Question

Sterling, Inc. is a manufacturer of state-of-the-art computers. For the past ten years, Sterling has acquired all of its microchips from NoBugs Corporation, the only producer of chips meeting Sterling's high specifications. The relationship has been mutually profitable. Sterling could not have built its reputation as an industry leader without NoBugs's reliable and consistently high-quality products; Sterling's business has enabled NoBugs to grow rapidly while providing its investors with an attractive rate of return. Some months ago, several of Sterling's computers exploded shortly after installation. Upon investigation, Sterling discovered that tiny imperfections in NoBugs's microchips had aggravated a dormant design defect in the computers, causing the explosions. Analysis of the chips indicated that they were indeed below specifications and that the imperfections were caused by a slight miscalibration of NoBugs's encoding equipment. NoBugs recalibrated the equipment and promptly resumed production of perfect chips. Sterling's losses from the explosions - lost profits, out-of-pocket costs associated with compensating customers for the explosions, and injury to business reputation - are estimated to exceed $20 million. Sterling and NoBugs disagree on the amount of the loss for which NoBugs should be responsible. Sterling has a strong legal case for breach of contract against NoBugs. Sterling's CEO is considering a lawsuit. She asks you to prepare a report discussing litigation strategy and the advantages and disadvantages of litigation; and discussing pretrial planning should the company opt for litigation.

Answer 1

Facts to consider: -

1. NoBugs Corporation is the only producer of chips meeting Sterling's high specifications.

2. The relationship has been mutually profitable.

3. Sterling could not have built its reputation as an industry leader without NoBugs's reliable and consistently high-quality products.

4. Sterling's business has enabled NoBugs to grow rapidly while providing its investors with an attractive rate of return.

5. Explosions occur due to defect in NoBugs chips.

Since such explosions were caused mainly due to defect in Nobugs chips, it has caused loss of reputation, money, brand image, customer loyality to the brand in addition to the monetary loss of $20 million.

It takes years for a brand to develop a reputaion in market and its value is not easily to quantify. Its loss is not limited to one period but customers will consider this fact while making a decision of buying Sterling's computer even in future.

Since NoBugs could not meet the specification as mentioned and required by Sterling and commited a breach of contract, Sterling is looking for a compensation from NoBugs limited on above mentioned grounds.

Advantages :-

Sterling will be able to recover the losses cuased if decision comes in favor.

Disadvantage:-

Since NoBugs is the only vendor available that can provide Sterling will chips of required specification, a law suit can hamper the relation between two companies and may result in discontinuing the contract.

In that case Sterling will have to go and look for another vendor and this can lead to loss in production dduring this lead time.