Hemlock v. Sachsen - Brief PDF

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Hemlock Semiconductor Operations v. Solarworld Industries (Sachsen) COURT AND DATE: US Court of Appeals (2017) PROCEDURAL HISTORY: The trial court held in favor of Hemlock. ISSUE: Does the frustration-of-purpose defense require that an unforeseen event substantially frustrate the parties’ primary purpose in making the contract?

TRIGGER FACTS: - Hemlock Semiconductor Operations, LLC (plaintiff) entered into a series of agreements to supply SolarWorld Industries Sachsen GmbH (defendant) with specific quantities of polysilicon at fixed prices over a 14-year period. - In exchange, SolarWorld agreed to a take-or-pay provision stating that SolarWorld would pay for a minimum amount of polysilicon each year, even if it took delivery of less than that amount. Further, under the agreements’ liquidated-damages provision, if SolarWorld failed to pay this minimum amount in a given year, then it had to pay Hemlock the minimum amount for that year plus any future years still left in the agreements. - Several years into the agreements, the Chinese government began subsidizing polysilicon production in China, which unexpectedly drove down market prices. Although Hemlock and SolarWorld negotiated a temporary downward price adjustment in one year’s agreement, they were unable to agree on any amendments to the future agreements. - The next year, SolarWorld did not pay the contractual minimum amount. Hemlock sued for breach of contract, seeking damages under the liquidated-damages provision. Trial court found for Hemlock. SolarWorld appealed.

PLAINTIFF’S MAIN ARGUMENTS: DEFENDANT’S MAIN ARGUMENTS: -

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SolarWorld claimed that the Chinese government had acted illegally in dumping massive amounts of polysilicon on the market and had illegally committed criminal espionage against an entity related to SolarWorld. SolarWorld argued that these illegal actions were unforeseeable events that supported the defenses of impossibility, impracticability, and frustration of purpose. The district court determined that these defenses did not apply. The district court based this conclusion on its findings that: (1) market shifts, for any reason, were a basic assumption of the parties’ agreements and (2) the parties’ primary contractual purpose was to provide SolarWorld “with a stable supply of polysilicon at a predictable price.”

RULE (the law): The frustration-of-purpose defense requires that an unforeseen event substantially frustrate the parties’ primary purpose in making the contract.

HOLDING + REASONING: Yes. For a frustration-of-purpose defense to a contract claim to be successful, an unforeseen event must have substantially frustrated the parties’ primary purpose in making the contract. -

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There is a lot of overlap among the contractual defenses of impossibility, commercial impracticability, and frustration of purpose. All three defenses require that an unforeseen event alter a basic assumption that the parties made when they formed the contract. However, the frustration-of-purpose defense also requires that the unforeseen event thwart the parties’ primary purpose for having entered the contract to such an extent that one party’s performance became virtually worthless to the other party. Further, in general, it is rare for parties to assume that market conditions will remain unchanged when making a contract, because market conditions are always changing. Here, an underlying assumption of the parties’ agreement was that market prices would fluctuate. Thus, the primary purpose of the agreements was to provide SolarWorld with polysilicon at a fixed price that eliminated having to gamble with market prices. The district court correctly concluded that the possible illegal source of major market fluctuations was irrelevant. The only relevant fact is that the parties had assumed fluctuations might occur. Therefore, a market decrease was not an unforeseen event that could support the defenses of impossibility, impracticability, or frustration of purpose. Further, the agreements’ purpose was not to assure that SolarWorld would always get a good price—just a steady price. The decrease in market price did not frustrate this purpose. The district court’s decision is affirmed....