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Contract Case C

An equipment manufacturer (Manuco) contracted to build a heat recovery steam generator for a paper company (Paperco) for $7.5 million, to be paid in monthly installments. The contract allowed Manuco to terminate if payment was more than 10 days late. Paperco was consistently over 20 days late in payments but Manuco accepted late payments and said it understood Paperco's cash flow issues. By September, Manuco was losing money on the contract due to its own errors. It terminated the contract when the August payment was unpaid by September 15th.

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Hayley Rouillard
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35 views

Contract Case C

An equipment manufacturer (Manuco) contracted to build a heat recovery steam generator for a paper company (Paperco) for $7.5 million, to be paid in monthly installments. The contract allowed Manuco to terminate if payment was more than 10 days late. Paperco was consistently over 20 days late in payments but Manuco accepted late payments and said it understood Paperco's cash flow issues. By September, Manuco was losing money on the contract due to its own errors. It terminated the contract when the August payment was unpaid by September 15th.

Uploaded by

Hayley Rouillard
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Contract Case C

An Ontario pulp and paper company ("Paperco") entered into a written equipment supply
contract with a manufacturer of heat exchange and turbine equipment ("Manuco"). According
to the agreement, Manuco was to design, manufacture, and deliver a heat recover steam
generator for Paperco's pulp and paper mill in Ontario for a purchase price of $7.5 million.
Paperco would arrange to install the equipment in its mill as part of a cogeneration system for
the purpose of converting steam into electricity.

According to the agreement, Manuco was to begin manufacturing the equipment on February
1st and deliver the finished product to Paperco on or before March 30th of the following year.
The agreement provided that Paperco would pay the $7.5 million purchase price in monthly
installments over the manufacturing period. The agreement contained the following provision:

Each installment of the purchase price shall be due and payable by Paperco on the last day of
the month for which the installment is to be made. If Paperco fails to pay any installment within
10 days after such installment becomes due, Manuco shall be entitled to stop performing its
work under this contract or terminate this contract."

As work progressed, Manuco invoiced Paperco for each monthly installment. Although Paperco
paid the first installment on time, it was more than 20 days late in paying each of the second,
third, fourth, fifth, and sixth installments. Manuco never once complained about the late
payments, even when Paperco apologized for the delayed payments and commented in a
meeting with Manuco that Paperco's current cash flow difficulties were the reasons for the late
payments. Manuco even commented at three separate meetings, in response to Paperco's
acknowledgment of its cash flow difficulties, that it understood that Paperco had cash flow
problems and that Manuco was prepared to wait for the late payments provided the payments
weren't more than 30 days late.

By the middle of September, it became apparent to Manuco that due to serious cost overruns
resulting from its own design errors and lack of productivity, it would stand to lose a substantial
amount of money on the contract by the time the equipment would be completed. Although
the installment for August had been invoiced and was due on August 31st, Paperco had not
paid it by September 15th. On September 15th, Manuco terminated the contract.

Was Manuco entitled to terminate the contract? Identify the contract law principles that each
of Paperco and Manuco may argue should apply and explain the basis of the principles of how
they should apply.

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