Smith and Roberson's Business Law 16th Edition by Richard Mann,Barry Roberts

Exercise 7

Major Company subcontracted the development of part of a large technology system to Start-up Company, a small corporation specializing in custom computer systems. The contract, which was a major breakthrough for Start-up Company and crucial to its future, provided for an initial development fee and subsequent progress payments, as well as a final date for completion. Start-up Company provided Major Company with periodic reports indicating that everything was on schedule. After several months, however, the status reports stopped coming, and the company missed delivery of the schematics, the second major milestone. As an in-house technical consultant for Major Company, you visit Startup Company and find not only that they are far behind schedule but also that they had lied about their previous progress. Moreover, you determine that this slippage has put the schedule for the entire project in jeopardy. The cause of Start-up's slippage was the removal of personnel from your project to work on short-term contracts to obtain money to meet the weekly payroll. Your company decides that you should stay at Startup Company to monitor their work and to assist in the design of the project. After six weeks and some progress, Start-up is still way behind their delivery dates. Nonetheless, you are now familiar enough with the project to complete it in-house with Major's personnel. Start-up is still experiencing severe cash flow problems and repeatedly requests payment from Major. But your CEO, furious with Start-up's lies and deceptions, wishes to "bury" Start-up and finish the project using Major Company's internal resources. She knows that withholding payment to Start-up will put them out of business. What do you do? Explain.