Question

The NSW Beef Farmers [‘NSWBF’] breeds a mix of Mashimi and Wagyu cattle, producing a unique and expensive beef product selling for $200 per kg on wholesale markets. In November 2019, NSWBF signed a binding agreement with China Beef Imports [‘CBI’] to provide 500kg of their beef, each week during 2020 to 2023, with NSWBF responsible for delivering the beef to the CBI warehouse in Beijing as part of the agreed price. NSWBF arranged freight contracts with Wantas Airlines to fulfil these deliveries, at a cost of $9 per kg. NSWBF’s agreements with CBI and Wantas made no mention of pandemics, flight cancellations, or Government restrictions on flights or trade.

In April 2020 Wantas cancelled all scheduled flights to China, due to the Covid19 pandemic. Freight remained possible via special Wantas flights, or alternative flights via Hong Kong or Singapore, but with limited cargo space on each flight, the cost of freight has increased to $290 per kg.

CBI has received an exemption from import restrictions for Australian beef products, as the beef products are very popular amongst wealthier people in Beijing. CBI is insisting that NSWBF meet their contractual obligations and continue beef deliveries. NSWBF has a cost of production of $110 per kg of beef, and will lose a large mount of money each week if they continue to make deliveries to CBI paying the increased freight costs.

Discuss whether NSWBF must still deliver beef under their contract, given the rise in freight costs between Sydney/NSW and China.

Answer 1

As per me, NSWBF should deliver beef under their contract, though the frieght costs have increased between Sydney/NSW and China. Non fulfilling of contract will result into breach and may attract lawsuit also. It can also become a question mark on the reputation of NSWBF negatively impacting their goodwill in the market. A legal contract between two parties is an enforceable contract though one of the parties may be suffering financial losses. The promises under contract are enforced by law. Both the parties have to upheld their responsibilities under a contractual agreement. The breach of contract may lead to serious disputes between the parties.

In the above case, the freight cost has increased from $9 to $209. It is a significant increase of more than 2000 percent ((209-9)/9*100). The total cost of product for NSWBF now will be $290+$110 = $400 per kg and the selling price is just $200 per kg. It is a direct loss of $200 per kg. For 500 kg NSWBF will loose 500*$200=$100000 per week which is a huge amount. Still, due to contractual agreement NSWBF should supply beef to CBI.