Contracts II, Pages 1009–1015

Northern Indiana Public Service Co. v. Carbon County Coal Co.

United States Court of Appeals for the Seventh Circuit, 1986

Facts:

Plaintiff agreed to buy and defendant to sell 1.5 million tons of coal per year for 20 years at $24 per ton, with various provisions which drove the price up to $44 a ton. The Indiana Public Service Commission issued plaintiff "economy purchase orders" saying to find and buy electricity from utilities that would sell it for cheaper than plaintiff could produce it itself. Plaintiff found such a utility but was no longer to raise rates to pay for it and further coal purchases, and plaintiff therefore stopped accepting coal deliveries. Plaintiff then filed this suit to receive a declaration that it was no longer required to purchase coal under the agreement, at least as long as the "economy purchase orders" were in effect.

Plaintiff's Argument:

Plaintiff's performance was excused either under the contract's force majeure clause, the doctrine of frustration of purpose, or the doctrine of impossibility. This is because the "economy purchase orders" prevented it from using the coal it agreed to buy.

Procedural History:

The jury gave a verdict for defendant of $181 million. The judge rejected defendant's argument that it should receive specific performance. The mine then shut down due to the loss of its only customer.

Issue:

Was plaintiff excused from purchasing further coal?

Rules:

  • Impracticability is a defense for sellers. Frustration of purpose is the closest concept for buyers, which Indiana does not allow.

Reasoning:

  • Plaintiff was not prevented from using the coal anymore, it could just not shift the increased costs onto its customers. Such a long-term contract with fixed price and quantity is an inherent gamble that fuel costs would rise rather than fall. This gamble going against a party is not force majeure. Plaintiff especially should have known the risk when it allowed the price to escalate. A force majeure clause is not intended to buffer a party against the normal risks of a contract.

  • Impracticability is a defense for sellers, and Indiana rejects the doctrine of frustration of purpose. This would not even fall under frustration of purpose if it did follow it. All of plaintiff's cited doctrines are for shifting risk to the party better able to bear it. they don't apply when the contract explicitly assign a particular risk to one party, like a fixed-price contract does.

Holding:

No, plaintiff was not excused from its obligation to purchase the coal. Affirmed.

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