Many companies face a common dilemma in the modern business world; reducing the cost of production or reducing the product quality. In most cases, the cost of production rises because of a company’s focus on keeping the quality high. If product quality is compromised while reducing costs, the firm may lose customers. Additionally, there are ethical and legal consequences of selling low-quality products. Every company strives to maintain high-profit margins while doing so legally. Although ethical standards play a less significant role than legal standards, they still define the brand’s image and contribute to the success or failure in a competitive market. The paper will outline the elements of breach of contract, negligence, Foreign Corrupt Practices Act, and deceptive advertising to the Timmco case.
Timmco organization operates in the state of Texas, United States. The firm makes high-pressure valves for commercial applications. It promotes the products using the tag “Made in USA” to encounter the decline in sales as competition in the market intensifies. The firm has focused on efforts to cut the cost of production in the recent past to increase its competitive edge and earn more profit margins than before. Consequently, the consideration has been outsourcing cheaper products such as those provided by the Sanco Company from Slawrovia. Getting the valves from Slawrovia will save over 40% of expenses per unit compared to the domestic supplies. However, the outsourced version could be of lower quality than the domestic one, raising safety issues. The valves from a different country and poor quality could contrast the tagline: “Made in America.”
There are numerous legal and ethical issues with the decision to outsource from Sanco. For instance, the manufacturer employs cheap labor from underpaid workers and children. The agreement to export the valves to Timmco would proceed through dubious means. Thus, this decision could have significant ramifications on Timmco in the market. Cutting the purchase agreement with the American manufacturer could force it to shut down operations or make massive layoffs. Still, outsourcing would make a substantial save of money to advance some notable objectives of the businesses under shareholder theory.
Breach of Contract and Remedies
Contract breach has severe consequences depending on several circumstances. A breach happens when a party fails to deliver its part of the obligations (Langvardt et al., 2018).
The issue is whether TIMMCO’s action to switch to Sanco Company for the outsourcing would be a contract breach. The firm currently has a contract with Blagg industries to purchase 1,000 valves a year at $2,500 per valve. The contract has been in place for three years and has two more years to run. Could Timmco be liable for the damages incurred by Blagg industries?
A breach of contract claim is the core of almost every business litigation. Anytime two or parties make an agreement that is considered valid, a breach can happen because of many instances. There can be a minor breach (when one party fails to perform a part of the contract), material breach (when one party ends up with something significantly different from what contract specifics), actual breach, or anticipatory breach. A breach requires the innocent party to prove there was a valid contract. The plaintiff must also prove that the defendant failed to perform their part of the contract, causing damage (Hunnicutt, 2021).
There are two categories of remedies available for a breach of contract: common law remedy and equitable remedies (Jajodia, 2012). The common law remedy seeks to compensate the non-breaching party by considering the position they would have been in if the breaching party performed their duty as stipulated in the agreement. This category includes compensatory damages. Then, there are consequential damages, liquidated damages (if any), reliance damages (to compensate the harmed party for the damages they suffered for acting in reliance on the other party’s contractual obligations), and statutory damages.
Equitable remedies include rescission, restitution, specific performance, injunction, quantum meruit, and mareva injunction (Jajodia, 2012). Of concern among these is the specific performance remedy, which seeks to compel the breaching party to perform their contractual obligations. It happens when the court determines that such a remedy would do more justice to the non-breaching party than awarding monetary damages. Another possible remedy in similar cases is an injunction, a restraining order to prevent a party from breaking a contract.
TIMMCO decided to abandon the contract in the third year, which indicates an actual breach. The agreement was valid and was honored by both parties for the past three years and intended to run for five years. Blagg was performing and willing to continue with their contractual obligations for another two years. However, the breaching party intended to abandon their part of the contract. As a result, the breach would cause massive economic harm to the non-breaching party, causing the shutdown of operations or substantial layoffs.
The courts would award Blagg compensatory damages to return to the condition it would have been if Timmco honored its obligations. It would be estimated using the total revenue expected by Blagg from the sales for two years. TIMMCO purchases 1,000 valves a year at $2,500 per valve. Hence, the total compensatory damages to Blagg industries would amount to $2,500,000 annually, amounting to $5 million for the two years.
Negligent Torts and Product Liability
Product liability is the liability of any party during the manufacturing stage for damage caused by the product. It includes products containing inherent defects that may cause harm to other people, including consumers. On the other hand, negligence cases are lawsuits that name businesses as defendants, according to the responsibility for physical or financial harm caused by lack of ordinary care.
The issue is whether NIMMCO engaged in a negligent action of ordering goods that had a higher risk of causing physical harm to the operators and other people standing by. Manufacturing and other businesses are subjected to thorough quality reviews by independent and government agencies to ensure product safety. In the United States, OSHA is responsible for ensuring safety standards in the manufacturing of such products. OSHA’s safety and health hazards, including those of asbestos, fall protection, cotton dust, trenching, machine guarding, lead, and pathogen protection, have prevented countless injuries and fatalities in the production of goods (OSHA, 2020). However, this is not the case with the Slawrovia country where Blagg operates. As per the background information, there are unsafe working conditions because of child labor and cheap labor. It potentially lowers the quality of valves.
Defects that create liability include design defects, manufacturing defects, and defects in marketing. Products liability is a strict liability offense. A defendant is liable when the plaintiff proves that the product is defective, regardless of intent. In this case, it is irrelevant whether the defendant exercised great care; if there is a defect, they will be liable for it. Consumers have five primary rights: the right to safety, the right to choose, the right to know, to be heard, and the right to be educated. Violation of these rights comes with severe cases of product liability. It means that if a consumer or third party’s life, body, or assets get harmed, the manufacturers of such products and the providers of product safety must accept the liability and make appropriate compensation for damages incurred (Lee et al., 2010). It can also build up a negligence lawsuit. It is the responsibility of a manufacturer and product provider to ensure that the product is safe for use and presents minimal harm to third parties. They must carry out testing and reasonable care during production to assure quality standards. Failure to do this amounts to negligence punishable by law.
Application and Conclusion
If the valves cause injury to the operators or third parties, the company could be held responsible under product liability. Again, product liability does not consider the intent of the manufacturer. TIMMCO’s failure to follow reasonable care for other people in order the valves from Sanco could amount to negligence Langvardt et al., 2018). The company had the information that Sanco was using children labor and cheap labor to produce the valves at a low cost. Consequently, this compromised production process meant that the valves would have a higher possibility of bursting and causing harm than the domestically produced ones.
Foreign Corrupt Practices Act
The Foreign Corrupt Practices Act was enacted in 1977 to prohibit U.S. companies from bribing foreign officials (Westbrook, 2010). It also requires such companies to keep accurate books and records (Langvardt et al., 2018).
Sanco company located in Slawrovia operates under different laws and regulations than the U.S. The process of getting the approval to export the valves to TIMMCO would be tedious and prolonged unless the company agreed to offer a ‘gift’ of $20,000 to the Slawrovia Minister of Commerce. Hence, the issue is whether such action would violate the Foreign Corrupt Practices Act.
The anti-bribery provisions of the FCPA prohibit the willful use of bribes to influence a foreign official to do or omit to add an act in violation of their official capacity. It also prohibits securing any improper advantage to obtain business for any person (U.S. Department of Justice, 2017).
Application and Conclusion
TIMMCO is a U.S-based company, so it is under the legislation, particularly in dealing with Sanco in Slawrovia. The involvement of the Slawrovia Minister of Commerce could potentially reduce this process. To do this, the Minister of Commerce requires Timmco to make a $20,000 gift. The statute covers payments made to foreign officials in any form, including ‘gifts’ and promises, to obtain business or influence legislation or regulations. Therefore, it does not matter whether the payment was labeled as a ‘gift’ or not. The intended purpose was for the Minister of Commerce to hasten the approval for the deal between Sanco and Timmco, a direct violation of the Act.
Timmco intends to source the valves from a non-US manufacturer, Sanco. However, the company anticipates advertising the product as “Made in the USA, by Americans, for Americans.” The issue is whether this advertising is deceptive.
Deceptive advertising intends to give a false appeal to consumers or present a product as different from what it is. The Federal Trade Commission (FTC) has laws against this kind of behavior and companies that violate them get charged for misleading and fraudulent advertising. In most cases, consumers may be willing to support locally produced goods or a specific brand type, causing a company to falsely brand their products (Langvardt et al., 2019).
Application and Conclusion
Timmco is guilty of engaging in deceptive advertising for intentionally using the tagline “Made in the USA by Americans, for Americans” on products made outside the country. In this case, the court may impose a corrective advertising remedy. First, the court may require Timmco to launch a remedial advertising campaign and make an affirmative statement in that campaign. Second, the courts can award consumers who may have made their purchases based on this information monetary damages by proving that they got deceived or the company used false advertising in bad faith.
Timmco is trying to remain competitive in the market by employing means that reduce production costs and increase profit margins. Beyond the legal aspect of such decisions, there are ethical implications. The company will be contributing to any unethical practice during the manufacturing process. The following section analyzes the case based on shareholder theory and virtue theory.
According to shareholder theory, the social responsibility of a business is to increase its profits (Mansell, 2012; Langvardt et al., 2018). Mansell says that there is one and only one social responsibility of a business – to use its resources and engage in activities that intend to increase profitability as long as these activities are legal and free of deception and fraud. Despite the interests in Timmco to increase the revenue according to this theory, it is unethical to engage in practices that are potentially harmful to people. In deontological ethics, an action is morally good based on some characteristic, even if the product of the action is good. Sanco employs children and pays its workers low wages to minimize the cost of production. It would be unethical to source the valves from such a supplier. The company should take decisions that support stakeholder theory rather than focusing on the shareholders.
The decision to shift from a U.S.-based manufacturer, Blagg, to a foreign manufacturer, Sanco, had legal and ethical implications on Timmco. The firm violated its contractual obligations in the five-year contract with Blagg industries. This decision would lead to compensatory damages in which Timmco would have to pay the amount of revenue that Blagg expected from the remaining two years of the contract. There is a product liability case by selling low-quality valves that would potentially harm operators and other individuals who use them. Additionally, ignoring the possibility of potential harm caused by the low-quality valves could be negligence. The company could be liable for damages incurred by third parties upon using the valves. The decision may be per the shareholder theory but is illegal and unethical. Timmco should reconsider its decision and possible consequences before proceeding with the action. The firm should not prioritize profits over the quality or safety of consumers, as this can cause massive damage to the brand.
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