Teaching Assistants: Victor Goldberg on the Middleman's Damages

This is the seventh in our series of posts on Victor Goldberg's second volume of collected essays on contracts law, Rethinking the Law of Contract Damages (RLCD).  Links to previous posts on the first volume, Rethinking Contract Law and Contract Design (RCL), can be found here.  Today's post covers the sixth chapter of RLCD, which is about the correct measure of damages when there is a middleman, "B," and goods are sold from A to B in one contract, and then from B to C in a second contract. 

The chapter in some way typifies Professor Goldberg's approach.  There is a basic problem with a straightforward solution.  The middleman's damages should be the difference between the price of the breached contract and the market price.  The cases discussed often get it wrong, and scholarship, following the cases, justifies the mistaken approach to damages.  The interesting part is trying to figure out where the courts go wrong.

But the chapter is unusual, if not unique, in that the key problem with the case law and scholarship is doctrinal.  Economic principles and the logic of the transaction play a role, but the key mistake that Professor Goldberg identifies is that the cases and the scholarship lose track of the basic principle of privity of contract.  As a result, they fail to distinguish between cases where the middleman acts as a broker and those in which there are two independent contracts, both involving the middleman and no contract at all between A and C. 

Were the middleman a broker, a breach would deprive it only of its brokerage fee and perhaps some incidental damages.  But the cases handled in this chapter involve situations where the transaction between A and B and that between B and C are clearly distinct.  B has exposure to market risks on both ends.  For example, imagine that A agrees to sell 1 million units to B at a rate of 100,000 units per year over ten years.  B also buys units from other sources. In year three of its contract with A, B enters into a five-year contract with C to supply it with 50,000 units per year.  B has other contracts with other buyers.  The two contracts are completely independent, and the damages if A breaches can be determined without any need to consider the contract with C.  Similarly, if C breaches, B’s damages are not affected by its obligation to buy units from A.

When courts get the damages calculation wrong, they often fear giving the middleman a “windfall.”  In part, they fear windfalls because of a problem of statutory interpretation.  Some scholars think that the general provision in UCC § 1-305 limits recovery to putting the aggrieved party in as good a position as they would have been in had the counterparty performed. Because they perceive these middleman transactions as involving brokers, they think it is a windfall if the broker recovers more than its expected brokerage fee.  But these are not brokerage agreements.  As a result, there is no windfall and no problem with damages in excess of what § 1-305 permits.

In Professor Goldberg's view, where the middleman (B) is exposed to market risk if the seller (A) breaches, allowing the difference between contract and market under § 2-713 is the appropriate remedy.  If the buyer (C) breaches in a situation where the middleman is exposed to market risk, the appropriate remedy is similarly provided in § 2-708. The courts sometimes reach that conclusion based on the canon of construction that specific terms trump general terms.  They reason that § 2-708 or 2-713 is more specific than § 1-305.  But from Professor Goldberg's perspective, there is no tension between the provisions, because §§ 2-708 and 2-713 merely grant the non-breaching party its expectation.

Cases discussed in the chapter include:

• Allied Canners & Packers v. Victor Packing Co.
• Tongish v. Thomas
• TexPar Energy v. Murphy Oil)
• KGM Harvesting v. Fresh Network
• H-W-H Cattle v. Schroeder
• NHF Hog Marketing v. Pork-Martin
• Cargill, Inc. v. Fickbohm
• Unlimited Equipment Lines v. Graphic Arts Centre
• Nobs Chemical U.S.A. v. Koppers Co.
• Union Carbide Corp. v. Consumers Power
• Diversified Energy v. Tennessee Valley Authority
• Purina Mills v. Less
• Westlake Petrochemicals v. United Polychem

Below are links to previous posts on RLCD and the first post links to post posts on RCL:

Teaching Assistants: Victor Goldberg, Volume II, An Introduction

Teaching Assistants: Victor Goldberg on Valuation of the Contract as an Asset

Teaching Assistants: Victor Goldberg on The Golden Victory

Teaching Assistants: Victor Goldberg on Lost (Volume) in America

Teaching Assistants: Victor Goldberg on Lost Volume in the UK

Teaching Assistants: Victor Goldberg on Mitigation