This was the hearing of a preliminary issue. DRC Distribution Ltd (“DRC Distribution”) and DRC Polymer Products Ltd (“DRC Polymer”) were sister companies. In 2003 DRC Distribution and Ulva Ltd (“Ulva”) entered into a long term supply agreement for 100% of Ulva’s requirements for an insulation cladding system. DRC Distribution did not have a manufacturing facility and so the cladding supplied to Ulva was manufactured by DRC Polymer.

From October 2005, Ulva began sourcing its requirements from another supplier as well as DRC Distribution. Ulva admitted at the hearing that this was a breach of the supply agreement that required DRC to take 100% of its products from DRC Distribution.

Under the terms of the distribution agreement, Ulva was given a 60 day credit period after the date of any invoice in which to pay that invoice. Ulva frequently paid invoices late. In May 2006, DRC Polymer’s insurers reduced the permitted credit limit for transactions for Ulva to nil on the grounds that its financial statements indicated a deteriorating financial position and that losses had been sustained by Ulva. In June 2006, DRC Distribution informed Ulva that it was no longer prepared to supply Ulva on credit terms.

On 14 June 2006, Ulva gave a notice to terminate the supply contract with effect from 14 December 2006. DRC Distribution replied stating that until the expiry of the notice it expected that all Ulva’s supplies would continue to be supplied by DRC Distribution and that unless the position in relation to credit terms was resolved the agreement would terminate after 30 days. After further correspondence on 1 August 2006 DRC Distribution terminated the agreement with immediate effect for material breaches including the sourcing of supplies from an alternative manufacturer.

The following three issues were to be decided:

1 the extent to which Ulva was in breach of its agreement with DRC Distribution;

2 whether DRC Distribution had suffered any loss;

3 whether DRC Distribution could recover, in principle, the loss suffered by DRC Polymer.