BCO125 – Business Law Academic Year 2021 – 2022 (Spring)
“The Lost Profit” Case Study
Instructors
Alexandra Severino (alexandra.severino@euruni.edu) Paulo Lopes (paulo.lopes@euruni.edu)
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.
