With Black Friday fast approaching, supply chain disruption and the lack of microchips could be a disaster for retailers. At this time of year, retailers are keen to hit key sales metrics in what is likely to be their most profitable quarter of the year. However, this is going to be much easier said than done.
Semiconductor-based microchips are used in a whole host of products, from mobile phones and microwaves to dishwashers and cars. With ongoing shortages caused by supply chain disruption and demand remaining strong, some retailers will doubtless sell fewer products this year than they otherwise could have.
The question then becomes whether, and how, retailers can recoup lost profits from suppliers.
A retailer specialising in the sale of video game consoles enters into a contract with a manufacturer. The contract stipulates that the manufacturer must produce and deliver 100,000 consoles by the delivery date. The manufacturer enters into a contract with a supplier who agrees to supply the manufacturer with 100,000 microchips.
Due to the lack of availability of shipping containers and HGV drivers, the supplier is unable to deliver the 100,000 microchips and only sends 30,000 to the manufacturer.
The manufacturer is only able to manufacture and deliver 30,000 consoles to the retailer.
In the lead-up to Christmas, the retailer sells all 30,000 units via its online and bricks-and-mortar stores.
The retailer in previous years sold at least 85,000 consoles and has experienced a significant loss of profit for the 55,000 units it had anticipated it would have been able to sell, but for the manufacturer's failure to deliver under the terms of the contract.
Loss of profit
A business may pursue a loss of profit claim where it experiences a loss of profit flowing from a contractual breach caused by another party. The claim is for net profits lost as a result of the breach.
If successful in proving its claim, the court will make an order putting a party in the position it would have been in, had the contract been performed. In the circumstances above, the court could order the manufacturer to pay the retailer the profits it would have made, had the manufacturer delivered the contractually required quantity of video game consoles.
The court will consider whether: the contract was breached; that the breach can be attributed to the manufacturer; and that the breach caused the loss complained of and the basis for which the claimant is claiming losses.
Once the court has agreed that the claimant is entitled to damages, it will consider how much to award.
This will generally be based upon:
- the timing of the breach and the ensuing loss;
- the proportion of the loss that can be attributed to the party who breached the contract;
- whether the injured party mitigated its loss; and
- whether there are any terms in the contract which limit or cap claims for loss of profit.
Time to act
If your business is involved in the production, distribution or purchase of semiconductors, now is the time to ensure you are prepared, contractually as well as operationally, for the busy trading period ahead. We suggest as an initial step that you initiate a contract review process to examine the contractual relationships of your business and determine whether there are foreseeable risks arising from them.