Tesoro Petroleum (p.512)
Prof. Bill Long 4/5/05
The Tension Between 2-706 and 2-708
The problem illustrated in Tesoro is the seller's equivalent of the buyer's dilemma we explored under the cover provision (2-712) and the damages provision (2-712), which we explored in Allied. I am devoting an essay to this case because it includes some potentially confusing things about lost volume sellers which need to be explained.
Briefly stated, plaintiff asserts that it contracted to sell about 10 million gallons of gas to defendant for $1.30 a gallon. When the cost of gasoline plummeted, defendant breached. Tesoro was able to resell its gasoline at $1.10 per gallon, even though the market price had plummeted to about $.80 per gallon. What is the measure of damages that should come to Tesoro?
Theories of Recovery
Under 2-706, the measure of recovery when the seller has resold is the difference between the resale price and the contract price together with any incidental damages allowed under 2-710. Thus, under a 2-706(1) analysis, Tesoro would have received $2,000,000 in damages. However, the plaintiff wanted to proceed under a 2-708 theory, which would allow recovery, in a case of non-acceptance or repudiation, the difference between the market price at the time and place for tender and the unpaid contact price together with 2-710 incidentals. This could eventuate in a recovery of $5,000,000. Big difference.
But what plaintiff argued, and is not really laid out well in the case excerpt, is that it was a lost volume seller under 2-708(2) or, alternatively, it was a seller under 2-708(1). A lost volume seller is like a car dealer who, if stiffed by a buyer, can recover the profit s/he would have lost in the sale, despite being able to sell the car to the next person who walks on the lot. This situation is covered in 2-708(2). In Tesoro's case, they would argue that since it was a lost volume seller, it could have bought the other gasoline on the market for $.80 per gallon and then sold it at $1.10 to Eso Sapa. This would lead to a recovery of $3,000,000. But, if they went under 2-708(1), they should be able to recover the market-contract difference, which, as stated above, would be a $5,000,000 recovery.
The Court's Analysis
The court went two directions in analyzing these claims. First, it spent considerable effort trying to decide if recovery should happen under 2-706 or 2-708. Was the seller a lost volume seller? In a word, no. The burden was on the buyer to show that the goods which in fact were resold were those that would have been delivered to him, the breaching buyer (p.513). If the buyer can show this, then the seller is not a lost volume seller, and his measure of recovery will not be under 2-708(2). This is why the court goes through so much commentary and analysis of whether Tesoro was such a seller.
The court also considered the work of the New York Law Revision Commission and the legal effect of a possible deletion from 2-708 that would have limited that section to situations were "goods have not been sold." But the court examined some of the language of 2-706 (Cmt 2) to conclude that, in general, the Code drafters envisioned that 2-708 recovery would be less than the contract-resale price differential under 2-706 (p.515). The court then went on to show how, by quoting testimony or legal memoranda, that both parties assumed that the sale was not a lost volume sale--it rather was a 2-706 sale.
The second direction pursued by the court was to consider the language of old 1-106 (new 1-305) which laid out the basic policy of the Code--"remedies provided by this Act shall be liberally administered to the end that the aggrieved party may be put in as good a position as if the other party had fully performed..." Thus, following Summers & White, the court held that recovery should be under 2-706.
This result seems instinctively right to me (to you?) but the court had to go through some pretty major throes, it seems, to get there.
Copyright © 2004-2007 William R. Long