BCO125 – Business Law Academic Year 2021 – 2022 (Spring)

“The Lost Profit” Case Study

Instructors

Alexandra Severino ([email protected]) Paulo Lopes ([email protected])

河南省优质电视机有限公司 [HENAN HIGH-QUALITY TV, LIMITED] is a Chinese

company that has sold 1 000 television sets to IMAGEM FANTÁSTICA, SA [FANTASTIC

IMAGE, PLC], a Brazilian company based in the State of Rondônia.

The contract consisted of an e-mail sent on 13 April 2016 by the Brazilian company

asking for the delivery within the following sixty days of 1 000 TV sets and indicating the

reference number for the desired model. On the next day, the Chinese company accepted

the order. Furthermore, it indicated that it was foreseeable that the delivery of the goods

would happen thirty days after the payment of the respective price (€ 150 000). As a result,

the buyer paid the price due it that same day.

Forty-six days after paying this price, the buyer lost a deal that would yield a € 100 000

profit because the televisions had not yet been delivered. Twenty days later, as the buyer

still did not have the merchandise, it lost another opportunity to sell all the TVs for a total

profit of € 75 000.

The seller finally delivered the goods on 5 July 2016 (82 days after the price was paid).

The Brazilian company sold all the devices on that same day for a profit of € 50 000.

May the buyer claim any damages to the seller?

The Lost Profit (Case Study)

I. Introduction

The factual background is already established above. If any information gap is faced, it

is possible to approach alternative scenarios. However, any factual assumption made

should be mentioned.

Both companies entered into a contract for the international sale of goods, considering it

as «A sale involving a buyer and seller with places of business in different States» (August

et al., 2012:540). Which means that the situation has elements of connection with more

than one State, demanding the intervention of the private international law branch to

manage the three main issues that arise from the presence of a foreign element of

connection in a given situation: Which court is competent to hear the case? Which law will

be applied to the case? How can the case decision be recognised and enforced in another

country? (Kiestra, 2014). Regarding the case under analysis, only the question about

knowing which law governs the contract is relevant, as no question about jurisdiction or

recognition and enforceability is raised. It is relevant to note that there is no reference to

any choice of law by the parties.

The parties to the contract seem to be regularly incorporated, and both are limited

liability business organisations. There is a clear difference in the type of organisation in

question, as the Chinese company is a private limited company, and the Brazilian

company is a public limited company. Regardless, both of them protect «managers and

investors from personal liability for the debts of the corporation and the actions of others,

but not against liability for their own negligence (or other torts and crimes)» (Beatty et al.,

2013:764). It is noteworthy that a company must act within the objects set in its

memorandum of association — anything done beyond is 'ultra vires' (Beatty et al., 2013)

— and management can be personally liable for such unlawful action.

Answer (Proposed Guidelines)

It is clear that the object of the contract is the 1 000 TV sets, and the consideration is

the price paid of € 150 000. There is no reason to question this contract's legality or its

parties' capacity and consent.

Regardless, it seems unclear if the Chinese company was bound to deliver the goods

thirty days after the payment of the price or in the sixty days following the order from the

Brazilian company. Considering that a deal was lost between these two deadlines, this

issue may be relevant in this case discussion.

II. Discussion

Considering the above mentioned, the fundamental problems raised by the case are:

Which law governs the contract? Is there a valid and effective contract of sale between the

parties? When should the goods be delivered?

Establishing the applicable law can be a laborious task. Each State has the right to

regulate its public order — legislating for everyone within its territory and even for its

nationals regarding actions abroad (Lowe, 2003:329). The private international rules to be

applied in the choice of the law applicable to the case may differ depending on the

jurisdiction where the dispute is presented.

China signed the United Nations Convention on Contracts for the International Sale of

Goods (CISG) on 30 September 1981, accepted it on 11 December 1986, and the

convention entered into force for this State on 1 January 1988. Brazil became a participant

State on 04 March 2013, and CISG entered into force regarding this new member on 01

April 2014. As the Chinese seller and the Brazilian buyer concluded the contract on 14

April 2016, CISG will govern the contract according to its Art. 1(1)(a). There is no reason to

consider the application of the convention excluded under its Arts. 2 and 3. The UNIDROIT

Principles of International Commercial Contracts (PICC) may be used to interpret or

supplement the CISG if necessary, as provided in its preamble.

The CISG governs the formation of the contract of sale (Art. 4), providing that «A

contract is concluded at the moment when an acceptance of an offer becomes effective in

accordance with the provisions of this Convention» (Art. 23). According to Art. 18(2) from

this convention, «An acceptance of an offer becomes effective at the moment the

indication of assent reaches the offeror». As the e-mail from the Brazilian company meets

the requirements to be considered an offer [Art. 14(1) CISG], the reply from the Chinese

company was the acceptance of the offer and became effective at the moment it reached

the Brazilian company (14 April 2016). As the dispute does not regard the contract's price,

it is irrelevant to analyse how it was established. However, it is relevant to mention that

article 55 from the CISG accepts an offer as such, even if it does not expressly or implicitly

fix or make provision for determining the price, which may have been what happened in

the case under analysis.

«A contract of sale need not be concluded in or evidenced by writing and is not subject

to any other requirement as to form. It may be proved by any means, including

witnesses» (Art. 11 CISG). Therefore, there is no problem with the formalities observed to

conclude the contract. China and Brazil are not States that presented reservations against

the convention provisions that allow a contract to be made in any form other than in

writing.

As seen above, the seven key characteristics of a contract are present: Offer,

Acceptance, Consideration, Legality, Capacity, Consent, and Writing (Beatty et al., 2012).

So, there is no doubt about the enforceability of this agreement.

The above-mentioned leaves unanswered the question about the seller's obligation to

deliver the goods. One could problematise the possibility of the Chinese company's reply

being a counter-offer (Art. 19 CISG). However, it seems polemical to defend that the seller

had the intention of anticipating the deadline for the delivery of the TV sets. The CISG

provides the early delivery of the merchandise (Art. 37), but that does not apply to the case

under analysis, as the Brazilian company established a period for the delivery of the goods

[Art. 33(b)], which the seller accepted.

According to the mentioned Art. 33(b) from CISG, the seller must deliver the

merchandise within the period fixed in the contract. Furthermore, there is no responsibility

from the Chinese seller for the first deal lost by the Brazilian company. However, on the

other hand, this is not true regarding the second sale that was lost. The Chinese seller was

bound to deliver the goods sixty days after the e-mail sent by the Brazilian company. This

deal was lost sixty-seven days after the offer sending because the Chinese company failed

to perform its obligation of delivering the bought goods timely.

As the Brazilian company accepted the seller's delayed delivery, any possibility of

terminating the contract is lost [Art. 49(2) CISG], and would not be available as, according

to Art. 49(1)(b) CISG, the right to avoid presupposes that the non-performing party fails to

deliver the goods within the additional period of time fixed by the buyer. In the case under

examination, the Brazilian company did not fix such a period for the delivery.

The Chinese company breached the contract by failing to deliver within sixty days. The

buyer is entitled to recover any damages resulting from the twenty-three-day delivery delay

[Art. 45(1)(b) CISG]. The loss of profit from the second lost deal was € 75 000. However,

the Brazilian company ensured measures to mitigate the loss of profit resulting from the

breach of contract (Art. 77 CISG) — namely the sale made on 5 July 2016, ensuring a

66% reduction on the damages caused by the seller's late delivery.

The loss of profit resulting from the delay (€ 75 000 – € 50 000 = € 25 000) amounts to

16% of the value of the goods bought. Given the circumstances of this case, this value

must be considered within the loss foreseeable at the time of the conclusion of the contract

as a possible consequence of its breach (Art. 74 CISG). As «any other sum in

arrears» includes damages (Art. 78 CISG and Article 7.4.10 PICC), the Brazilian buyer is

entitled to interest. The CISG does not provide the rate of interest on the unpaid amount. If

necessary, Article 7.4.9(2) from PICC may be used to set it.

III. Conclusions

The CISG governs this contractual relationship, and the UNIDROIT PICC may be used

to interpret or supplement the convention.

The agreement between the parties is legally enforceable, presenting all fundamental

elements of contracts.

The seller failed to perform its obligation of delivering the goods (Art. 30 CISG),

infringing the principle pacta sunt servanda (Art. 1.3 PICC), and must compensate, as

seen above, the aggrieved party for the loss of profit suffered (€ 25 000) as well as pay the

respective interest over these damages.

Nothing in the case can sustain the exemption from the Chinese company's liability to

pay damages for the loss of profit suffered by the Brazilian company.

Bibliography

August, R., Mayer, D. & Bixby, M. (2012) International Business Law. (6th ed.)

Indianapolis: Prentice Hall.

Beatty, J.F., Samuelson, S.S. & Bredeson, D.A. (2013) Business Law and the Legal

Environment. (6th ed.) Mason, Ohio: South-Western, Cengage Learning.

Kiestra, L.R. (2014) The Impact of the European Convention on Human Rights on

Private International Law. Hague: T.M.C. Asser Press.

Lowe, V. (2003) Jurisdiction. In: Evans, M.D. (ed.) International Law. Oxford: Oxford

University Press.

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