Running Head: NATURAL GAS CASE STUDY 1

Natural Gas Case Study

Diane K. Pearson

University of Phoenix

NATURAL GAS CASE STUDY 2

Natural Gas Case Study

In 1990, the buyer and seller in this case agreed that the seller would provide the buyer

between 700 and 800 metric tons of propane gas at a cost of $376 per ton. The buyer also agreed

to provide the seller with a letter of credit (L/C) to secure financial assurances. In order for the

buyer’s bank to complete the issuance of the L/C, the buyer required the location of the port of

loading. The buyer requested this information from the seller, who in turn stated that the buyer

would receive the details on location at the time of determination.

Concurrent with the discussions of this issue, the seller requested that the buyer increase

its initial order. The buyer secured a subcontracted order with a reseller that promised to pay

$381 per ton on a load of 3,000 tons. As a result of this agreement, the buyer would add to the

order with the seller and also earn an extra $15,000 from the increase in price of $5 per ton.

The following January, the buyer again requested loading information from the seller,

reiterating that the bank required this detail prior to issuing the L/C. At this point, the seller

stated that it had not secured clearances necessary for bringing goods into Belgium. This

required the subcontracted company to locate replacement propane at a higher cost than what

was agreed to with the buyer. Ultimately, the buyer sued the seller in an attempt to recover

losses and costs associated with this transaction.

Risks for Participants

Because the participants in this transaction are not in geographical proximity with each

other, there exists a greater risk of misunderstanding terms of contracts. Deals conducted over a

telephone line or via the Internet can create confusion and be difficult to enforce when the

process becomes more detailed or if a snag in plans occurs. Therefore, clarification may rely on

regular face-to-face interaction. Had both seller and buyer conducted such meetings, the urgency

NATURAL GAS CASE STUDY 3

of need for information may have been better communicated by the buyer and the seller may

have been more motivated to provide that information. During such meetings, the participants

may have also touched on the topic of required documentation and approvals for moving goods

to the destination. By involving representatives of the subcontracted reseller in these

discussions, the buyer may also have promoted the related necessity of completing the terms of

the agreement as expected.

Breach of Contract

“Terms and conditions are a fundamental part of a legally binding contract and any

broken terms can lead to breach of contract” (Contracts, 2010, p. 1). In this case, breach of

contract rests with the seller. Not only did the seller fail to obtain the proper clearances required

for exporting goods to its destination, the seller also failed to provide the buyer with the

information required to complete the L/C. This stalled the buyer’s efforts in accomplishing this

necessary task and removed the buyer from liability for breaching the contract. By failing to

provide needed information to the buyer for completion of the L/C the seller neglected to carry

out contract-related tasks that would have moved the agreement to completion. The resulting

failure of the buyer to have the L/C issued stemmed from the lack of action by the seller.

Therefore, the buyer is not responsible for the collapse of the terms of the contract.

The contract was not avoided by the buyer, as the buyer did not ask to cancel the contract

and was not in a position to return items (August, Mayer, & Bixby, 2009). Moreover, the buyer

is entitled to receive reimbursement for the $5 per ton overage agreed to with the subcontracted

reseller. The seller would be responsible for this reimbursement because the actions of the seller

caused the loss of this income for the buyer: a material breach with extensive effects on the

execution of the contract (Contracts, 2010).

NATURAL GAS CASE STUDY 4

As noted by August, Mayer, and Bixby (2009), the buyer would not qualify to receive

compensation for damages if the buyer did not take steps to lessen or mitigate the chance of loss.

The seller claimed that the buyer had not taken these steps but could not prove this lack of

action. Because the seller could not show that the buyer had failed to mitigate the chance of loss,

the buyer had the right to receive compensation for losses sustained.

Outcome

At the conclusion of this case, the court determined that the seller had failed in the duties

required to fulfill the terms outlined in the natural gas contract by not providing requested

information. The seller also neglected to procure the correct approvals for shipping the natural

gas to its destination. Although the buyer also failed to carry out actions within the agreement by

not issuing the L/C, this was the result of the initial shortcomings of the seller. Because the

seller was at fault with regard to provision of necessary details and attainment of export

approvals, the seller breached the contract, which enabled to the buyer to seek damages for lost

income.

NATURAL GAS CASE STUDY 5

References

August, R., Mayer, D., & Bixby, M. (2009). International Business Law: Text, Cases and

Readings, (5th ed.). Upper Saddle River, NJ: Prentice Hall.

Contracts & Agreements. (2010). Breach of contract. Retrieved November 15, 2010, from

http://www.contractsandagreements.co.uk/breach-of-contract.html