As in the case of a complete destruction of the grape crop, the seller should notify the buyer when the seller first becomes aware of the problem. Under the California Commercial Code, anything less than “perfect tender” (i.e., grapes meeting the exact specifications of the parties) is a breach of contract.
In the event of a breach, the buyer may recover damages, generally the difference between the contract price and either the price at which the buyer bought substitute grapes or the fair market value of the grapes. The buyer is also entitled to consequential damages to the extent they were foreseeable. This might include lost profits suffered on the buyer’s end as a result of the defective grapes.
In order to recover damages, the buyer must mitigate its damages. This means attempting to purchase substitute grapes. It may also mean selling the damaged grapes if they are in the buyer’s possession and at risk of perishing or further deteriorating in quality.
Section 2613 of the California Commercial Code may also apply and has slightly different rules. Where goods are identified (e.g., grapes from a certain vineyard), the buyer has a right to demand an inspection. Thereafter, the buyer can cancel the contract or accept delivery. This can be done either in whole or in part.
If the buyer cancels the contract, neither party has any additional liability. If the buyer accepts the grapes in their non-conforming/damaged state, the buyer is entitled to an adjustment in purchase price, basically the difference between the price of the grapes as promised and the price of the grapes as delivered (in their damaged state). The buyer in this case would not be entitled to consequential damages (as the buyer might be in a case where Section 2613 does not apply).
In addition to grape purchase contracts, the above rules also apply to a custom wine making agreement whereby the seller agrees to sell finished wine to the buyer under the buyer’s label. These agreements can sometimes be more detailed than a grape purchase agreement (especially with respect to the quality and specifications of the finished product). In all cases, reference must first be made to the terms of the written agreement itself which may expressly or implicitly allocate the risk of loss in a different manner. Many of these agreements have detailed dispute resolution procedures and (sometimes) limitations of liability (e.g., disclaiming consequential damages and the like).
Most grape purchase and custom winemaking agreements have force majeure clauses. It is important to review this language. For example, clauses only apply if the seller’s operations are suspended for things like fire and would not cover things like smoke damage to the grapes or the wine.