Fact Pattern

Within about three months after Solutions and Galactic executed the definitive contracts for the integration project, Solutions had delivered and installed the InteGREATER 2k software and completed three of the four Custom Integrations.

The problems continued to prevent Solutions from completing the "Fourth Integration" and the parties now stand at impasse over how to proceed. Solutions says that Galactic failed to provide crucial information about their systems as part of the project scoping and, if they had provided that information, Solutions would not have agreed to the Fourth Integration. Galactic says, in essence, that Solutions held themselves out as experts in system integration and should have assessed the four integrations more diligently.

Communications between the parties are now quite strained, and both sides have threatened lawsuits. Galactic is withholding payment for part of the completed work until Solutions completes the Fourth Integration. Solutions has refused to deliver the Training Materials for the completed work until they are paid, so Galactic is having difficulty using the InteGREATER 2k system and the three completed Integrations.

Solutions tendered a proposal for a large change order to the original contract that estimates the additional cost to make necessary changes to the InteGREATER 2k software and complete the Fourth Integration at approximately $100,000. However, the estimate is not a firm, fixed-price, and Solutions says they cannot offer a fixed price due to uncertainties in the project. Galactic believes that Solutions is trying to charge them for work they will eventually have to do anyway for their other customers.

Meanwhile, Galactic has notified Solutions that they are losing between $2,000-5,000 per day in orders because they cannot access data in the integrated systems fast enough to respond to customer requirements. They claim that these losses result directly from Solutions' failure to complete the Fourth Integration. Further, some of Galactic's most senior sales representatives are threatening to quit because the system problems are making their jobs very difficult. If they do quit, Galactic says it will lose more than $1 million as a consequence. If there is a lawsuit, Galactic says it will hold Solutions responsible for all of these actual and potential losses.

Read the Practical Law articles on Damages for Breach in Commercial Contracts and Risk Allocation in Commercial Contracts and address the following scenarios.

• For questions A & B, assume it is clear that Galactic did not breach the contract and that Solutions has breached.
• For question C, assume that it is clear that:
  • Both parties may have breached but questions of fact remain unanswered, and
  • It may be that only one of the parties breached.
• For question D, the assumptions are detailed in the question.

1. The facts presented above describe several different types of damages that may be recoverable in the event of breach of contract. Some damages include compensation for failure to adequately deliver a product or complete a service while others address indirect losses resulting from a breach. For example, if you hire a painter to paint the exterior of your home for a fee of $6,000 and the painter only paints one-half of the house, the direct damages would likely be $3,000 (half of the cost). If, as a result of not painting the whole house, some of the wood siding began to rot, the cost of replacing the damaged wood would be an indirect or consequential element of damage. By default, both types of damage would likely be recoverable but language in the contract may change the outcome.
   • With reference to the Practical Law text on damages, what potential damage claims could be described for the CEO? What amounts would be recoverable?
2. Frequently, commercial contracts include language that limits the types or amounts of damages that may be claimed by a non-breaching party against a breaching party.
   • If the contract between Galactic and Solutions includes the following language, how would the potentially recoverable damages be affected?
     • B.1 "Limitation of Liability. In no event will either party be liable to the other for special, consequential, indirect, or speculative damages."
     • B.2 "Limitation of Liability. In the event of breach by Solutions, the absolute limit of liability Solutions will be obligated to pay to Galactic for any cause individually or all causes in the aggregate shall be the total amount paid by Galactic under this Agreement."
3. While Galactic has threatened to sue Solutions (and Solutions has in turn threatened to sue Galactic), Galactic's CEO would strongly prefer to find a less costly and time-consuming way to resolve the dispute.
   • Review the Domke on Commercial ADR excerpt and identify three alternative dispute resolution (ADR) procedures that the parties could consider. The three alternatives identified should include at least one method that would empower the parties to determine their own solution to the dispute and another method that would provide a neutral third-party to determine what a fair solution would be.
   • Describe the procedures and assess the advantages and disadvantages of each.
4. Finally, assume that after protracted negotiations, Solutions concedes that they should have completed the Fourth Integration and agrees to do so at their own cost provided that Galactic pays the originally agreed fee for the Fourth Integration and the fees for training materials and support. This agreement would settle all of the issues between the parties except for compensation for Galactic's claims for lost sales during the delay in implementing the Fourth Integration. Galactic believes these losses total $500,000 and Solutions counters that much of that is speculative and believes that the actual losses are only $100,000.
   • How could the parties resolve this issue through "Final Offer Arbitration" as described in 3:13 of the Domke article?
   • If Galactic proceeds with this arbitration, what amount would the Galactic CEO to propose to the Arbitrator?