Reformation / Default & Implied Terms
XYZ CO. Versus ABC corp.
Directions: Review the fact pattern and question and use IRAC to answer the question.
Michael is a Procurement Agent for ABC Corporation. On July 13th, he enters into a contract to purchase ten (10) aircraft engines from XYZ Company to incorporate into airplanes that ABC Corp. will manufacture. ABC Corp. has ordered these engines in the past, so he did not feel the need to specify a price. The last time Michael ordered these engines, the unit price was $10,000. The final contract is silent on the price and states that delivery of the engines will occur on October 15th, with Net 30 days payment terms.
Michael returns from a short vacation on October 16, 2018 to find that ABC Corp. has not received the aircraft engines, and he has also received an invoice charging $12,000 per engine; higher than he expected. Michael complains to XYZ Co. and is informed that the engines are ready for pickup at the XYZ Co. shipping dock. Michael is also informed that the increased price went into effect two (2) weeks ago due to increased materials costs. Michael demands that XYZ Co. deliver the product to ABC Corp.’s facility at the $10,000 unit price. XYZ Co. claims they have performed under the contract and states that payment of the $12,000 unit price is already one (1) day late. In turn, ABC Corp. refuses to make payment.
What would a court likely hold if XYZ Co. brought suit against ABC Corp. for payment under the contract? Please set forth the applicable rules of law and explain how a court would likely apply them to the facts presented.
XYZ CO. Versus ABC corp.
Michael works as a procurement agent for ABC Corporation. On behalf of his company, he enters into a contract for the purchase of 10 aircraft engines from XYZ Company. Since the company has ordered these airplanes in the past, Michael did not see any need to have the price specified. In the previous purchase, the price was $10,000. The contract made between the ABC CO. And XYZ Corp. does not state the marked price of the engines but only the delivery time. After coming back from his vacation, Michael received an invoice for $12,000 for each one of the engines, a value higher than the previous price. He lodges a complaint and was informed that they were ready for delivery.More so, XYZ Corp. Informed him that the new price was effected two weeks ago. Michael insists that the product must be delivered at the price of $10,000 per unit. XYZ states that the payment under the contract is already late by a day. ABC Co. refuse to honor the payment thus creating a stalemate.
Michael was aware of the market price of the aircraft engines but during the contract, the price was not included. The two parties entered into a silent contract that only stated the time of delivery for the engines. Michael and in extension ABC Co. is aware of the cost of the engines and the variations that occur due to the cost of materials. Therefore, the price of a product could vary at different times of purchase. XYZ Corp quoted a higher price without informing ABC Co. Finally, XYZ failed to deliver the engines in time as agreed under the contract.
The rule of law
A contract is only valid if it fulfills all the elements. There must be the parties entering the contract, an offer, acceptance, and legal subject matter in case of breach. When Michael signed the contract on behalf of ABC, the contract became valid. The contract falls under the open price term. This is because nothing was said about the price (Karapetov, & Shirvindt, 2020).Also based on the market price at the time of signing the contract, both the buyer and seller were aware of the value.
In a lawsuit brought before the court by XYZ Co., there is no basis of characterizing the issue as a breach of contract by ABC Co. Under the Open price rule, the parties entering into a contract are expected to do so in good faith. This means that fairness must be observed by both parties. Michael entered into a contract with XYZ Corp. in consideration of their previous contracts and was well aware of the market price of the airplane engines. In case of any changes, XYZ Corp. was obligated to communicate the same to Michael and inform him of the price adjustments before the delivery date. However, XYZ corporation adjusted the price without notifying ABC Co. Under the Open Price rule, this was not done in good faith. Under the open price rule, if a price fails to be fixed when non of the two parties is at fault, the contract can be canceled or the price fixed at a reasonable value. Therefore, XYZ Corp. is not showing any goodwill by pushing ABC Co to pay for the engines at a price that they are not aware of.
ABC Co is not in breach of the contract. XYZ Corp should agree on a reasonable price with ABC Co for the engines or cancel the contract.
Karapetov, A. G., & Shirvindt, A. M. (2020). Freedom of Contract in Respect of Price Terms in Russian Law: With a Special Focus on Price Terms in Standard Form Contracts. In Control of Price Related Terms in Standard Form Contracts (pp. 531-560). Springer, Cham.