Question

Ross Enterprises has a contract with Big Steel Company Limited in respect of Information Technology (IT) Services. The contract was signed on January 1st 2020 and will be effected on the 1st April 2020. In mid-February 2020 Big Steel’s sales plummeted due to the Covid 19 pandemic. In addition, an already high long term debt, and operating cost, as well as Big Steel’s current negative cash flows situation placed the company in serious financial peril. Indeed if they cannot find a resolution soon to deal with their cash flow problems and debt, they will have to close operations permanently and send all employees home. Upon hearing this pronouncement, the Trade Union representing workers at Big Steel advised management that they will take strike action. This further affected the operations of Big Steel and resulted in a loss of production, sales and the much-needed cash flows, which is critical to pay off their debt and meet current fixed operating cost. On 3rd March 2016, Big Steel files for bankruptcy and sent all employees home. On the 4th March, Big Steel wrote Ross Enterprises advising of their circumstances and the virtual impossibility of implementing the sign contact for IT Services, which is scheduled to commence on 1st April 2020. Ross Enterprises is adamant that they have binding arrangement and wanted to proceed as per signed contract. However Big Steel has advised Ross that certain events, covid 19, global recession and a subsequent strike has culminated for which the company has little or no control of. Thus, it was impossible to implement the contract on the agreed start date due to these circumstances.

Advise Ross Enterprises on this matter.

Answer 1

After critically analysing the case and taking all the facts presented into consideration, it is quite evident that the insolvency of Big steel Company cannot be considered as breach of contract because of the prevailing unforeseeable conditions company faced such as covid pandemic, followed by strikes which worsened the financial position of the company. Therefore Ross enterprise have very less chances of winning based on the notion that breach took place.

The Big steel company due to the events, such as covid 19, global recession and a subsequent strike has the right to suspend the contract for a particular period of time. And if Big steel company is not able to revive the company then either of the parties can resolve mutually to terminate the contract. However.

Ross Enterprises in such case houd look if the parties had agreed on any payment protection in the contract with the insolvent party value of works properly executed. Ross Enterprises should further prepare a list listing the claims which can ne made out of terminating the contract which shall involve any losses and expenses incurred by Ross and the cost of terminating the contract. Moreover it shall also include the cost of software, equipments, technical know how, man power etc ordered in advance to excute the contract on time to get a reimbursement..

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