FACTS
Plaintiff dealer in used heavy equipment bought glass-making equipment from defendant company for $20,000, hoping to sell it for $220,000. The day after signing the bill of sale and accepting the check, defendant notified plaintiff that it actually did not own the equipment, and it returned the check. Plaintiff has not yet cashed it.
ISSUES
1. Does defendant's belief at the time of contracting that it had title to the goods, or that the goods were worth less than they were, constitute a mistake of fact that will allow rescission?2. If not, what may plaintiff recover in damages?
SUMMARY
1. A mistake regarding value will not allow rescission, although one regarding title apparently will. The contract contained an implied warranty of title, but that warranty only allows recovery after the buyer takes possession.
2. Plaintiff may recover as actual damages the difference between the market value of the goods at the time of the breach and the price it paid. It may also recover its lost profits if it can prove them without excessive speculation.
DISCUSSION
1. Mistake
Because the transaction constitutes a sale of goods, it falls under Article 2 of the Uniform Commercial Code. Comm. Code §2102. The code does not supplant common-law or equitable principles of mistake unless otherwise stated. Comm. Code §1103. Rescission may be had for mistake of fact if the mistake is material to the contract and is not the result of a neglect of legal duty, if enforcement of the contract as made would be unconscionable, and if the other party can be placed in status quo. Conservatorship of O'Connor (1996) 48 Cal.App.4th 1076, 1096. The party seeking relief must give prompt notice of the election to rescind and must restore or offer to restore to the other party everything received under the contract. Ibid.
The easier mistake issue concerns value. A mistake regarding value--or such determinants as quality, capacity, and scarcity--will not allow rescission. Tetenman v. Epstein (1924) 66 Cal.App. 745, 751; 3 Corbin on Contracts (rev. ed. 1961) §605, at 638-639. Because value is uncertain, in every contract each party consciously assumes the risk of error of judgment. 3 Corbin, supra, at 639. People enter into contracts to determine the value of goods, and in the process they themselves agree on value and help to determine market value. Id., at 638.
The alleged mistake regarding title is more difficult. Historically, one who is mistaken or ignorant regarding rights or interests in property or in contract and who enters into a transaction for the purpose of affecting those rights or interests is considered to have made a mistake of fact, and equity will grant affirmative or defensive relief. Mitchell v. California-Pacific Title Insurance Co. (1926) 79 Cal.App. 45, 51, citing 2 Pomeroy's Equity Jurisprudence (4th ed) § 849, at 1734. But under the UCC, every contract for sale warrants that the title conveyed shall be good and its transfer rightful. Comm. Code §2312(1)(a).
This provision did not change earlier California law. Id., Legis. Comm. 1. In fact, little scholarly discussion or case law, in this state or others, interprets this section. Some probably inapposite authority states that a warranty of title in a contract refers to the time of conveying rather than the date of the contract for sale. McDorman v. Moody (1942) 50 Cal.App.2d 136, 142, 122 P.2d 639, citing Kares v. Covell (1901) 180 Mass. 206, 52 N.E. 244. In both McDorman and Kares, the seller had good title at the time of contracting--in the former corporate stock and in the latter real property--but could not deliver good title. The courts held that their earlier ability to deliver good title did not prevent their liability for breach of contract at the time of conveyance. McDorman, 50 Cal.App.2d at 142. When a seller has entered into a contract to sell something to which he does not have title, the legal consequences are thus strangely uncertain.
Every published opinion regarding this section in fact concerns remedies available to a buyer for a cloud on title arising after conveyance. See 13 Williston on Contracts (3rd ed. 1970) §1566, at 352 (the warranty of title had obviated mistake of title as grounds for the buyer's rescission). One treatise, citing no authority, states that a cause of action does not arise until after the seller has fully completed performance under the contract. 2 Nelson & Howicz, Williston on Sales (5th ed. 1992-1995) §16-11, at 458. A major purpose of the warranty is to ensure that a buyer will not be exposed to a lawsuit to protect title. Jeanneret v. Vichey (S.D.N.Y. 1982) 541 F.Supp. 80, 82, citing comm. 1, rev'd o.g. (2nd Cir. 1982) 693 F.2d 259. The buyer does not risk that exposure when the seller, as here, never delivers the goods.
It is arguable that §2312, creating a warranty of title, modified the earlier rule regarding rescission for mistake regarding legal relations. The statute states that not just every sale but every contract for sale contains the warranty. The seller who does not have title thus breaches the warranty even if no actual sale ever takes place. A "sale" occurs when the seller passes title to the buyer for a price. Comm. Code §2106(1). Unless otherwise agreed, title passes to the buyer when the seller delivers the goods. Comm. Code §2401(2). Because not just sales but contracts for sale contain the warranty, actual delivery should be irrelevant to its breach. But the weight of authority-- however slight--seems to state that the warranty is not breached until after the buyer takes possession.
Defendants have argued that their sale of the goods "as is" excluded any warranty of title. But the warranty is excluded only by specific language or circumstances that give the buyer reasons to know that the person selling does not claim title or only sells whatever title he has. Comm. Code §2312(2). Sale of the goods "as is" does not disclaim a warranty of title. Id., comm. 6; see Comm. Code §2316(3).
2. Damages
The measure of damages for the seller's nondelivery or repudiation is the difference between the market price when the buyer learned of the breach and the contract price, together with any incidental or consequential damages. Comm. Code §2713(1). In estimating damages, the value of property is deemed to be the price at which the buyer might have bought an equivalent thing in the market nearest to the place where under the contract he should have been put into possession. Civ. Code §3354; see Comm. Code §2713(2) (market price determined at place of tender); comm. 2 (market price is price for the same goods and the same branch of trade). If the evidence of a price prevailing at a time or place is not readily available, the price prevailing within any reasonable time before or after the time described or at any other place that in commercial judgment would serve as a reasonable substitute may be used, making any proper allowance for the cost of transporting the goods to or from the other place. Comm. Code §2723(2).
The fact that these are used goods, with a small market, makes proof difficult. Generally, the plaintiff must show that the market for the goods existed or show comparative prices for comparable goods. See Harbor Hill Lithographing Corp. v. Dittler Bros. (Sup. 1973) 76 Misc.2d 145, 348 N.Y.S.2d 922. Where no market price is available, the plaintiff can use evidence of spot sales--similar, smaller transactions. Comm. Code §2713, comm. 3; see ibid. (no evidence that spot sales reflected the market price); Kirkwood Agri-Trade v. Frosty Land Foods International Corp. (5th Cir. 1981) 650 F.2d 602, 605 (applying Alabama law). Of course, in this case, any evidence of spot sales would be of limited use. If the transaction was in one of each type of equipment, rather than of several of each type of good, then any lesser sales would likely be different sales altogether.
Other means of proving market price are through the plaintiff's own testimony (cf. Willametz v. Goldfield (1976) 171 Conn. 622, 370 A.2d 1089, 1092 (testimony not credited for unstated reasons)); or with experts (see Harbor Hill Lithographing, supra, 348 N.Y.S.2d at 922). In California, the amount recoverable under §2713 cannot exceed the amount the plaintiff expected to obtain under the contract. See Allied Canners & Packers, Inc. v. Victor Packing Co. (1984) 162 Cal.App.3d 905, 915 (limiting damages to the $4,000 plaintiff would have gained had defendant performed rather than the $150,000 damages under §2713). Proving a difference in market values requires showing that the plaintiff took advantage of the defendant by buying the equipment for a price significantly under its market value. With proof of lost profits, the necessity of proving market value disappears.
Consequential damages under §2713 include any "loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise." Comm. Code §2715(2)(a). These damages include lost profits. Sun-Maid Raisin Growers v. Victor Packing Co. (1983) 146 Cal.App.3d 787, 791. Before recovering lost profits, the plaintiff must show three things: (1) that the lost profits were within the parties' contemplation at the time of making the contract, (2) that the plaintiff could not have mitigated damages, and (3) that, with sufficient certainty, the damages occurred.
The first two matters are not difficult. A seller of goods to one it knows is in the business of reselling them automatically has reason to know of the buyer's particular requirements. Id., at 791-792, citing Comm. Code §2715, comm. 6. In this case, plaintiff's name alone gives away its business.
The provision requiring a showing that the plaintiff not be able to minimize damages "by cover or otherwise" only codifies the common-law rule requiring mitigation of damages. Id., at 792. Ordinarily, a duty to mitigate does not require the injured party to take measures that are unreasonable or impractical or that require disproportionate measures. Gerwin v. Southeastern California Ass'n of Seventh-Day Adventists (1971) 14 Cal.App.3d 209, 219. A showing that the plaintiff cannot buy the goods elsewhere satisifies this requirement. Southern Idaho Pipe & Steel Co. v. Cal-Cut Pipe & Supply, Inc. (1977) 98 Idaho 495, 567 P.2d 1246, 1255. Even if a replacement were available, the plaintiff who would have bought it anyway is not required to cover. Calbag Metals Co. v. Guy F. Atkinson Co. (1989) 95 Ore.App. 514, 770 P.2d 600, 602-603 (in scrap metal seller's market, plaintiff reseller of scrap was buying all it could).
The real difficulty in this case is showing the fact and amount of lost profits. An established business may recover lost profits the extent and occurrence of which it can prove with reasonable certainty. Resort Video, Ltd. v. Laser Video, Inc. (1995) 35 Cal.App.4th 1679, 1697. Once those have been established, the actual amount need not be shown with mathematical precision. Id., at 1698. It is enough to demonstrate a reasonable probability that profits would have been earned but for the defendant's conduct. S.C. Anderson, Inc. v. Bank of America (1994) 24 Cal.App.4th 529, 536. The plaintiff must produce the "best evidence available under the circumstances" to prove its claim. Id., at 536-538 (recovery denied because the plaintiff failed to produce sufficient evidence of the fact of loss).
When the plaintiff buys the goods for resale, the best evidence possible is usually contracts or firm orders for resale. See American Road Equipment Co. v. Extrusions, Inc. (8th Cir. 1994) 29 F.3d 341, 344. Some courts have prohibited any profits for which there were no resale orders. For example, in Hillside Enterprises v. Carlisle Corp. (8th Cir. 1995) 69 F.3d 1410, 1414, the plaintiff endeavored to sell generic wine in shrink-wrapped plastic glasses, which it bought from the defendant. Leaking glasses dealt the plaintiff a blow from which it could not rebound. It sought its lost profits from the defendant, but the court held that, in an untested business, any recovery beyond the one firm order it had already received was purely speculative. Id., at 1414. Similarly, in National Controls Corp. v. National Semiconductor Corp. (3rd Cir. 1987) 833 F.2d 491, 496-498, the defendant failed to deliver semiconductors for use in advanced telephones. Although the plaintiff claimed that it would have sold more than 180,000 telephones if it had been able to supply them, the court limited its loss of profits to the 450 that had actually been ordered.
No rule requires firm orders for recovery for lost profits; rather, recovery will be limited to firm orders only when the plaintiff fails to present sufficient evidence of other losses. Jewell-Rung Agency v. Haddad Organization (S.D.N.Y. 1993) 814 F.Supp. 337, 342. Generally, lost profits are available when the product is sold in an established market or the plaintiff has a sufficient history of selling goods to establish the loss. For example, in Bob Willow Motors, Inc. v. General Motors Corp. (7th Cir. 1989) 872 F.2d 788, the defendant breached its contract to sell cars to the plaintiff dealer. The court refused to limit damages to the fifty-eight cars for which the plaintiff actually had orders, holding instead that national sales trends provided a reasonable estimate of the number of cars the plaintiff could have sold. Id., at 799. (It also held that, because the defendant breached in bad faith, it would not require the plaintiff to take orders it knew it could not fill to obtain lost profit damages on the entire contract. Id., at 798). In United California Bank v. Eastern Mountain Sports (D.Mass. 1982) 546 F.Supp. 945, aff'd (1st Cir. 1983) 705 F.2d 439, the plaintiff's assignor breached its contract for the sale of down garments to the defendant retailer by failing to meet minimum standards for down content. The court allowed the defendant to set off the profits it would have made on resale of the garments by showing sales history for similar products. Id., at 967-968.
Courts have allowed lost profits for resale even of goods that, like used glass-making equipment, are not mass-produced and have no extensive histories and comparable markets. The lost profits on sales of irrigation systems to two committed and long-standing customers were capable of being proved with competent evidence to a reasonable certainty in R.A. Jones & Sons v. Holman (Fla.App. 1975) 470 So.2d 60. In Harper & Associates v. Printers, Inc. (1986) 46 Wash.App. 17, 730 P.2d 733, 737, the plaintiff could recover the lost profits for the posters it ordered by showing that it was able to sell those it did order.
Most aptly, Simeone v. First Bank National Ass'n (8th Cir. 1996) 73 F.3d 184, allowed recovery for lost profits on unique goods. The plaintiff contracted to buy repossessed vintage Mercedes Benz automobiles and parts. One of the cars was a one-of-a-kind 1929 Roadster, and another was a 1928 vehicle, one of only 39 manufactured, once owned by the son of Sir Arthur Conan Doyle. The bank refused to sell the automobiles to the plaintiff, instead later selling them to the debtor himself. After finding that collectors of antique cars collect them partly to resell them, the court credited the plaintiff's expert testimony on the vehicles' value at the time of the breach and their appreciated value. Id., at 189. The testimony was based on the expert's knowledge of the available market, the rate at which the cars appreciate, and prices comparable vehicles commanded. Ibid.
The requirements of the experts' testimony are as varied as the requirements of proof of lost profits. Generally, the expert's testimony must demonstrate the existence of a market and the goods' market value. See Automated Controls, Inc. v. MIC Enterprises, Inc. (D.Neb. 1978) 27 U.C.C.Rep.Serv. 661, 663, aff'd (8th Cir. 1979) 599 F.2d 288. The expert's testimony must accurately reflect market conditions. See Advent Systems Ltd. v. Unisys Corp. (3d Cir. 1991) 925 F.2d 670, 681-682 (district court properly rejected testimony of expert who stuck by discredited two-year-old prediction).
CONCLUSION
The various cases regarding the proof of lost profits reveal no common thread except for the most abstract rules. Instead, each must stand on its own facts. Plaintiff in this case probably can put on expert testimony to show what the equipment could have sold for. To do so, he can discuss the frequency with which used glass-making equipment is bought and sold, the nature of the equipment, the prices on sales of similar goods, and the size of the market for the particular good.
Defendant's mistake as to the value of the goods does not excuse its performance. A mistake about ownership probably would excuse performance unless plaintiff can convince the court that the warranty of title protects plaintiff even before it takes possession.