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Trading Tip: Assessing Damages

Following a breach of contract the injured party is entitled to be made whole.  This is the guiding principle when assessing damages.  Although the claimant’s assessment of whether the carrier earned its freight may seem relevant, in fact, it is not.  Let’s look at three slightly different scenarios where a shipment of romaine shipped out of California is purchased on an F.O.B. basis by a wholesale buyer on the East Coast.

In the first scenario the shipment arrives with only minor damage, say one pallet shifted in transit causing $500 in losses.  The injured party (the buyer) is made whole when damages of $500 are deducted from the breaching party’s invoice (the freight invoice).  Easy enough.

Similarly, in a scenario where a shipment arrives with major damage, say warm temperatures causing $10,000 in losses after salvage, the buyer is made whole when it deducts its losses from the freight invoice and recovers any additional losses from the carrier.    So, if the cost of the freight was $7,000, the buyer applies a credit against the freight invoice in this amount and is owed the balance of its damages, or $3,000, from the carrier.

Generally speaking, these first two scenarios don’t lead to much confusion.

But what about a scenario where the driver never delivers to its final destination?  Maybe the driver goes AWOL or has an accident during the first day of the trip.  In these circumstances claimants are sometimes tempted to seek to recover the full destination value of the shipment, let’s say $20,000, from the carrier without accounting for the freight invoice “because the carrier didn’t earn its freight.”

And while a driver that goes AWOL, for example, surely didn’t earn his freight, what the driver or the carrier earned is not relevant to the damage assessment.

If the carrier would have delivered as contracted, the buyer would have received product with a destination market value of $20,000 and the buyer would have been obligated to pay the carrier’s $7,000 freight bill.  Therefore, the buyer is made whole when it recovers $13,000 from the carrier.  If the buyer were to recover $20,000 from the carrier “because the carrier didn’t earn its freight,” the buyer would improperly make out better than it would have had there been no breach.  The anticipated cost of the freight needs to be deducted as a savings, if not as a credit, to arrive the amount due the buyer.

Simply put, the injured party is entitled to be made whole, it is not entitled to a windfall—regardless of our sense of what the carrier may have earned.