Question

Lumber Company Limited ("LCL") sells wood to retail customers. Tree Company Limited ("TCL") owns several woodlots across the Maritimes. TCL chops down trees and sells them direct to wood resellers and hardware stores. TCL and LCL have engaged in conversations to lock in pricing on wood. On Tuesday, LCL and TCL enter into a contract in which TCL agrees to deliver 1000 trees to LCL on Thursday and LCL agrees to pay $5.00 per tree. One tree can be converted into one supporting beam for new house construction. TCL's cost of chopping down the trees and delivering is $2000. LCL's cost of converting the trees into support beams is $1000, $500 of which must be spent on Thursday morning before the trees are delivered and which cannot be recovered if the trees do not arrive. If no trees arrive on Thursday, LCL must wait until Friday to purchase trees on the spot market for $6.00 per tree. You should assume that if TCL breaches, LCL is required to go to the spot market. LCL can sell their support beams for $10.00 per unit. Assume that TCL collects payment at the time the contract is entered into. Just before delivering the trees on Thursday, TCL gets a call from Fire Wood Company Limited ("FWCL") who desperately needs trees to service supply contracts. FWCL needs 1000 trees immediately and is willing to pay $8.00 per tree. (a) is it efficient for TCL to breach the contract? (b) under what measures of damages will efficient breach/performance be achieved?

Answer 1

In this scenario, the question is whether it is efficient for Tree Company Limited (TCL) to breach the contract with Lumber Company Limited (LCL) and under what measures of damages efficient breach/performance will be achieved. The answer explains that to determine efficiency, TCL needs to consider the opportunity costs and potential damages. The measures of damages will depend on the difference between the contract price and the market price at the time of breach.

Step-by-step explanation:

In this scenario, TCL has entered into a contract with LCL to deliver 1000 trees on Thursday at a price of $5.00 per tree. However, just before delivering the trees, TCL receives a call from FWCL who is willing to pay $8.00 per tree for immediate delivery. The question is whether it is efficient for TCL to breach the contract and under what measures of damages efficient breach/performance will be achieved.

To determine if it is efficient for TCL to breach the contract, we need to consider the opportunity costs. If TCL breaches the contract with LCL, they can sell the trees to FWCL at a higher price of $8.00 per tree, resulting in a greater profit. However, TCL will also need to consider the potential damages that LCL can claim if they breach the contract.

The measures of damages that will determine whether efficient breach or performance will be achieved include the difference in the contract price ($5.00 per tree) and the market price at the time of breach ($8.00 per tree). If the market price is higher than the contract price, LCL can claim the difference as damages. On the other hand, if the market price is lower than the contract price, TCL can argue that LCL did not suffer any damages.