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Q1) You are the associate in law firm of Moose and Squirrel LLC. One of the firm's clients, ABC Transport, currently sent firm an audit letter. Letter asks firm to give information to ABC's auditor concerning a possible claim involving contract between ABC and Baddenoff Corporation ("Baddenoff."). Captain Peachfuzz, firm's billing partner for ABC, negotiated Baddenoff contract nine months ago. Captain Peachfuzz has asked you to suggest  him on audit response.

Contract needs ABC to transport valuable art to New York City for auction. ABC's most recent shipment was hit by train and art was totally destroyed. ABC didn't insure shipment as needed by contract. ABC has not yet reported accident to Baddenoff, so Baddenoff is not aware of possible breach.

Exact value of art is uncertain. Captain Peachfuzz thinks loss to Baddenoff could be from $1.1 million to $3.4 million, or even more. Though, contract gives for liquidated damages of $850,000 per shipment in event of  uninsured loss. If Baddenoff brings a claim, law of State of Vida will apply. Vida courts almost always enforce liquidated damages clauses, especially when injured party's actual damages exceed specified liquidated damages.

Captain Peachfuzz believes there is possible interpretation of contract that would only need insurance against theft, not accident. If this interpretation is accepted, ABC would not be in breach and would not be liable. When you asked Captain Peachfuzz about claim, he said, "Other side has good case. Our argument is a plausible interpretation of contract, but we are not probable to win on that argument." Captain Peachfuzz is pretty sure ABC will sue when it discover out about accident.

Describe what information Captain Peachfuzz may give to auditor about Baddenoff possible claim against ABC . (Suppose that amount involved is material to ABC.)

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M918848

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