Hemlock Semiconductor Operations, LLC, and SolarWorld Industries Sachsen GmbH, are both companies involved in the manufacture of components for solar power products. Prior to the lawsuit, the two companies entered into a long-term supply agreement whereby Hemlock would provide polysilicon to Sachsen at a fixed price. The contract, which spanned a 13-year period from 2006 to 2019, set the price of polysilicon below the market price.
Part way through the contract, the price of polysilicon collapsed after firms subsidized by the Chinese government began flooding the market with the material. Hemlock and Sachsen reached a temporary agreement to lower the price in 2011, but when the agreement expired in 2012, the price of polysilicon between the two parties returned to the original fixed price. Sachsen subsequently refused to pay the original price and Hemlock sued for breach of contract. The district court granted Hemlock’s motion for summary judgement and awarded the company $800 million in damages and prejudgment interest.
Sachsen appealed, alleging among other claims, that the district court erred in concluding that Sachsen’s defense of commercial impracticability lacked merit.
RONALD GILMAN Sachsen next argues that the district court erred in concluding that the doctrines of commercial impracticability and frustration of purpose do not excuse Sachsen’s breach of contract. The theory underlying both defenses is that the Chinese government (1) illegally subsidized its national production of polysilicon and dumped massive quantities of the product onto the market, causing the price of polysilicon to fall; and (2) committed acts of “criminal industrial espionage” against Sachsen’s U.S.-based sister company, SWIA. As a result of these illegal actions, Sachsen argues, the price of polysilicon plummeted, rendering Sachsen’s performance impracticable and frustrating the purpose of entering into the LTAs.
We will assume without deciding that the alleged illegal actions by the Chinese government actually occurred. Hemlock does not in fact dispute Sachsen’s evidence that these actions were deemed illegal by both U.S. and E.U. authorities. Rather, Hemlock argues that the district court properly rejected Sachsen’s affirmative defenses because the drop in the price of polysilicon, regardless of cause, was simply a change in market conditions that does not excuse contract performance.
Sachsen asserts the affirmative defenses of commercial impracticability and impossibility. Both parties and the district court discuss these defenses interchangeably. We will therefore refer to these defenses collectively as “commercial impracticability.”
Under Michigan law, a party charged with breaching a contract can assert as an affirmative defense that its performance was rendered impracticable. Performance need not be impossible, but “there must be a showing of impracticability because of extreme and unreasonable difficulty, expense, injury or loss involved.” The impracticability defense applies only if “an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties when they entered into the contract.” In other words, the defense is viable only if an unforeseen event occurs and “the non-occurrence of that event [was] … a basic assumption on which both parties made the contract.”
The expectation that current market conditions will continue for the life of the contract is not such a basic assumption, so shifts in market prices ordinarily do not constitute impracticability. the simple fact that a contract has become unprofitable for one of the parties is generally insufficient to establish impracticability.
This is especially true when the parties have entered into a contract for the sale of goods at fixed prices because such contracts are made for the very purpose of establishing a stable price despite a fluctuating market.
Even relatively drastic changes in the market have been held insufficient to trigger the impracticability defense. In Karl Wendt Farm Equipment Co. v.
International Harvester Co., for example, this court concluded that the Michigan Supreme Court would not apply the impracticability defense when International Harvester (IH) “experienced a dramatic downturn in the farm equipment market,” decided to go out of business, and breached a dealership agreement by unilaterally terminating it. The court rejected IH’s argument that impracticability excused its contractual duties under circumstances where IH was losing over two million dollars per day. Although the market shift was drastic, it did not alter the parties’ basic assumptions underlying the contract. The court also noted that applying the doctrine of impracticability would contravene the parties’ intentions regarding assumption of the risk. Because the contract provided for termination procedures in the event that certain conditions occurred, the court concluded that IH had to bear the risk of financial loss until those procedures were completed;
excusing IH’s performance would therefore have unfairly burdened the plaintiff dealer.
Similarly, a district court applying Michigan law concluded that a defendant could not assert an impracticability defense based on the economic downturn of 2008. The fact that the 2008 market collapse and the ensuing recession were unusually disastrous economic shifts did not excuse the defendant’s performance, the court reasoned, because “[t]he state of the market is one of the things on which the parties are gambling when the contract … is made.”
Sachsen, however, argues that the impracticability defense should apply because the illegal actions of the Chinese government caused an out-of-the-ordinary drop in the market price for polysilicon. According to Sachsen, the fact that a third party’s illegal actions allegedly caused this market shift differentiates the present case from Karl Wendt and other cases finding that changes in market conditions are not a basis for the impracticability defense.
The district court disagreed, reasoning that the allegedly illegal actions of the Chinese government were irrelevant because they had “simply caused a market shift in pricing, making it unprofitable for [Sachsen] to perform as promised.” In so ruling, the court incorporated its reasoning from the court’s decision in Hemlock’s case against another company, Kyocera, under a nearly identical LTA [Long Term Agreement]. Because Sachsen’s argument “amount[ed] only to claims of ‘economic unprofitableness,’” the court concluded that the impracticability defense did not apply for the reasons stated in Karl Wendt.
We find the district court’s reasoning persuasive. Our research has not revealed any case law from either this court or the Michigan courts supporting the proposition that a third party’s illegal actions can render the performance of a contract impracticable. Hemlock and Sachsen presumably would not have specifically foreseen the allegedly illegal actions of the Chinese government when the parties entered into the LTAs. But the possibility that the market price for polysilicon could skyrocket or plummet for a myriad of reasons would have been well within their contemplation. The fact that the LTAs provided a fixed price for polysilicon suggests that the parties anticipated that the market price could change and that they wanted to establish a stable price that would operate independently of the market. Allowing Sachsen to escape its obligation to pay that price simply because the purported illegal actions contributed to the price drop would be unfair to Hemlock.
Applying the impracticability defense here could also open up a flood of similar arguments based on allegedly illegal actions of third parties. In the context of global market fluctuations, which can be affected by the actions of many businesses from different countries, defendants in breach-of-contract cases could easily claim that a violation of the law by a third-party actor contributed to a market shift. Allowing parties to litigate the causes of market shifts would swallow the general rule that a contract’s unprofitability does not warrant application of the impracticality defense.
We also note that Sachsen could have protected itself against a large drop in the market price of polysilicon during the 14-year term of the LTAs by requiring a renegotiation if the market price dropped a certain percentage or dollar amount below the contract price. But no such condition was included in the LTAs despite the sophistication of both the parties and their lawyers. Sachsen thus knowingly assumed the unfiltered risk of a drop in price for a high-tech product during a long-term, fixed-price contract.
CRITICAL THINKING:
If you apply the situation in this case to the three elements required in a discharge by reason of impracticability, are any of them fulfilled? Explain your reasoning.
ETHICAL DECISION MAKING:
What purpose does this decision serve? What shareholders and ethical values was the appellate court keeping in mind as it made it decision?