Vitex Manufacturing Corp. v. Caribtex Corp.

United States Court of Appeals for the Third Circuit · Contracts

ContractsDamagesLost ProfitsOverheadbreach of contractlost profitsoverheadfixed costs

Facts

Vitex, a Virgin Islands processor of imported wool cloth, entered into a contract with Caribtex to process 125,000 yards of wool at 26 cents per yard. To perform, Vitex reopened its closed plant, ordered chemicals, recalled workers, and prepared for processing, but Caribtex never delivered the goods, apparently because it was uncertain whether the processed wool would receive duty-free treatment. The trial court found that Vitex would have earned $31,250 in gross profits and incurred $10,136 in costs, leaving $21,114 in lost profits. Caribtex argued on appeal that Vitex's overhead should have been included as a cost, thereby reducing the damage award.

Issue

When a buyer breaches a contract before performance, must the seller's fixed overhead be deducted as part of the seller's costs in calculating lost profits? Also, was this contract unenforceable as unconscionable?

Rule

Normally, in a claim for lost profits, fixed overhead should be treated as part of gross profits and recoverable as damages rather than deducted as a cost, where the overhead is unaffected by performance or nonperformance of the particular contract and the breach produced no overhead savings. A freely negotiated contract between parties of apparently equal bargaining strength is not unconscionable merely because one party stood to make a large profit and the other bore substantial risk.

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Lakefront Custom Coating, a small fabric-finishing company in Cleveland, entered a contract with Nora Benton to waterproof 80,000 yards of canvas for a stated processing fee. Before any goods were delivered, Nora repudiated. Lakefront proves that its executive salaries, office rent, and property taxes would have remained exactly the same whether or not it performed this contract, while labor, chemicals, and fuel would have increased only if it performed.

In calculating Lakefront’s lost profits, how should the court treat the executive salaries, office rent, and property taxes?

Explanation. The majority rule stated in the opinion is that normally, in a lost-profits claim, fixed overhead should be treated as part of gross profits rather than deducted as a cost when that overhead would have remained constant and nonperformance produced no overhead savings. The key inquiry is whether the expense was a continuous business expense irrespective of the particular contract. Here, the listed items are classic fixed overhead and were unaffected by breach, so they are recoverable as part of profit rather than subtracted. (Derived from Vitex Manufacturing Corp. v. Caribtex Corp. (n.d.).)