You have worked hard to setup your business for a profitable quarter: once you receive the materials from your suppliers, you can deliver to your customers and turn a profit!
But what happens when your key supplier doesn’t deliver? That’s when you need to ensure that your contract enables you to claim Consequential Damages. Many suppliers seek to insert a Limitation of Liability section into their agreements that eliminates claims for Consequential Damages. If you want to hold your supplier responsible for lost profits that could result from your supplier’s failure to deliver, you should make sure that claims for Consequential Damages are not waived or prohibited.
Your would have made a certain profit if your supplier honored the contract and delivered. Thus, your lost profit was a consequence of your supplier’s failure to deliver as promised. Thus, your lost profits may be deemed Consequential Damages.
So how does this play out in the real world? Here’s a story we heard (literally) through the grapevine:
The famous Sun-Maid Raisin Growers of California were planning another year of big sales, with buyers lined up for millions of pounds of raisins. At the last minute, several of their raisin supplier refused to deliver. Sun-Maid tried to find replacement suppliers, but a drought made alternative raisin sources scarce. The result was that Sun-Maid had to forgo hundreds of thousands of dollars in profits they would surely have earned had their suppliers delivered.
Not surprisingly, Sun-Maid filed a lawsuit against the suppliers, claiming lost profits that it would have earned had the supplier delivered. The court agreed, finding that Sun-Maid should be left by the Supplier in "as good a position as if the [Supplier] had fully performed” its duties under the contract. Sun-Maid could never have achieved this result if they agreed to a contract that had a limit on Consequential Damages.
So what is the lesson for your business? If you are relying on key suppliers, study any Limitation of Liability clauses in your contracts carefully. If you spot a limit on Consequential Damages, try to renegotiate it. Of course, for those of you lucky enough to use Contract Wrangler, we spot those limitations on liability for you automatically so your raisins are never at risk.