Read Case 16-3 in Chapter 16 of our textbook, Stern Oil. v.
Brown, 908 N.W.2d 144 (S. Dak. 2018). Consider the Critical
Thinking questions following the case; then, answer the Ethical
Decision Making questions for this discussion thread.
CASE
16-3
STERN
OIL
CO.
v.
BROWN
SUPREME
COURT
OF
SOUTH
DAKOTA
908
N.W.2d
144
(2018)
FACTS:
Stern
Oil
is
a
fuel
and
petroleum
distributor
based
in
Freeman
operated
by
Scott
and
Staci
Stern
and
Scott's
father, Gillas.
The
business
supplies fuel at locations
across
the
Midwest.
Brown
is
a
businessman
from
Gettysburg.
Brovin
operates
two
convenience
stores
in
North
Sioux
City,
South
Dakota:
Goode
to
Go
and
Freeway
Mobil.
In
2005,
Brown
and
Stern
Oil
entered
into
two
ten-year
Motor
Fuel
Supply
Agreements
(MFSAs)
for
Stern
Oil
to
supply
ExxonMobil
branded
fuel
to
Brown
to
sell
at
his
two
convenience
stores.
The
MFSAs
required
Stern
Oil
to
sell
and
deliver
up
to
a
contractually
determined
“Maximum
Annual
Volume”
of
fuel
to
Brown.
Brown
was
obligated
to
purchase
at
least
75
percent
of
that
amount
annuaily.
Approximately
a
year
and
a
half
into
the
ten-year
agreements,
Brown
stopped
purchasing
fuel
from
Stern
Oil.
Stern
Oil
sued
Brown
for
breach
of
contract.
Brown
counterclaimed
and
asserted
that
Stern
Oil
fraudulently
induced
him
to
enter
into
the
MFSAs
to
the
validity
of
the
MFSAs.
The
circuit
court
granted
Stern
Oil's
motion
for
summary
judgment
on
its
claims
for breach
of
contract
and
on
erbally
guaranteeing
Brown
a
five-cent
profiton each
gallon
of
fuel
sold
at
his
convenience
stores.
Brown
also
asserted
defenses
Brown's
fraud
claims.
The
parties
waived a
jury
on
the
issue
of
damages,
and
the
case
proceeded
to
a
bench
trial
in
October
2009
and
January
2010.
The
circuit
court
awarded
Stern
Oil
lost
profits
in
the
amount
of
$925,317.
ISSUE:
Whether
the
circuit
court
erred
in
instructing
the
jury
that
Stern
Oil’s
damages
had
to
be
foreseeable
to
Brown.
REASONING:
Stern
Oil
argues
that
lost
profits
resulting
from
an
immediate
payment
discount
given
by
ExxonMobil
were
recoverable
as
direct
damages
and
not
as
consequential
damages,
and
as
such,
the
damages
were
not
subject
to
a
foreseeability
requirement.
Brown
contends
that
any
profits
arising
from
the
discount
received
from
ExxonMobil
were
consequential
to
the breach
of
the
MFSAs
because
they
were
based
upon
a
third-party
contractual
agreement
between
Stern
Oil
and
ExxonMobil.
Brown
was
not
a
party
to
that
agreement
and
claimed
he
was
not
aware
of
its
terms,
He
maintains
the
jury
was
properly
instructed.
In
the
alternative,
Brown
claims
that
if
an
error
occurred,
it was
harmless.
Because
Stern
Oil
established
the
factual
basis
to
seek
lost
profits
as
the
alternative
measure
of
damages,
the
remaining
question
Page
377
is
whether
the
circuit
court
erred
in
instructing the
jury
on
consequential
damages
and
the
foreseeability
of
Stern
Oil’s
lost
profits
to
Brown
at
the
time
of
contracting.
The
UCC
does
not
distinguish
between
direct
and
consequential
damages
jor
lost
profits
claimed
by
seller.
.
Where
the
UCC
is
silent,
SDCL
57A-1-103
allows
other
“principles
of
law
and
equity”
to
supplement
the
UCC’s
provisions.
Because
the
UCC
does
not
address
when
lost
profits
are
direct
or
consequential,
we
apply
general
contract
law
in
determining
this
question.
This
Court
has
stated
that
“the
ultimate
purpose
behind
allowance
of
damages
for
breach
of
contract
is
to
place
the
injured
party
in
the
UCCUBES
NOK
GAAFESS
WHEN
10ST
PrOfTS GPE
UIPeCT
OF
CONSE
TUCHITAL,
We
APPIV
GeNePAL
COMPACT
TAW
TH
AeTEF
MINING
THIS
question:
This
Court
has
stated
that
“the
ultimate
purpose
behind
allowance
ofdamages
for
breach
of
contract
is
to
place
the
injured
party
in
the
a
|
position
he
or
she
would
have
occupied
if
the
contract
had
been
performed,
or
to
‘make
the
injured
party
whole.’”
The
amount
of
recovery
may
not
exceed
the
amount
the
plaintiff
would
have
gained
if
the
contract
had
been
fully
performed.
This
Court
has
allowed
a
party
to
recover
lost
profits
for
breach
of
contract.
In
general,
to
prove
damages
for
lost
profit,
a
plaintiff
must
establish
“a
reasonable
relationship
between
the
method
used
to
calculate
damages
and
the
amount
claimed.”
Damages
must
also
be
“reasonably
certain
and
not
speculative.”
Id.
Further,
we
have
required
that
damages
be
a
direct
consequence
of
the
breach
of
contract
and
reasonably
within
the
contemplation
of
the parties
at
the
time
of
making
the
contract.
To
this
end,
‘[cJonsequential
damages
must
be
reasonably
foreseeable
by
the
breaching
party
at
the
time
of
contracting.”
We
have
not,
however,
had
an
occasion
to
address
the
distinction
between
lost
profits
as
direct
or
consequential
damages.
A
number
of
courts
have
wrestled
with
this
question.
DECISION
AND
REMEDY:
The
lost
profits
claimed
by
Stern
Oil
are
direct
damages,
not
consequential
damages.
We
require
a
non-
breaching
party
to
show
that
consequential
damages
were
foreseeable
to
the
breaching
party
at
the
time
of the
contracting.
In
contrast,
direct
damages
for
breach
of
contract do
not
have
an
element
of
foreseeability
because
they
are,
by
their
very
nature,
foreseeable
by
the
parties
at
the
time
of
contracting.
Because
the
lost
profit
damages
flowed
directly
from
the
MFSAs,
Stern
Oil
did
not
have
an
obligation
to
show
foreseeability.
SIGNIFICANCE
OF
THE
CASE:
This
case
illustrates
the
limits
to
which
damages
may
be
assessed
against
a
breaching
party.
Clearly
lost
profits
are
not
just
consequential
but
are
direct
and
foreseeable
damages
under
any
kind
of
breach
and
foreseeability
need
not
be
proven
by
the
plaintiff.
CRITICAL
THINKING
Can
you
envision
a
situation
where
lost
profits
are
not
foreseeable?
What
if
the
buyer
is
not an
obvious
merchant?
A
home
baker
orders
a
supply of cake
ingredients
for
her
home
bakery
business.
The
seller
fails
to
deliver
the
correct
supplies
and
the
home
baker
loses
a
number
of
lucrative
wedding
cake
customers.
The
supplier
had
no
idea
it
was
dealing
with
a
commercial
baker
but
thought
the
delivery
was
a
home
delivery.
Should
lost
profits
be
recoverable?
ETHICAL
DECISION
MAKING
Following
up
on
the
critical
thinking
issue
above,
should
it
make
a
difference
at
all
whether
a
buyer
or
seller
is
a
merchant
or
not.
Should
a
merchant
beheld
to a
higher
standard?
If
the
seller
above
was
a
neighbor
from
whom
our home
baker
were
buying
supplies
from
and
who
subsequently
breached,
should
the
neighbor
be
liable
for
lost
profits?
Running head: LIMITS OF DAMAGES 1
Limits of Damages
Name
Course
Tutor
Date
LIMITS OF DAMAGES 2
Limits of Damages
The award of damages against a party in breach of contract in a commercial transaction is
highly based on the foreseeability of the damages that were suffered by the person claiming the
damages (Kippenham et al., 2023). When dealing with a merchant as the buyer, it is easy for the
seller to foresee the loss that could be suffered if he fails to deliver as expected. However, this is
not the case when the seller is unaware that the buyer is a merchant and could suffer significant
loss from failure to deliver as expected. While the standards may be higher for merchants than
individuals who only engage in the selling of products in a way that is noncommercial or when
the purchase is made for home use, I believe that each party has a duty to fulfill their obligation
as per the agreement.
Therefore, I do not think it should make a difference whether the buyer or seller is a
merchant or not. I think that the lost profits should be recoverable as consequential damages as
long as the plaintiff can prove the amount of damages that were suffered were foreseeable as
legally required (Tran & Hutton, 2019). The buyer must also show that the seller accepted
liability for any profits that would be lost. In this case, the seller was not aware that the buyer
was a merchant or aware of any profits that would be lost if he failed to deliver; hence he cannot
be held liable unless the buyer can prove with reasonable certainty that the lost profits were
foreseeable (Harris et al., 2020). If the seller was a neighbor of the buyer, the buyer would still
have to prove that the seller was aware that she was a merchant making a profit and take liability
in the contract for lost profits to recover from the seller. Therefore, the buyer would only recover
the lost profits if the seller accepted liability for lost profits under their agreement.
The Bible in Matthew 5:23-24 says, “Therefore, if you are offering your gift at the altar
and there remember that your brother or sister has something against you, leave your gift there in
LIMITS OF DAMAGES 3
front of the altar. First go and be reconciled to them; then come and offer your gift” (New
International Version, 2011). This means that one has to accept the consequences of their actions
and take responsibility. The seller, in this case, has to accept that he made a mistake and take
responsibility for it, and while the law may protect him because the lost profits were not
foreseeable, he should find a way to make peace with the buyer.
LIMITS OF DAMAGES 4
References
Harris, D. M., Garner, D. R., Meyers, C. M., & Lockridge, B. N. (2020). The Anatomy of Lost-
Profits Claims in Franchise Cases. Franchise Law Journal, 40(2).
https://heinonline.org/HOL/LandingPage?handle=hein.journals/fchlj40&div=22&id=&pa
ge
Holy Bible, New International Version (2011). Biblica (Originally published in 1973).
https://www.biblegateway.com/passage/?search=Matthew+5%3A23-24&version=NIV
Kippenham, N., Kubasek, N., Brown, M., Herron, D., Dhooge, L. & Barkacs, L. (2023).
Biblical Worldview Edition of Dynamic Business Law. McGraw Hill Education.
Tran, L.H. & Hutton, T.R. (2019). Forensic Analysis and Lost Profits Damages Measurements.
https://willamette.com/insights_journal/19/spring_2019_5.pdf
