Question

answer the question

Spud Co. is a dealer in potatoes. Chip Co. makes potato chips. On Monday, Spud and Chip enter into a contract in which Spud agrees to deliver 100 bushels of potatoes to Chip on Friday; Chip agrees to pay Spud $2.00 per bushel.

Spud’s cost of growing and delivering potatoes ? $100.

Chip’s cost of converting potatoes into chips ? $100, $25 of which must be spent on Friday morning before the potatoes are delivered and which cannot be recovered if no potatoes arrive.

If no potatoes arrive on Friday, Chip must wait until Monday to call around to alternative suppliers to purchase potatoes. The price of potatoes on this “spot” market is $3.00 per bushel. The price of potato chips is $4.00 per bushel. Assume that Chip paid for the potatoes at the time the contract was signed. Just before delivering the potatoes to Chip at noon on Friday, Spud receives a frantic phone call from Babette, the chef at Chez Babette. She has discovered that the potatoes she bought from someone else are rotten and she needs 100 bushels immediately to make her famous vichyssoise (a fancy name for cold potato soup) that weekend. She is willing to pay $5.00 per bushel as she cannot wait till Monday to buy potatoes on the spot market.

Is breach efficient? Under what measures of damages will efficient breach be achieved?

Variation 1. Assume for this variation that Chip paid for the potatoes at the time the contract was signed. Just before delivering the potatoes to Chip at noon on Friday Spud receives a frantic phone call from Babette, the chef at Chez Babette. She has discovered that the potatoes she bought from someone else are rotten and she needs 100 bushels immediately to make her famous vichyssoise (a fancy name for cold potato soup) that weekend. She is willing to pay $5.00 per bushel as she cannot wait till Monday to buy potatoes on the spot market

Is breach efficient? Under what measures of damages will efficient breach be achieved?

Answer 1

First Part : Efficient Breach is a voluntary breach of contract and payment of damages by a party who concludes that they will incur great economic loss by performing under the contract.

In the current scenario, the breach is efficient as Spud Co. would incur economic loss if he abides by the contract which he has done with Chip Co. The price which is offered by Babette is very lucrative and would result in greater profit for Spud Co. which he should follow in ideal scenario.

Second Part: Efficient breach will be achieved only when Spud Co would gain benefits even after incurring all the damages which he will have to pay to Chip Co as he had signed a contract with him.

Total damages suffered by Chip Co =

1) Extra price which Chip Co had to pay for purchasing potatoes at spot rate from market= 100 bushels @ $3.00 per bushel.instead of $2,00 per bushel which implies extra cost = 100 x $(3-2) per bushel = 100 x 1 = $100.

2) $25 cost for conversion of potatoes into chips which had to be paid in advance on Friday morning itself before the potatoes could be delivered.

Hence from the above, total damages that Chip Co would incur because of non performance of contract by Spud Co=

$100 +$25 = $125.

Now, since Spud Co is going to cater the needs of Babette who is in a urgent need of $100 bushels and is ready to pay $5 per bushel , so total income that Spud Co would be generating out of the transaction would be-

=100 bushels x $5 per bushel = $500 .

The price which Chip Co was paying to Spud Co was $ 2 per bushel which was coming to 100 bushels x $2= $200.

So, extra income from selling potatoes to Babette = $500 - $200 = $300.

Final Economic benefit after efficient breach= Extra income (-) Damages paid to earlier party

= $300 (-) $125

= $175.

So, we can conclude by saying that efficient breach has been achieved as Spud Co is gaining $175 extra on the entire transaction.