Question

A publisher entered into a contract with a paper manufacturer who used very fine materials, whereby the publisher was given the right to purchase all paper refined by the paper manufacturer for the next five years at a price set at 95% of the domestic market price at the time of delivery. The publisher agreed to purchase no less than 1,000 pounds of paper a week. At the time this contract was signed, the publisher gave written notice to the paper manufacturer that it intended to buy all paper produced by the paper manufacturer until further notice. The paper manufacturer then sold its business to a lumber-processing company.What is the effect of this sale on the paper manufacturer's obligation to the publisher?

Answer 1

Answer:

Depending on the terms of the contract, it can either be option B or C.

• B) The paper manufacturer is liable for damages if the lumber processing plant fails to deliver paper to the publisher.
• C) The paper manufacturer is excused from further performance because it no longer has a factory to produce paper.

Explanation:

If the ownership of a business changes, e.g. the company is acquired by another company, current contracts are assigned to the new owner. Usually the new owners try to substitute new contracts for the old ones if the other side agrees. The company's value is determined by its ability to generate cash flows, and sales contracts are a major part in that process. So the new buyers generally want to continue or extend existing contracts.

But if for some reason, the new owner doesn't want to comply with existing contracts, that would result in a contract breach, and the buyer can sue to recover damages.

The publishing company will probably sue both the paper manufacturer and the lumber company for contract breach. Then they will have to show who is responsible for the breach depending on the terms of the business sale. If the terms of the sale specifically state that the lumber company doesn't accept the assignment of the contract, then the paper manufacturer is responsible for the breach. But if the sales contract didn't specifically exclude this contract, then the lumber company is liable.