MEMO TO:
Alexsei Demo US
RESEARCH ID:
#40009773163594
JURISDICTION:
State
STATE/FORUM:
California, United States of America
ANSWERED ON:
December 22, 2022
CLASSIFICATION:
Contracts

Issue:

In what circumstances will a buyer’s purchase of substitute goods be considered unreasonable and not in good faith under Cal. Com. Code § 2712?

Research Description:

Vanessa is an artist and owns a creative company in Los Angeles that has been invited to construct and decorate five floats for the Rose Parade. Vanessa contracts with a nursery in Van Nuys to provide all of the flower/plant material she needs for the floats. Two weeks before the parade, the nursery realized it completely missed the line on Vanessa’s order for Pampas grass. The nursery calls Vanessa and tells her that they cannot supply her with the Pampas grass. Vanessa decides to use Mexican Feather Grass instead. The Mexican Feather Grass that Vanessa buys is twice as expensive as the Pampas grass price listed in her contract with the nursery. Vanessa argues that the nursery owes her for the added cost. The nursery refuses and claims that Vanessa could have found a more affordable alternative.

Conclusion:

Cal. Com. Code § 2712(1) sets out that a buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller. (Cal. Com. Code § 2712 (2022))

There is no cover if the buyer does not purchase like goods but rather purchases goods substantially different. (Sun Pac. Mktg. Coop. Inc. v. Dimare Fresh, Inc., CIV-F-06-1404 AWI GSA (E.D. Cal. 2011))

However, "cover" includes goods not identical to those involved but commercially usable as reasonable substitutes under the circumstances of the particular case. (CORONO ORO, INC. v. THOMPSON, 2002 Cal. App. Unpub. LEXIS 2501, 2002 WL 471679 (Cal. App. 6th Dist. March 28, 2002))

The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective. (CORONO ORO, INC. v. THOMPSON, 2002 Cal. App. Unpub. LEXIS 2501, 2002 WL 471679 (Cal. App. 6th Dist. March 28, 2002))

The reasonableness of the injured party's efforts must be judged in light of the situation confronting them at the time the loss was threatened and not by the judgment of hindsight. The fact that reasonable measures other than the one taken would have avoided damage is not, in and of itself, proof of the fact that the one taken, though unsuccessful, was unreasonable. It is sufficient if the injured party acts reasonably and with due diligence, in good faith. (Huntington Beach Union High School Dist. v. Continental Information Systems Corp., 621 F.2d 353 (9th Cir. 1980))

It is ordinarily a factual question for the fact-finder whether a buyer has made a reasonable, good faith purchase of substitute goods. (CORONO ORO, INC. v. THOMPSON, 2002 Cal. App. Unpub. LEXIS 2501, 2002 WL 471679 (Cal. App. 6th Dist. March 28, 2002))

In the unpublished decision of CORONO ORO, INC. v. THOMPSON, 2002 Cal. App. Unpub. LEXIS 2501, 2002 WL 471679 (Cal. App. 6th Dist. March 28, 2002), the the California Sixth District Court of Appeal rejected the appellant's argument that it was unreasonable to cover used office furniture with new because the goods differed significantly. The buyer presented substantial evidence that the appellant's work stations were essentially as good as new and that it was reasonable under these circumstances for the buyer to cover with new work stations. The Court also noted that the trial court was not required to accept the appellant's testimony that he twice offered to provide alternates, as this testimony was contradicted by a representative of the buyer. Another representative of the buyer acknowledged that the appellant offered a possible alternative a week after he was unable to deliver the work stations, but by that time, the buyer had already located substitute goods. Therefore, this offer by the seller did not undermine the evidence that the buyer made reasonable efforts to obtain cover.

In the unpublished decision of Sun Pac. Mktg. Coop. Inc. v. Dimare Fresh, Inc., CIV-F-06-1404 AWI GSA (E.D. Cal. 2011), the appellant argued that the appellee's purchases did not constitute valid cover because the appellee's purchases did not always match the tomato categories of the contract. The appellee purchased different types, sizes, and grades of tomatoes. The United States District Court for the Eastern District of California found that although the purchases did not all fit into the six categories of the contract, they appeared to generally qualify as cover under Cal. Com. Code § 2712. The evidence showed that some variance in the grade, size, and color of tomato was commercially reasonable and that there were shortages in the specific tomato categories contained in the contract.

Law:

Subdivision (1) of Cal. Com. Code § 2712 (2022) sets out that a buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller: 

2712. "Cover"; buyer's procurement of substitute goods

(1) After a breach within the preceding section the buyer may "cover" by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

(2) The buyer may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2715), but less expenses saved in consequence of the seller's breach.

(3) Failure of the buyer to effect cover within this section does not bar him from any other remedy.

No published California state court decisions were identified that discussed the circumstances in which a buyer’s purchase of substitute goods is considered unreasonable and not in good faith under Cal. Com. Code § 2712; however, the following unpublished California and federal court decisions may be instructive.

In the unpublished decision of CORONO ORO, INC. v. THOMPSON, 2002 Cal. App. Unpub. LEXIS 2501, 2002 WL 471679 (Cal. App. 6th Dist. March 28, 2002), the California Sixth District Court of Appeal noted that the Uniform Code comment on Cal. Com. Code § 2712 states that "cover" includes goods not identical to those involved but commercially usable as reasonable substitutes under the circumstances of the particular case. The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner. It is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective (at 22-23): 

On appeal broker makes several challenges to the cover damages awarded reseller. The trial court awarded reseller $ 36,000 in cover damages, the difference between the cost of 64 new cubicles that reseller purchased at $ 1,562.50 apiece and the contract price of $ 1,000 apiece for the used Radius cubicles.

Section 2712 states in part: "(1) After a breach within the preceding section the buyer may 'cover' by making in good faith and without unreasonable delay any reasonable purchase of or contract to purchase goods in substitution for those due from the seller.

"(2) The buyer [*23] may recover from the seller as damages the difference between the cost of cover and the contract price together with any incidental or consequential damages as hereinafter defined (Section 2715), but less expenses saved in consequence of the seller's breach."

As this court recognized in KGM Harvesting Co. v. Fresh Network (1995) 36 Cal.App.4th 376, 385, footnote 4, the Uniform Code comment on section 2712 states that "cover" includes "goods not identical with those involved but commercially usable as reasonable substitutes under the circumstances of the particular case." (§ 2712, com. 2.) "The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective." (Ibid.)

The Court rejected the appellant's argument that it was unreasonable to cover used office furniture with new because the goods differed significantly. It is ordinarily a factual question for the fact-finder whether a buyer has made a reasonable, good faith purchase of substitute goods. In this case, the Court found that the buyer presented substantial evidence that the appellant's work stations were essentially as good as new and that it was reasonable under these circumstances for the buyer to cover with new work stations. The Court also noted that the trial court was not required to accept the appellant's testimony that he twice offered to provide alternates, as this testimony was contradicted by a representative of the buyer. Another representative of the buyer acknowledged that the appellant offered a possible alternative a week after he was unable to deliver the work stations, but by that time, the buyer had already located substitute goods. Therefore, this offer by the seller did not undermine the evidence that the buyer made reasonable efforts to obtain cover (at 23-24): 

Broker essentially contends that it was unreasonable to cover used office furniture with new because the goods differed significantly.

It is ordinarily a factual question for the fact-finder whether a buyer has made a reasonable, good faith purchase of substitute goods. (Dangerfield v. Markel (N.D. 1979) 278 N.W.2d 364, 368; [*24] Dickson v. Delhi Seed Co. (1988) 26 Ark.App. 83 [760 S.W.2d 382, 389]; see Kanzmeier v. McCoppin (Iowa 1987) 398 N.W.2d 826, 832.) Reseller presented evidence that the Radius work stations, though used, were of high quality. After broker was unable to deliver the Radius work stations, reseller was unable through diligent efforts to locate similar high quality used product. This amounts to substantial evidence that the Radius work stations were essentially as good as new and that it was reasonable under these circumstances for reseller to cover with new work stations.

Broker also contends that he "twice offered to provide alternates." As we pointed out earlier, the trial court was not required to accept broker's testimony on this point, which was contradicted by Dalton. Hollenback did acknowledge that broker offered a possible alternative a week after he was unable to deliver the Radius work stations. By that time, reseller had already located substitute goods. This offer by broker does not undermine the evidence that reseller made reasonable efforts to obtain cover.

In Huntington Beach Union High School Dist. v. Continental Information Systems Corp., 621 F.2d 353 (9th Cir. 1980), the Ninth Circuit Court of Appeals found that the trial court erred when it found that it would have been more reasonable for the plaintiff to accept the second-best offer on July 12, rather than let the other offers lapse and hope that the defendant could obtain and deliver a satisfactory computer by July 31. The Court explained that a buyer can cover through any reasonable purchase, and failure to mitigate reduces recoverable damages only when the course of action chosen is affirmatively unreasonable or in bad faith (at 357):

The defeated bidders' offers to sell the School District a computer remained open, by their required terms, until July 12. On that date, the School District knew that CIS had not yet formally refused to perform and in fact was actively negotiating to obtain a computer from a third party. Rather than declare CIS in breach on July 12 and accept the second-best bidder's offer (thus running the risk of winding up with two computers or being held liable to CIS for breach), the School District chose to let the other offers lapse and to hope that CIS could obtain and deliver a satisfactory computer by July 31.

The district court found as facts that this was a "reasonable" course of action and that the School District acted "in good faith," and the court's conclusion of law was that the School District "acted reasonably." Nonetheless, since the court believed that it would have been "more reasonable" to accept the second-best offer on July 12, it limited the School District's general damages to $12,403.06, the difference between CIS's offer and the offer of the second-best bidder. 452 F.Supp. at 541-42.

This was clear error. A buyer can cover through "any reasonable purchase," Cal. Commercial Code § 2712(1), and failure to mitigate reduces recoverable damages only when the course of action chosen is affirmatively unreasonable or in bad faith. "The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective." UCC § 2-712, Official Comment 2.

The reasonableness of the injured party's efforts must be judged in light of the situation confronting them at the time the loss was threatened and not by the judgment of hindsight. The fact that reasonable measures other than the one taken would have avoided damage is not, in and of itself, proof of the fact that the one taken, though unsuccessful, was unreasonable. It is sufficient if the injured party acts reasonably and with due diligence, in good faith. Therefore, the Court held that the plaintiff was entitled as a matter of law to recover as general damages the difference between the contract price and its actual cover price (at 357):

As a California court has said,

The reasonableness of the efforts of the injured party must be judged in the light of the situation confronting him at the time the loss was threatened and not by the judgment of hindsight. (Citations.) The fact that reasonable measures other than the one taken would have avoided damage is not, in and of itself, proof of the fact that the one taken, though unsuccessful, was unreasonable. (Citation.) "If a choice of two reasonable courses presents itself, the person whose wrong forced the choice cannot complain that one rather than the other is chosen." (Citation.) The standard by which the reasonableness of the injured party's efforts is to be measured is not as high as the standard required in other areas of law. (Citations.) It is sufficient if he acts reasonably and with due diligence, in good faith. (Citations.)

Green v. Smith, 261 Cal.App.2d 392, 396-97, 67 Cal.Rptr. 796, 800 (1968).

Applying the facts as found by the district court to the applicable law, we hold that the School District was entitled as a matter of law to recover as general damages the difference between the contract price and its actual cover price: $59,424.66.

In the unpublished decision of Sun Pac. Mktg. Coop. Inc. v. Dimare Fresh, Inc., CIV-F-06-1404 AWI GSA (E.D. Cal. 2011), the United States District Court for the Eastern District of California explained that there is no cover if the buyer does not purchase like goods but rather purchases goods substantially different. However, this is not to say that the goods must be identical to those contracted for. The cover goods must be commercially usable as reasonable substitutes under the circumstances of the particular case. In this case, the appellant argued that the appellee's purchases did not constitute valid cover because the appellee's purchases did not always match the tomato categories of the contract. The appellee purchased different types, sizes, and grades of tomatoes. The Court found that although the purchases did not all fit into the six categories of the contract, they appeared to generally qualify as cover under Cal. Com. Code § 2712. The evidence showed that some variance in the grade, size, and color of tomato was commercially reasonable and that there were shortages in the specific tomato categories contained in the contract (at 16-17): 

DiMare seeks to collect cover damages under Section 2712. In the alternative, DiMare asserts it can collect damages under Section 2713. See Procacci Bros. Sales Corp. v. Frank's Distrib. of Produce, LLC, 2009 U.S. Dist. LEXIS 42671, *31 (D. Ariz. Apr. 6, 2009) (applying U.C.C. language identical to California law). DiMare has provided a summary of the cover purchases made and how they correspond to the Contract tomatoes. Defendant's Exhibit A. This table lists 102 purchases for the period 9/4-9/10 through 10/30-10/31 and seeks damages of $1,225,362. The information on this table comes from invoices DiMare received from the suppliers. Joint Exhibit 12. Additionally, DiMare seeks attorney's fees and costs for both the present trial and the PACA Hearing. Sun Pacific objects to DiMare's measure of damages on a number of different bases.

First, DiMare's cover purchases did not always match the tomato categories of the Contract. DiMare purchased different types, sizes, and grades of tomatoes. Sun Pacific argues these purchases do not constitute valid cover. "A buyer can cover through 'any reasonable purchase,' and failure to mitigate reduces recoverable damages only when the course of action chosen is affirmatively unreasonable or in bad faith. 'The test of proper cover is whether at the time and place the buyer acted in good faith and in a reasonable manner, and it is immaterial that hindsight may later prove that the method of cover used was not the cheapest or most effective.'" Huntington Beach Union High School Dist. v. Continental Information Systems Corp., 621 F.2d 353, 357 (9th Cir. 1980), quoting Cal. Com. Code §2712 and U.C.C. §2-712, Official Comment 2. "[T]here is no cover if the buyer does not purchase like goods but rather purchases goods substantially different. This is not to say that the goods must be identical with those contracted for, but the cover goods must be commercially usable as reasonable substitutes under the circumstances of the particular case." Kanzmeier v. McCoppin, 398 N.W.2d 826, 831 (Iowa

Page 17

1987) (applying Iowa law whose wording is identical to Cal. Com. Code §2712), citations omitted.

In this case, the tomatoes under the Contract were resold to third parties. Plaintiff has provided DiMare's agreements with two of these third parties. DiMare agreed to sell "US No 1 6x6 gas green tomato" to Jack in the Box and "25# 6x7 red & pink firm" tomatoes to IPC. Plaintiff's Exhibit 18 and 20. While the Jack in the Box contract appears to involve tomatoes that fit a category covered by the Contract, the IPC contract does not. From this evidence, it appears that some variance in the grade, size, and color of tomato is considered commercially reasonable. Further, it is not clear whether the cover purchases of similar tomatoes cost more in the aggregate. The invoices show that Roma tomatoes of different sizes were often sold for the same price. See Joint Exhibit 12, at 10, 11, 22, 35, 59, 71, 73; contra Joint Exhibit 12, at 9, 35, 48, 73. As for differing grades, Mr. Janke was not able to state whether any of the cover purchases were for #2 tomatoes. Trial Transcript, at 315:6-316:6. However, some invoices do indicate that #2 tomatoes were purchased. For example, DiMare purchased from Pacific Triple E both 6x6 Sunripe Jackie tomatoes for $18 and 6x6 JE tomatoes for $14. Joint Exhibit 12, at 31. As Sun Pacific calls #1 tomatoes Airchiefs and #2 tomatoes Stardusts, Pacific Triple E appears to call #1 tomatoes Sunripe Jackies and #2 tomatoes Stardusts. While the quantities do not match those required under the Contract, the court again relies on Mr. Licato's statement that there were shortages in the specific tomato categories contained in the Contract. DiMare's purchases, though they do not all fit into the six catogories of the Contract, appear to generally qualify as cover under Section 2712; the court need not resort to Section 2713.

In the unpublished decision of Primex Farms, LLC v. Chaparral Farms, Inc., F060514 (Cal. App. 2012), the California Fifth District Court of Appeal found that the plaintiff could not cover with unprocessed pistachios because none were available at the time of the breach. Therefore, while the parties did not characterize them as such in the trial court, the finished pistachios the plaintiff bought were arguably substitute goods. Due to the defendant's breach, the plaintiff lost about 20 percent of its anticipated pistachio supply. Accordingly, to mitigate its damages, the plaintiff purchased finished pistachios to compensate for its inventory shortage. There was no indication that these purchases were not made in good faith. However, the price of pistachios fluctuates. Thus, the plaintiff purchased high and, in order to fulfill certain contracts, was required to sell low. Nevertheless, the Court found that the plaintiff made a reasonable effort to avoid loss. Under these circumstances, the losses incurred by the plaintiff in its effort to avoid losses resulting from the defendant's breach were recoverable as damages (at 18-19):

Chaparral argues that the trial court erred in permitting the jury to award Primex damages for its replacement cost loss. According to Chaparral, the finished pistachios were cover goods and Primex did not meet the requirements for cover damages. Therefore, Chaparral asserts, Primex was limited to damages under California Uniform Commercial Code section 2713, i.e., the difference between the market price and the contract price.

As noted above, when a seller breaches the contract, the buyer may cover by buying substitute goods, in good faith and without unreasonable delay. Here, Primex could not cover with unprocessed pistachios because none were available at the time of the breach. Nevertheless, although the parties did not characterize them as such in the trial court, the finished pistachios were arguably substitute goods. (Cf. KGM Harvesting, supra, 36 Cal.App.4th at p. 385, fn. 4.)

In any event, Primex was not required to cover and was still entitled to damages. Primex could recover the difference between the market price and the contract price plus any incidental and consequential damages. (KGM Harvesting, supra, 36 Cal.App.4th at

Page 19

p. 381.) However, because no unprocessed pistachios were available to Primex at the time of the breach, there was no market price. Be that as it may, Primex was not precluded from receiving consequential damages. An award of damages as measured by California Uniform Commercial Code section 2713, is not a prerequisite to an award of consequential damages. (Green Wood Industrial Co. v. Forceman Internat. Development Group, Inc. (2007) 156 Cal.App.4th 766, 773-774.)

Due to Chaparral's breach, Primex lost about 20 percent of its anticipated pistachio supply. Primex must keep an inventory of finished pistachios to maintain the supply during the "off" crop years or risk losing customers both that year and in the future. Accordingly, to mitigate its damages, Primex purchased finished pistachios to compensate for its inventory shortage during 2007 and 2008. There is no indication that these purchases were not made in good faith. However, the price of pistachios fluctuates. Unfortunately, Primex was not prescient and did not time the market properly. Rather, it purchased high and, in order to fulfill certain contracts, was required to sell low.

Nevertheless, Primex made a reasonable, albeit somewhat unsuccessful, effort to avoid loss. Chaparral was the party in breach. Accordingly, the risks incident to Primex's effort are to be carried by Chaparral, the party whose wrongful conduct caused such effort to be necessary. (Brandon & Tibbs v. George Kevorkian Accountancy Corp. (1990) 226 Cal.App.3d 442, 460.) Under these circumstances, the losses incurred by Primex in its effort to avoid losses resulting from Chaparral's breach are recoverable as damages. (Id. at p. 461.)

Authorities:
Cal. Com. Code § 2712 (2022)
CORONO ORO, INC. v. THOMPSON, 2002 Cal. App. Unpub. LEXIS 2501, 2002 WL 471679 (Cal. App. 6th Dist. March 28, 2002)
Huntington Beach Union High School Dist. v. Continental Information Systems Corp., 621 F.2d 353 (9th Cir. 1980)
Sun Pac. Mktg. Coop. Inc. v. Dimare Fresh, Inc., CIV-F-06-1404 AWI GSA (E.D. Cal. 2011)
Primex Farms, LLC v. Chaparral Farms, Inc., F060514 (Cal. App. 2012)