For years, Hai Yun, a Chinese instrument manufacturer, made high-quality drums for Armadillo, which was a major distributor of musical instruments in the United States.

Armadillo put great time and effort into developing a new line of drum kits called “Diablo.” Hai Yun provided samples of possible Diablo kits. After Armadillo approved both the design and quality of an appropriate drum kit, it placed an order with Hai Yun for 1,000 Diablos.

Hai Yun delivered the kits in five shipping containers (of 200 units each) to Armadillo’s Florida headquarters. Because Armadillo trusted Hai Yun, it immediately sent the first container of 200 to its retail stores, without checking them first.

Almost immediately, Armadillo was overwhelmed with complaints: The drums looked nothing like the approved samples and the wood was warped and cracked beyond repair. Upon inspection, Armadillo confirmed that all the other drum kits were also catastrophically defective. Armadillo tried to fix them, but they could not be salvaged or sold

Hai Yun did not respond to complaints and failed to take any steps to cure the defective goods. Because the Diablo brand was damaged beyond repair, Armadillo had to cease distribution and discontinue the line.

Armadillo sued Hai Yun for breach of contract seeking direct, incidental, and [consequential] damages. Because the parties had agreed that Florida law would govern their agreement, the UCC applied to this international contract. Continuing its trend of unresponsiveness, Hai Yun did not answer the complaint and the court issued a default judgment. The main issues for determination were the categories and amount of damages.

Questions:

1. Was Armadillo entitled to direct, incidental, and consequential damages?

2. What were Armadillo’s direct damages?

3. What were Armadillo’s indirect damages?

4. What were Armadillo’s consequential damages?

5. How important was documentation of losses in this case?