The California and Hawaiian Sugar Company (C&H), a California corporation, is an

Question

The California and Hawaiian Sugar Company (C&H), a California corporation, is an agricultural cooperative owned by 14 sugar plantations in Hawaii. It transports raw sugar to its refinery in Crockett, California. Sugar is a seasonal crop, with about 70 percent of the harvest occurring between April and October. C&H requires reliable seasonal shipping of the raw sugar from Hawaii to California. Sugar stored on the ground or left unharvested suffers a loss of sucrose and goes to waste. After C&H was notified by its normal shipper that it would be withdrawing its services as of January 1981. C&H commissioned the design of a large hybrid vessel--a tug of a catamaran design consisting of a barge attached to the tug. After substantial negotiations, C&H contracted with Sun Ship, Inc. (Sun Ship), a Pennsylvania corporation, to build the vessel for $25,405,000. The contract, which was signed in the fall of 1979, provided a delivery date of June 30, 1981. The contract also contained a liquidated damage clause calling for a payment of $17,000 per day for each day that the vessel was not delivered to C&H after June 30, 1981. Sun Ship did not complete the vessel until March 16, 1982. The vessel was commissioned in mid-July 1982 and christened the Moku Pahu. During the 1981 season, C&H was able to find other means of shipping the crop from Hawaii to its California refinery. Evidence established that actual damages suffered by C&H because of the nonavailability of the vessel from Sun Ship were $368,000. When Sun Ship refused to pay the liquidated damages, C&H filed suit to require $4,413,000 in liquidated damages under the contract. The district court entered judgment in favor of C&H and awarded the corporation $4,413,000 plus interest. Sun Ship appealed. Case Question Brief the facts of the case and assume your boss is seeking your opinions on whether the use of liquidated damage clauses in contracts is good or bad for your business by giving examples of when the clause should and should not be used? Provide convincing arguments for both sides of this issue.

Explanation / Answer

Liquidated damage is paid when we fail to meet the contract with in specified time. The Company like Sun Ship engaged in Vessal manufacturing the liquidated damage is not good in term of finnace. The project like vessal building will take substantial time and uncertainities will cause the company to pay liquidated damages.

The liquidated damage is good for getting more orders. The company who place the order have to get some assurance that project will be completed in time. Depends upon the size and nature of the project the loss of delay in completion will vary. Some times even one month variation will cause huge loss to the company. Suppose Copmany A under take a project of 100 million in January. It wants to complete the same by December. Company A doesnot have the required equipment to complete the project. Company A has signed a contract with Company B for the required equipment. Company A wants to get the equipment latest by March to starts the project. Suppose comapany B fails to supply the equipment. Company A will loos the project and also have to pay compensation for not doing the same.

In the above example Company A has two year time to complete and Company B supplied the equipment by June and Company A is able to manage the situation we can say that situation is not so critical.

The liquidated damage can be used in contract were the loss of the counter party is high and it will affect their reputation also. If incidental loss is negligeble it is advisable not to include liquidated damage clause.

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