Horizons, Inc. v. Avco Corp.

Avco Corporation (Avco) (defendant) sold remanufactured engines through authorized-domestic distributors. Horizons, Inc. (Horizons) (plaintiff) contacted Aviation Sales, Inc. (Aviation Sales), an authorized-domestic distributor, to purchase an Avco-engine for one of its company airplanes. Aviation referred Horizons to another authorized-domestic distributor named Casper Air Service (Casper). Casper sold an Avco-engine to Horizons that proved to be defective. Horizons sued Avco for breach of express and implied warranties of fitness for an ordinary purpose and fitness for a particular purpose. During trial, Horizons presented evidence that its president habitually explained the nature of Horizons’s business. Horizons also presented evidence that Avco sent mailings to Horizons’s business address, which identified Horizons as an aerial photographer, and that Casper had previously modified Horizons’s plane for aerial photography. The district court ruled in Horizons’s favor and, in addition to general damages and incidental damages, awarded Horizons $56,265.00 in consequential damages for the value of production capacity lost during the engine’s down time. The district court reasoned that consequential damages were warranted because Aviation Sales was Avco’s agent who had reason to know of Horizons’s business pursuant to South Dakota’s version of Uniform Commercial Code (UCC) § 2-715, which South Dakota law imputed to Avco as the principal. In calculating the consequential damages, the district court ignored the fact that Horizons ultimately received the full contract price for its delayed contracts by treating Horizons as a lost-volume seller. The district court multiplied the contract payment rate per square mile times the number of square miles that the aircraft could have covered had the engine worked properly for the 57.7 hours of productive time lost, and then subtracted the operating costs and cost of materials.