438 F.2d 500 (8th Cir. 1971)
Paul Lewis, doing business as Lewis Lumber Company, has operated a sawmill in Cove, Arkansas, since 1956.1 In 1963, to meet competition, Lewis purchased a used hydraulic system from a competitor that was in good operating condition at the time of purchase.2 The system remained in storage at his plant until November 1964, when it was installed in a newly constructed mill building.3
In November 1964, Lewis asked Frank Rowe, Mobil's local dealer with whom Lewis had done business for many years, to supply the proper hydraulic fluid for the gear-type pump system.4 Rowe stated he did not know the correct lubricant, contacted a Mobil representative, and recommended Ambrex 810, a straight mineral oil containing no chemical additives. Lewis began operations with the new equipment using this oil.5
Within days the oil changed color, foamed over, and overheated.6 Multiple oil changes produced no improvement.7 By late April 1965 the system broke down completely, requiring installation of an entirely new system.8 Between April 1965 and April 1967, Lewis replaced six Commercial-brand pumps.9 In April 1967 he installed a Tyrone-brand pump that failed after three weeks.
On May 9, 1967, a Mobil engineer visited the plant for the first time, flushed and cleaned the entire system, installed a new Tyrone pump, and recommended oils containing chemical additives.10 The system thereafter operated without further difficulty.11 Lewis brought a diversity action against Mobil seeking damages for the equipment failures and related business losses.12 A jury returned a verdict for Lewis in the amount of $89,250, and Mobil appealed the resulting judgment to the Eighth Circuit.13
Whether the transactions between Lewis and Mobil's local dealer created an implied warranty of fitness for Lewis's specific hydraulic system?14
Under Arkansas law, which has adopted UCC § 2-315, an implied warranty of fitness for a particular purpose arises where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish suitable goods, unless excluded or modified.15
Yes. Lewis informed Rowe that the oil was needed for his specific gear-type pump hydraulic system installed in his sawmill, stated he did not know the proper lubricant, and relied on Rowe to obtain the correct recommendation from Mobil.16 Rowe knew Lewis was converting his sawmill to hydraulic operation, relayed the request to a Mobil representative without seeking further details, and supplied Ambrex 810.17 These facts satisfy both elements of the warranty: Mobil had reason to know the particular purpose, and Lewis relied on Mobil's expertise.18
The circumstances fall squarely within Comment 1 to § 2-315, as the seller had reason to realize the purpose and reliance even without explicit statements of every requirement.19
Yes, the transactions created an implied warranty of fitness for Lewis's specific hydraulic system.20
Whether the evidence was sufficient to support the jury's finding that use of Ambrex 810 caused the repeated breakdowns in Lewis's hydraulic equipment?21
On appeal from a jury verdict, evidence must be viewed in the light most favorable to the verdict, and the verdict will be sustained if there is sufficient evidence that the breach of warranty proximately caused the damage, including expert testimony on causation and circumstantial evidence such as the resolution of problems after the recommended change in product.22
Yes. Plaintiff's expert Edwards testified that Ambrex 810 lacked necessary additives, caused pump cavitation through inadequate air release, and was unsuitable for the equipment, directly resulting in the metal flaking, contamination, and repeated pump failures.23 A second expert and the equipment manufacturer confirmed that a non-additive oil was unsuitable.24 The Mobil engineer changed the recommendation to an additive oil upon inspection, after which the system operated without issue for two and one-half years.25
This evidence, together with the timing of failures while using Ambrex 810 and the absence of similar problems under the prior owner or with additive oil, supports the jury's finding that the oil caused the breakdowns rather than filtration or other factors.26
Yes, the evidence was sufficient to support the jury's finding that use of Ambrex 810 caused the repeated breakdowns.27
Whether Lewis could recover damages for the full two-and-one-half-year period during which he operated with Ambrex 810?28
Under UCC § 2-715(2)(a), consequential damages are recoverable only for losses that could not reasonably be prevented by cover or otherwise, and the buyer has a duty to mitigate damages with reasonable diligence; failure to give timely notice under § 2-607 may bar recovery, but notice is judged by commercial standards and need only alert the seller that the transaction remains troublesome.29
Yes. Lewis repeatedly notified Rowe that he suspected the oil and asked for confirmation it was correct, satisfying the reasonable notice requirement under Comment 4 to § 2-607.30 Neither Lewis nor Rowe knew the chemical requirements or that Ambrex 810 was unsuitable until the Mobil engineer visited and changed the recommendation.31 Lewis tried multiple oil changes, switched pump brands, and consulted the dealer and manufacturer; requiring an independent expert as a matter of law would exceed the duty of reasonable diligence under the circumstances.32
The jury was properly instructed on mitigation and found Lewis acted reasonably.33
Yes, Lewis could recover damages for the full two-and-one-half-year period during which he operated with Ambrex 810.34
Whether loss of profits during the period Lewis used Ambrex 810 constituted recoverable consequential damages?35
Under UCC § 2-715(2), consequential damages include losses resulting from general or particular requirements of which the seller had reason to know at contracting and that could not reasonably be prevented. The tacit-agreement test is rejected. Lost profits are recoverable when proximately caused by and the natural result of the breach, such as when a seller knows goods are for use in a manufacturing process where defective goods will disrupt production.36
Yes. Mobil knew the oil was to be used in Lewis's sawmill manufacturing operation and that defective oil would cause equipment failure and production curtailment.37 Loss of profits is a natural and proximate consequence of such disruption.38 Arkansas precedent allowing recovery of lost profits measured by lost crops in seed-warranty cases supports this result, and the UCC commentary expressly rejects any requirement of conscious acceptance of insurer liability.39
Evidence of market demand, pre- and post-breach profits, and actual lost production provided a reasonable basis for the jury to approximate the amount.40
Yes, loss of profits during the period Lewis used Ambrex 810 constituted recoverable consequential damages.41
Whether Lewis could recover lost profits for the period after he discontinued Ambrex 810 because of his reduced operating capacity?42
Consequential damages under UCC § 2-715 are limited to losses proximately resulting from the breach. Losses caused by the buyer's own capital limitations rather than the breach itself are not recoverable, even if the breach contributed to the buyer's weakened financial position.43
No. After switching to additive oil, Lewis operated at only 50 to 60 percent capacity solely because of insufficient capital resources resulting from prior expenses and shutdowns.44 The defendant oil company is not responsible for the capitalization of the buyer's business, and conventional financing sources would have been available if a market truly existed for full production.45 These post-breach lost profits were caused by Lewis's capital situation, not by the breach of warranty.46
No, Lewis could not recover lost profits for the period after he discontinued Ambrex 810 because of his reduced operating capacity.47