A-case-where-contractual-breach-caused-major-loss

Business risk: Contractual breaches

Author: Doug Hall, James Kirk (yBC.tv)

Categories: Business risk
Tags: commercial contract, contracts, Czech Republic, deals, Korea, loss, manufacturing business, parnerships, partners, profit
Business risk may hit in unexpected ways during an economic downturn. In this TV Doug Hall discusses a case where a contractual breach caused major loss.

A business risk case study

A commercial contract between two parties has to be mutually advantageous, so I acted for a client in the Czech Republic a couple of years ago and they supply components which go into engines for ships, very large components. In 2007 ship building in the far east was booming and err, their Korean customer wanted to make sure they can sufficient of these components, they wanted to secure suppliers, so they’d make a contract with my Czech clients. In 2008 the world changes, suddenly they literally stop building ships, so what was previously mutually advantageous suddenly is onerous for the Korean party to that contract, they don’t want those components anymore so they breach, they say ‘We don’t care about the contract, we’re not going to buy your components anymore’. So firstly there’s a question on liability, where they entitled to breach. The second question is what has the Czech manufacturer lost by reason of not being able to supply those components. So the question is how many units they will have sold and what profit they would have made per unit and both of those variables sound very simple but if you imagine how you can make a profit or how you’d measure profit in a very large manufacturing business there’s all kinds of detail in how you do that. So that’s broadly a kind of situation where a breach causes a loss. So in that case err it was tens of millions of dollars, you could have exactly the same situation where it’s £10,000, err one party to a contract decides they don’t want to continue with it, the other party says ‘Well if you had continued I would have made some money and I want to be compensated for the money that I’ve lost as a result of your breach’.

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