How are damages assessed when your supplier fails to deliver?

It is not uncommon for a company’s business to be disrupted because a supplier to fails to deliver materials on the agreed date.

In such cases, how do you assess the extent of the damage caused and whether it may be possible to claim compensation? A recent case involving an airline company gives a useful insight into how the courts approach the question of awarding damages.

The company had three contracts with a supplier for the delivery of aircraft seats. Some of the seats were delivered late and some were not delivered at all. It meant that the company was prevented from using five aircraft for 18 months until seats were obtained from another supplier.

The supplier admitted liability and the only question was how to assess damages.

The airline company claimed $162m to cover the cost of leasing aircraft from another company for three years. It also claimed a further $21m for buying and installing replacement seats for some of its aircraft.

The supplier claimed that the damages should be reduced because the company had gained certain benefits by having to find alternative suppliers. For example, its decision to enter into a three-year lease with another company turned out to be very cost-efficient and not only eliminated any losses the company might have suffered, but also covered the cost of the leases as well.

The company’s claim for damages relating to the leases should therefore be rejected.

The supplier also argued that the replacement seats were lighter than the seats it would have supplied and so had generated fuel savings to the benefit of the company.

The court took a balanced approach when assessing damages. It found that the supplier was wrong to state that the leased aircraft had completely mitigated the company’s losses.

However, the court also pointed out that the company could reasonably have expected to find replacement seats and bring its aircraft back into service within two years. In spite of this, it entered into a three-year lease with another supplier.

It agreed to a third year for purely commercial reasons and so this could not be included in its claim.

The court therefore limited the damages relating to the leases to $107m.

In relation to the lighter seats argument, the court found that some of the seats were more efficient and brought benefits but others did not. The damages were then calculated giving the supplier some credit for the number of lighter seats but making it liable for those seats that did not provide any added benefit.

Please contact Neil O’Callaghan if you would like more information about the issues raised in this article or any aspect of contract law and seeking damages.