college ed., 1991):
general … 1 of, for, or from the whole or all; not particular or local [a general anesthetic, the general welfare] 2 of, for, or applying to a whole genus, kind, class, order, or race [the general classifications of matter] 3 existing or occurring extensively; common; widespread [a general unrest] … – SYN COMMON, UNIVERSAL
particular … 1 of or belonging to a single, definite person, part, group, or thing; not general; distinct 2 apart from any other; regarded separately; specific [to want a particular color] 3 out of the ordinary; unusual; noteworthy; special [no particular reason for going] … – SYN … SPECIAL
. Cf. 25 C.J.S. Damages § 2 (1966):
Direct damages are such as result from an act without the intervention of any intermediate controlling or self-efficient cause. Direct damages include all such injurious consequences as proceed from, or have direct causal connection with, such consequences. … Consequential damages are such as are not produced without the concurrence of some other event attributable to the same origin or cause; such damage, loss, or injury as does not flow directly and immediately from the act of the party, but only from the consequences or results of such act.
. 14th c. London merchant who became immensely wealthy and was elected Lord Mayor four times. According to a folk tale that is probably not true, as a young man he was so poor that the only thing he owned was a cat. He gamely consigned the cat to a merchant ship trading into North Africa, where the King of Barbary, whose land had no cats and whose palace and capital were overrun by mice, paid a huge sum of money for the cat, the proceeds of which sale formed the foundation of Whittington’s fortune. See http://en.wikipedia.org/wiki/Dick_Whittington#Dick_Whittington_-_Stage_character.
. See Industrial Graphics, Inc. v. Asahi Corp., 485 F.SUPP. 793, 805 (D.Minn. 1980) (applying Minn. U.C.C.) (on claim for lost profits, “it was incumbent upon plaintiffs to prove to a reasonable certainty that they are entitled to such damages, including that the damages sustained were the result of the breach”). On “reasonable certainty” requirement generally, see Part IV.A.5, pp. 29-31, below.
. “He was our customer at Hiney Printing.” RT 1 at 58:15-16.
. Under the federal analog to A.R.Evid. 201, it has been held that judicial notice may be taken at any stage of a proceeding, even on appeal. In re Indian Palms Associates, Ltd., 61 F.3D 197, 205 (3d Cir. 1995). Sheila would submit that the fact of which notice is requested qualifies both under R. 201 (b)(1) because it is generally known in Maricopa County and under R. 201 (b)(2) because it can be readily determined from a source (the National Bureau of Economic Research) whose accuracy cannot reasonably be questioned.
. Principally, the accrual of pre-judgment interest. Sheila contends that its invoices became part of the contract pursuant to U.C.C. § 2-707 (2), A.R.S § 47-2207 (B). This would establish a contract rate of 1½% per month, or 18% per annum. RT 1 at 141-44 and Exhs. 2, 3, 4 and 50, “Condition of Sale” ¶ 4. In the absence of a contract rate, Arizona’s implicit rate on liquidated indebtedness, in 2007-08 set by A.R.S. § 44-1201(A) at 10% per annum, would apply.
. Since on any (plausible) view of the facts the court must have meant to award to Sheila, or rather credit Sheila with, something in excess of $75,000, at least, on account the claims stated in its Counterclaim (i.e., for supplying the 206,000 pounds of paper Plaintiff successfully resold), it was inappropriate to use this “claimant-takes-nothing” form of verdict.
. For instance, the trier of fact might have felt that but for its breach Defendant should have received $999,982,140.60 while on account of the breach Plaintiff was entitled to $999,999,999.00. The suggestion may seem facetious, but actually it accords well with Plaintiff’s “Who cares about the evidence? The sky’s the limit!” attempt to justify these verdicts. See C.I. 75 at 8:10-10:9.