Key Facts -- In this case there are really three key facts: 1) Sterling contracted with NoBugs to perform according to a specific set of instructions, which was expected and happened over the course of years. 2) NoBugs failed to meet specifications caused by a slight miscalibration of their equipment. 3) This miscalibration cased a previously hidden flaw to occur in Sterling's system.
Analysis - While NoBugs did replace all the chips that caused the Sterling computers to explode, there was still about $20 in damage. Arbitration or Litigation could be initiated against NoBugs, and there would be a strong case for breach of contract. In essence, it does not matter that the miscalibrated chip caused a previously unrelated engineering defect to mis-perform, had the chips been correctly calibrated, the flaw would...
There is clearly a breach since NoBugs failed to provide an agreed upon product that, in turn, caused damage to Sterling's client's computers.
That being said, Sterling and NoBugs are almost inexorably tied together. For the past decade, NoBugs has been the only producer meeting Sterling's strict specifications; thus Sterling could not have built its reputation as a state-of-the-art computer manufacturer without NoBugs, and NoBugs would not have been able to grow as rapidly and provide its investors with a lucrative rate of return. It is doubtful that Sterling could simply go into the market and immediately find another chip manufacturer; and if Sterling drops its contract with NoBugs then NoBugs would need to search for other markets -- which may take time and cause months of unprofitability.
