Contract Analysis

Contract law shows that the main reason for this law is to enforce promises and agreements that have been made between two parties. If a broken contract is taken to the law courts then there will be certain criteria that will be examined before deciding whether or not the contract can be enforced.

In its purest form, a contract exists when there an offer is made and there is a subsequent acceptance of that offer. In order to make the contract complete there must also be specific terms and conditions set out and accepted. DTC/E and CL/E meet enough of the listed criteria which are indicted through the memorandum of understanding that was signed by both parties. This memorandum of understanding was an agreement between both parties, and although it is not fully binding in the same way a contract is, it was strong enough that DTC/E dubbed CL/E their preferred long-term supplier indicating that CL/E will account for the majority of DTC/Es purchases.

Next, a call from DTCs CEO provided heartfelt and sincere appreciation for their level of risk they were taking on in conjunction with assurances of DTC/Es commitment to the partnership. From CL/Es perceptive this gave them the contract a green light and as a result, they proceeded with purchasing and investing funds into NewCo.

The terms and conditions spelled out that CL/E would provide the Product to meet pricing and volume commits over a multi-year term and further details about material breach of contract were explained in the draft contract.

Once all terms and conditions have been offered and accepted, and no further negotiations are intended then the contract can said to be complete or full.1 This is critical as this helps to prevent later misunderstanding by forcing he parties to articulate their intentions and desires. 2 It also reinforces the fact that a contract gives rise to legal rights and duties.3

Breach of Contract: The financial issues being experienced by DTC in the U.S. (i.e. declining stock price, cash reserve, and pending FDA approval) set the stage for DTC/Es significant decrease in volume orders, thus changing its forecasted purchases from CL/E. The need to save capital has forced DTC/E to purchase from other local suppliers for substantially less resulting in significant cost savings for DTC/E. This is permissible so long as DTC/E compensates CL/E for a specified percentage of what they would have made from the cancelled amounts.

Unfortunately, they are also hiding behind the fabrication of CL/Es inferior quality as a means of getting out of the contract, but audits performed by third parties reveal that this is in fact, not true.

Consequently, by not paying CL/E the difference in cancelled orders (by claiming a lack of quality) DTC/E is in material breach of contract which has resulted in the closing of NewCo. This entitles CL/E to damages

Appropriate damages based on Cambridges claim When one party has breached the contract, the party who has performed is entitled to various remedies for the breach. Reliance damages - This requires the breaching party to pay the non-breaching party an amount that puts the non-breaching party in the same position they would have been in if the contract was performed. CL/E would not have purchased the NewCo plant had it not worked closely with DTC/E senior management and seen DTC/Es projected 5 year rolling forecast. CL/E should be award monetary awards that cover the loss incurred from the drop in projected orders and cover the profits that CL/E would have made and DTC/E should buy back NewCo from CL/E

Non contractual items to consider in this case would be:

Mental or Physical Suffering. Ordinarily, damages are not recoverable for mental suffering resulting from a breach of contract in the absence of physical injury. However, the closing of the NewCo plant has resulted in the redundancy of the workers. The added cost of severance packages, money owed to subcontractors, etchas caused mental/physical suffering therefore damages should be awarded.

"Whenever the terms of a contract relate to matters which concern directly the comfort, happiness, or personal welfare of one of the parties, or the subject matter of which is such as directly to affect or move the affection, self-esteem, or tender feelings of that party, he may recover damages for physical suffering or illness proximately caused by its breach."[Westervelt v. McCullough (1924) 68 C.A. 198, 228 P. 734]

Recommend Course of Action As part of their legal strategy CL/E should involve detrimental reliance based on promissory estoppels. Detrimental reliance can be used by CL/E to force DTC/E to perform their obligations under the specified contract, using the theory of promissory estoppel.

Promissory estoppel may apply when the following elements are proven:

A promise was made- this was made during the CEO during the telephone conference you have my word that we are indeed partners and we at DTC will absolutely live up to all our commitments to you, going forward.

Relying on the promise was reasonable or foreseeable- consultations with senior DTC management led to acquisition and capital expansion.

There was actual and reasonable reliance on the promise- memorandum of understanding along with attached purchase forecast indicating significant ramp-up in volume over five years.

Injustice can only be prevented by enforcing the promise

There was reasonable reliance on the promises made by DTC that put CL/E in a position of detriment, (or detrimental reliance). This combined with the current purchase orders that are only 5% of the minimum quantity specified in the contract, (which is not within reason or good faith) and not compensating CL/E on lost profits, the courts should rule in favor of CL/E.

The Future: With the plant closed CL/E can only hope to recoup its lost funds through the litigation process, but as it stands right now this deal is a wash. Whats important is for CL/E to understand that while oral agreements, (backed by memorandums of understanding, promises and projections) can be used, it is imperative to have in place formal written contracts before fully engaging in operations. In the end it is a solid and formal contract which will safeguard CL/E resources and protect their interest in the future.

Sources: 1.http://www.contractsandagreements.co.uk/law-of-contracts.html 2,3 Bagley, Constance and Craig E. Dauchy. The Entrepreneurs guide to Business Law. 4th edition, South-Western 2012, 2008. Shaughnessy, Dennis. When is a Deal a Deal A Contract Law Case. 2012 http://www.legalmatch.com/law-library/article/breach-of-contract.html