Ms Webster: Thanks for coming in to see me. Could you briefly outline the current problem?
Mr Powell: Of course. Two months ago we entered into a supply contract with Brownstone Ltd retail chain stores. As this will lead to a large increase in production, we’ve invested in several more machines, employed more workers and have had to find a new fabric supplier.
Ms Webster: Cotton Solutions?
Mr Powell: Yes, that’s right. But we haven't received the fabric yet and are in serious risk of not being able to produce the suits for Brownstone in time for the opening of their new store. The Brownstone contract is important for us. As long as we meet the terms of the initial contract, and they’re happy with the suits, they’d be interested in placing a regular order.
Ms Webster: OK, so you have a supply contract with Cotton Solutions for the fabric and a contract with Brownstone for the finished suits. If things go well with Brownstone, there will be further contracts to follow. But you haven’t been able to start producing the suits as Cotton Solutions have failed to supply you with the fabric. Is that right?
Mr Powell: That's right.
Ms Webster: OK, so time is of the essence here. When do the suits need to be ready?
Mr Powell: Well, the store opens in six weeks. We told Brownstone they’d have the suits a week before the opening. If the suits aren’t ready the consequences would be huge. We’d lose the Brownstone contract, we’d be over-staffed and I wouldn’t be able to keep up payments on the new machines. And that’s not all. I recently invested in a small factory. If I don’t meet the mortgage payments I’d risk forfeiture—I could lose everything.
Ms Webster: I’m quite sure that we can avoid all this, but we have to act fast. Can I ask what contact you’ve had with Cotton Solutions?
Mr Powell: When we didn’t receive the fabric by the agreed date we tried to call them. We couldn’t get through, we left a message asking them to get back to us. But they didn’t.
Ms Webster: Have you considered an alternative fabric supplier?
Mr Powell: No.
Ms Webster: OK, well—this may be a problem should we end up having to sue for damages.
Mr Powell: Really? But they're clearly in breach, aren't they?
Ms Webster: Yes, they are. But I’m assuming that you want to try to find some way of being able to produce the suits in time for the store opening.
Mr Powell: Yes, we certainly want to keep the Brownstone contract.
Ms Webster: Of course. But if you do lose the Brownstone contract you may be able to recover damages from Cotton Solutions equal to the profits you’d have made on both the current and future contracts with Brownstone.
Mr Powell: I’d assumed that that was the case.
Ms Webster: As I said, you may be able to recover. First, you need to show that you’ve taken reasonable steps to mitigate your loss. That’s to say that you’ve done what you can to keep the losses to a minimum. To do this you need to start looking for an alternative supplier immediately. I’d like to see a copy of the contract with Cotton Solutions. Do you have one with you?
Mr Powell: Yes, here it is.
Ms Webster: Ah. Can I ask, did you consult a lawyer when drafting the contract?
Mr Powell: Er, no. We downloaded a standard form contract from the Internet and made a few changes where necessary.
Ms Webster: Hmmm. OK. Let’s say you terminate the contract and find another supplier. Cotton Solutions then finally deliver the fabric you were supposed to receive. You’d probably want to refuse delivery. My concern is that Cotton Solutions might then pursue you for damages. I’m looking at the clause concerning the date of delivery. It’s not absolutely clear whether this is a warranty or a condition.
Mr Powell: I’m sorry?
Ms Webster: A warranty, in the legal sense, is a non-essential term. If there’s a breach of warranty, the non-breaching party can sue for damages—but cannot, generally, terminate the contract.
Mr Powell: So if we do lose the Brownstone contract we could sue, but we may still have to buy the fabrics from Cotton Solutions?
Ms Webster: Yes. But not if we can show that the delivery clause is an essential term, or a condition. A breach of a condition is fundamental breach, this means that the non-breaching party can terminate the contract and sue for damages. In cases such as yours where the fulfilment of one contract is dependent on the completion of another, the court would interpret the delivery term as a condition. You relied on that condition when you entered into the contract with Brownstone. It seems clear that Cotton Solutions are not going to perform the contract. If this is the case, you’ll certainly suffer a material loss.
Mr Powell: Whatever the legal issues may be here I really need to keep the Brownstone contract.
Ms Webster: Right. How long do we have before you need to start production?
Mr Powell: Two weeks, maximum.
Ms Webster: OK. I’ll write to Cotton Solutions this afternoon notifying them of their breach and our intention to sue for damages. I don’t think we need to give them a further opportunity to cure, you’ve already tried to contact them twice without success. I’ll contact you shortly concerning the next steps.