Question 3

Assume that the sale of Topical Inc.s product was approved. Topical Inc. then entered into an exclusive distributorship agreement with Salesco Inc. to market and sell the product for a period of two (2) years. The agreement provided that Salesco Inc. would spend $1,500,000.00 on a massive marketing campaign, would submit orders 30 days in advance of the required delivery date and that Topical Inc. would manufacture and deliver the product to Salesco Inc.'s warehouse within the thirty (30) day period. Topical and Salesco agreed that Topical would supply and Salesco would purchase a minimum of 500,000 units per month during the term of the agreement. The agreement also included the following paragraph: "Although Topical Inc. will make every effort to supply product in accordance with orders submitted, the parties agree that if, as a result of manufacturing delays, the product is not available, or for any other reason whatsoever, Topical Inc. will not be responsible for damages of any nature. Topical Inc.'s total liability in any event shall not exceed $10,000.00." On September 1st, Salesco Inc. placed an order for 1,000,000 units at $4.00 per unit for delivery by 3 September 30th. Salesco Inc. had convinced People's Drugs, the largest Canadian pharmacy chain to stock the product and to purchase the units at $5.00 per unit for delivery on October 1. On September 20th, a COVID outbreak at Topicals manufacturing facility resulted in the closure of the facility for 2 weeks. No product could be manufactured or shipped during the shutdown period. Since the product was not available on October 1, People's cancelled their order and decided to stock a competitive product. Salesco Inc. commences an action to terminate its agreement with Topical Inc. since they no longer have a purchaser for the product and also requests damages of $1,000,000.00. In its defence Topical Inc. claims that:

(i) Salesco Inc. cannot terminate the contract and is still obligated to act as its distributor for the full two (2) year period;

(ii) damages in any event are limited to $10,000.00;

(iii) in the alternative, the contract was frustrated as a result of the COVID outbreak and no damages are payable.

Required:

Examine the issues that have been raised, discuss the applicable legal principle and likely result.