Business Law and the Regulation of Business 11th Edition by Richard Mann, Barry Roberts

Exercise 16

FACTS Doorenbos Poultry, Inc., is a company that keeps approximately 150,000 chickens for egg production and sells the eggs. Hens generally do not begin laying eggs until they are 17 or 18 weeks old, reach their peak production at approximately 26 weeks, and usually continue producing eggs until they are about 110 weeks old. The practice of Doorenbos Poultry has been to keep all chickens of a single age-group through their productive life and then simultaneously replace those birds with new chickens that are seventeen to eighteen weeks old. This practice maximizes production and continues some cash flow without interruption.
Midwest Hatchery Poultry Farms, Inc. is a producer and seller of poultry products. In the fall of 2006, Doorenbos Poultry entered into a written contract with Midwest, to purchase 112,000 pullets (young hens), at eighteen weeks of age, to be delivered on December 28, 2006. The contract listed a price of $1.27 per pullet, plus the cost of feed from the time of hatching to the date of delivery. The contract also provided, ''If Seller breaches this Contract, at Seller's option, customer is entitled to either replacement or refund of the price paid by Customer.''
By mutual agreement, delivery was delayed until January 16, 17, and 18, 2007, when Midwest delivered 115,581 pullets to Doorenbos Poultry. As the new chicks arrived, the old pullets were moved out. Scott Doorenbos, the president of Doorenbos Poultry, thought the new chickens looked small and, based on their weight, concluded the birds delivered were thirteen to fourteen weeks of age rather than eighteen weeks. Doorenbos could not cancel the order and return the chickens because his former flock had already been removed. The barns in which the chickens are kept do not have heating and the buildings maintain their temperature from the body heat of the birds. Therefore, if Doorenbos had not kept the pullets, the water lines in the barn would have frozen.
The pullets delivered by Midwest did not start laying eggs until February 18, 2007. From the time the pullets were delivered until the pullets reached their ''laying'' phase, Doorenbos Poultry incurred feeding and other maintenance costs for the pullets with no egg production to generate revenue. Doorenbos Poultry kept the pullets delivered by Midwest in production and intended to keep them in production until at least 119 weeks.
On January 20, 2007, Midwest sent Doorenbos Poultry an invoice for $267,916.76, which represented $146,787.87 for the cost of 115,581 pullets, $112,460.31 for feed, and $8,668.58 for vaccine. Doorenbos Poultry did not pay for the birds Midwest delivered when it received the invoice. Within thirty days after the pullets had been delivered, Doorenbos Poultry (1) complained to Midwest that it had not received chickens that were eighteen weeks old, as specified in the contract, (2) sought a reduction in the contract price, and (3) stated it lost income while the chickens were not mature enough to lay eggs. Doorenbos Poultry did not seek to have any of the pullets replaced. On August 19, 2007, Doorenbos Poultry sent Midwest a check for $184,135.18, which was what it believed should have been the cost for the younger pullets. Doorenbos Poultry has never returned any chickens to Midwest.
On September 14, 2007, Midwest filed an action for a money judgment alleging breach of contract.
Doorenbos Poultry responded with a counterclaim alleging breach of contract by Midwest. The parties waived their right to a jury trial, and their case was tried to the court. In a decision filed January 9, 2009, the district court concluded that about 80 percent of the pullets were three weeks too young, and about 20 percent were four weeks too young. The district court determined that (1) this action was governed by the Uniform Commercial Code (UCC); (2) because Doorenbos had accepted and kept the pullets, Midwest is entitled to the unpaid balance of the contract price; and therefore (3) Doorenbos Poultry was liable for the full amount billed by Midwest Hatchery, meaning it still owed $83,781.58 for the pullets that had been delivered. The court also concluded that (1) Doorenbos Poultry's acceptance of the pullets did not preclude its breach of contract claim against Midwest; (2) Midwest had breached the contract by providing pullets that were not of the specified age; (3) the limitation of damages clause in the parties' contract failed in its essential purpose; and (4) Doorenbos Poultry had lost profits of $31,732.79 because it was not able to replace its existing flock with eighteen-weekold birds. The court set off the amount of the loss against the balance Doorenbos Poultry still owed Midwest and entered judgment against Doorenbos Poultry for $52,048.79 ($83,781.58 minus $31,732.79).
DECISION The decision of the district court is affirmed.
OPINION Zimmer, S.J. Doorenbos Poultry has appealed from the decision of the district court. ***
BREACH OF CONTRACT
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The UCC applies to the sale of goods. [Citation.] The sale of livestock is included in the sale of goods. [Citation.] Therefore, the provisions of the UCC apply to the contract between the parties for the sale of pullets.
Article 2 of the UCC ''relaxes many of the legal formalisms and technicalities of contract formation associated with the common law of contracts.'' [Citation.] Under the UCC, section [2-607] provides, ''The buyer must pay at the contract rate for any goods accepted.'' A buyer accepts goods when the buyer ''take[s] or retain[s] them in spite of their nonconformity.'' [Section 2-606(1)(a).] A buyer also accepts goods if the buyer ''does any act inconsistent with the seller's ownership.'' [Section 2-606(1)(c).]
*** Under the UCC, if a buyer accepts goods, despite their nonconformity to the specifications of the contract, the buyer must pay the contract rate for the goods accepted. [Citation.]
We determine there is substantial evidence in the record to support the finding of the district court that Doorenbos Poultry accepted the chickens delivered by Midwest within the meaning of section [2-606], despite their nonconformity. ***
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LIMITATION OF REMEDIES PROVISION
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Before we begin our discussion of the limited remedy issue, we believe it is appropriate to express our agreement with the district court's conclusion that the acceptance of the nonconforming goods by Doorenbos Poultry did not preclude its counterclaim for breach of contract against Midwest. There is no dispute on appeal that Midwest breached the contract by providing nonconforming chickens. Section [2-607(2)] states, ''acceptance does not of itself impair any other remedy provided by this Article for nonconformity.'' Also, section [2-714(1)] provides:
Where the buyer has accepted goods and given notification (subsection 3 of section [2-607]) the buyer may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.
Clearly, acceptance of the pullets does not preclude Doorenbos Poultry from asserting a claim based on breach of contract by Midwest. We now turn to the arguments concerning the limited remedies provision in the parties' contract.
Under the UCC, the parties to a contract may agree to limit the remedies available if the seller breaches the contract by providing nonconforming goods, as follows:
[T]he agreement may provide for remedies in addition to or in substitution for those provided in this Article and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer's remedies to return of the goods and repayment of the price or to repair and replacement of nonconforming goods or parts.
[UCC Section 2-719(1)(a).] In this case, the parties' contract specifically provided, ''If Seller breaches this Contract, at Seller's option, customer is entitled to either replacement or refund of the price paid by Customer.''
Section [2-719(2)] provides, ''Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as provided in this chapter.'' A remedy's essential purpose ''is to give to a buyer what the seller promised him.'' [Citation.] The focus of analysis ''is not whether the remedy compensates for all damage that occurred, but that the buyer is provided with the product as seller promised.'' [Citations.]
Where repair or replacement can give the buyer what is bargained for, a limitation of remedies does not fail of its essential purpose. [Citation.] In other circumstances, however, repair or replacement is not sufficient, and then a court may find the remedy failed of its essential purpose. [Citation.]
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Upon our review of the record, we agree with the district court's ultimate conclusion that the limited remedy provision of the parties' contract failed of its essential purpose. The chickens were delivered over January 16, 17, and 18, 2007. Doorenbos Poultry notified Midwest that the pullets were not as specified in the contract within thirty days after delivery. We agree with the trial court's conclusion that the reference to a replacement or refund in the contract contemplates the entire sale with Midwest taking back the entire flock of birds.
At the time Scott Doorenbos informed Midwest that the pullets delivered were not eighteen weeks old, it is clear that Doorenbos Poultry was not interested in having the pullets replaced, and Midwest made no offer to replace them. When it was notified of the breach, we agree that Midwest could have exercised its option under the contract, taken back the entire flock, and either replaced the chickens with eighteen week old pullets or refunded the entire purchase price. The record supports the conclusion that this did not happen because, as the district court noted, it was plainly impractical.
It would have been extremely inefficient for both parties to replace the pullets Midwest had delivered. The pullets that Doorenbos Poultry had in its barn would have had to have been rounded up, placed in cages, and loaded into trucks while more that 100,000 replacement birds were moved into the barn. As Scott Doorenbos testified, a simultaneous exchange would have been necessary because the birds provided the only source of heat for the barn. In addition, it does not appear that either party was interested in the option of removal and refund.
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Under the circumstance presented here, we conclude the district court did not err in concluding the limitation of remedies provision in the parties' contract failed in its essential purpose. We next consider Doorenbos Poultry's alternative claim that the trial court improperly calculated its damages.
AMOUNT OF DAMAGES
Because the limitation of remedies provision failed in its essential purpose, a consideration of damages reverts to section [2-714(1)], which provides for the recovery of damages for ''the loss resulting in the ordinary course of events from the seller's breach as determined in any manner which is reasonable.'' Thus, any manner that is reasonable may be used to determine a buyer's damages for nonconforming goods. [Citation.] Here, the district court found ''a loss of profits would have been an expected loss resulting in the ordinary course of events from the nonconformity of the pullets delivered by Midwest under § [2-714(1)].''
Under section [2-714(2)], damages are measured by the difference between the value of the goods at the time of acceptance, and their value if they had been as specified in the contract, ''unless special circumstances show proximate damages of a different amount.'' The court noted that neither party submitted any evidence as to the value of fourteen- or fifteen-week-old pullets and expressed skepticism that there would be any recognized value for pullets that were between fourteen and fifteen weeks old and did not have the ability to lay eggs. As a result, the court concluded the ''special circumstances'' provision of section [2-714(2)] should apply.
*** After carefully considering the evidence presented, the district court concluded that eighty percent of the chickens were three weeks too young, and the feeding costs and lost revenues for those birds would have been sixty percent of the amount claimed by Doorenbos Poultry. Similarly, the court concluded that the feed costs and lost revenues for the chickens four weeks too young would have been eighty percent of the amount claimed by Doorenbos Poultry. The court calculated these pro-rated amounts and arrived at the total of $31,732.79 for the damages to be awarded Doorenbos Poultry on its counterclaim.
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We affirm the decision of the district court. ***
INTERPRETATION In cases in which circumstances cause an exclusive or limited remedy to fail of its essential purpose, the general remedy provisions of the Code apply.
CRITICAL THINKING QUESTION Do you agree with the Code's policy permitting the parties to establish an exclusive remedy in place of the Code's remedies?