Legal Question in Business Law in Minnesota

To pay or not to pay

Facts: Major Company subcontracted the development of part of a large technology system to Start-up Company, who specialized in custom computer systems. The contract provided for an initial development fee and subsequent milestone payments, as well as a final completion date. After several months, status reports stopped coming and the second major milestone was missed when Start-up Company failed to deliver the schematics. The entire project was in severe jeopardy because of the slippage of the schedule. After six weeks of monitoring, Start-up is still way behind its delivery dates but continues to request payment from Major. Should the decision be made to complete the project in-house with Major�s personnel and is Major liable for payment to Start-up?

As you see it what are the issues?

What rules apply?

If this case is brought to court who wins and why?


Asked on 3/27/01, 8:37 am

1 Answer from Attorneys
Vincent W. King Vincent W. King, PA

Re: To pay or not to pay

Under the UCC, which probably (but not definitely) applies, the buyer has several options in the events of the seller's breach. To answer definitively, I would need to review the contracts and stuff but it appears that Major would have the ability to terminate Start-up's contract and complete the work in-house. The cost of completing the work in-house is called "cover," and should be recoverable from Startup (as a legal matter; who knows if Startup has the dough to satisfy a judgment).

Depending on whether the work previuously done by Startup had any value, Startup might be able to claim some compensation, but that would be offset by Major's "cover" damages and possibly other consequential damages if Startup had reason to know of Major's potential losses if Startup didn't perform on time.

Overall, based on the hypothetical facts you gave, I like Major's case better than Startup's.

NOTE (the standard disclaimer): This is a hypothetical answer based on a hypothetical as presented in your question and should not be construed as legal advice. You should not rely on this answer as a solution for your situation without consulting with qualified legal counsel and giving him/her all the facts. You have not retained me as your lawyer and no attorney-client relationship exists between us at this time.

That said, good luck to you and let me know if I can help further.

Best regards.

Vince King

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Answered on 5/31/01, 4:41 pm


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