Sunday, April 22, 2012

How much do you owe?

My wife received a bill from one of her suppliers. The bill was for the entire contract price even though no work was performed. Her company had breached their obligations to provide materials so work could be done. She asked me what did they owe the company? Could the Supplier invoice the full amount? Clearly there was a breach of the agreement. The agreement itself included no limitation of liability provision and the governing law was English law. Payments were due in consideration of the supplier’s services of which none were provided.

The supplier clearly has the right to terminate the agreement and claim damages. The question here is what damages could they claim and could they claim the entire amount of the contract?

Since no work was scheduled and then cancelled there was no impact on their personnel expense. Since work was not performed, no cost or liabilities were incurred on the work. I concluded the supplier suffered no direct, indirect or consequential damages. As there was no limitation of liability precluding claims for lost profits, I determined that they could claims lost profits. There is a significant difference between what the lost profits would be and the full amount of the contract. My opinion was that the difference between the amount of the lost profits and the full amount of the contract would be considered a penalty and would not be allowable under English Law. A penalty is when one party would be unjustly enriched at the expense of the other party. In this the supplier had invoiced for work they simply had not performed. Since they incurred no costs, getting paid for costs they didn’t incur would be unjust enrichment.

Suppliers may invoice for things they clearly aren’t owed. Always consider what they are contractually entitled to.

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