Contracts II, Pages 1079–1084

Vitex Mfg. Corp. v. Caribtex Corp.

United States Court of Appeals for the Third Circuit, 1967

Judgment:

Affirmed.

Facts:

Defendant imported and exported cloth into and out of the Virgin Islands. Plaintiff shower-proofed imported cloth in the Virgin Islands, but the Virgin Islands had quotas imposed to limit the amount of cloth one could process. Plaintiff had not used its full quota amount and no customers, so it closed its plant. Defendant imported some Italian wool and subsequently negotiated for plaintiff to reopen its plant to process 125,000 yards of it at 26¢/yard.

Plaintiff reopened its plant, ordered the necessary chemicals, recalled its work force, and prepared to perform, but defendant never provided the goods because it was unsure about whether it would be duty-free by customs.

Procedural History:

Trial court found that plaintiff's gross profits for processing said material would have been $31,250 and that its costs would have been $10,136, leaving $21,114 for lost profits.

Issue:

Should overhead costs be deducted from lost profits?

Defendant's Argument:

Plaintiff's overhead costs should have been deducted from its lost profits.

Rule:

Reasoning:

  • If plaintiff did not find other business, its profitability would have been its production costs and overhead deducted from gross receipts of previous transactions. Reopening its plant did not change these fixed costs; it merely added the variable costs of reopening. While overhead is accounted for in the pricing of goods, it should not be considered a cost factor in the computation of lost profits on individual transactions. While not controlling, UCC § 2-708 agrees with this. Even if it theoretically was a cost factor, the other transactions' profitability would adjust to account for it, which would then be compensable on its own.

  • Unconscionability does not apply here, as defendant bore the risk of failure to meet customs standards voluntarily after much negotiation.

Rule/Holding:

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[O]verhead should be treated as a part of gross profits and recoverable as damages, and should not be considered as part of the seller's costs.