Total Waste Disposal Ltd. (TWD) made a contract with the City of Kingsville for collection of garbage in a growing area of the city. When the contract was made, there were 3,000 households in the collection area. The contract was for three years, and TWD estimated that in three years time there would be 1,000 more households in the area. TWD agreed to remove all garbage in the defined area for three years for $400,000 a year. TWD projected a profit of $75,000 on the contract. The area developed more quickly than expected. By the end of the first year, there were 4,000 households and more growth appeared likely. TWD broke even in year one, but it now predicts significant losses in years two and three. TWD is considering whether to approach the City for renegotiation of the contract for years two and three.
How does this contract allocate the risk? How else could the risk have been allocated? Should TWD request renegotiation? On what terms? What factors should the City consider in responding to the request? Has the contract been frustrated? Should TWD try to buy its way out of the contract? What is the best strategy for TWD?