Hemlock Semiconductor Operations, LLC v. SolarWorld Industries Sachsen GmbH
867 F.3d 692 (2017)
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Rule of Law:
A dramatic downturn in market price, even if caused by the illegal actions of a third party, does not excuse performance under a long-term, fixed-price contract through the doctrines of commercial impracticability or frustration of purpose, as market fluctuation is a foreseeable risk that such contracts are intended to allocate.
Facts:
- Hemlock Semiconductor Operations, LLC (Hemlock) and SolarWorld Industries Sachsen GmbH (Sachsen) entered into a series of long-term supply agreements (LTAs) for Hemlock to supply Sachsen with polycrystalline silicon (polysilicon) at fixed prices between 2006 and 2019.
- The LTAs contained a 'take-or-pay' provision requiring Sachsen to pay for a specified quantity of polysilicon each year, regardless of whether it took delivery.
- The agreements also included a liquidated damages clause stipulating that if Sachsen breached, it would owe Hemlock the full remaining balance of the entire contract term.
- In reliance on these LTAs, Hemlock invested over $4 billion to expand its manufacturing facilities.
- Initially, the LTA price was below the market price, which benefited Sachsen.
- Beginning in 2009, the Chinese government subsidized its domestic polysilicon production, causing the global market price to plummet far below the fixed price in the LTAs.
- The parties operated under a temporary price reduction in 2011, but when it expired in 2012, Sachsen refused to purchase polysilicon at the original, higher LTA price.
- Hemlock issued a 'Shortfall Notice' demanding payment for the 2012 quantities, which Sachsen refused.
Procedural Posture:
- Hemlock sued Sachsen for breach of contract in the U.S. District Court for the Eastern District of Michigan.
- Sachsen asserted seventeen affirmative defenses, including illegality, commercial impracticability, and frustration of purpose.
- The district court granted Hemlock’s motion to strike Sachsen's illegality defense.
- The district court subsequently denied Sachsen’s motion for reconsideration.
- The district court then granted Hemlock’s motion for summary judgment on its breach-of-contract claim, awarding nearly $800 million in damages plus interest.
- Sachsen, as appellant, appealed the district court's decisions to the U.S. Court of Appeals for the Sixth Circuit; Hemlock is the appellee.
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Issue:
Does a significant drop in the market price of a good, allegedly caused by the illegal market-distorting actions of a third-party government, excuse a buyer's performance under a long-term, fixed-price 'take-or-pay' supply contract under the doctrines of commercial impracticability or frustration of purpose?
Opinions:
Majority - Judge Gilman
No. A significant drop in market price, even one caused by the illegal actions of a third party, does not excuse a buyer's performance under a fixed-price contract. The court rejected all of Sachsen's affirmative defenses, finding that market fluctuation is a foreseeable business risk that fixed-price contracts are designed to address. The court reasoned that the illegality defense was inapplicable under Kelly v. Kosuga because enforcing the 'take-or-pay' provision does not enforce the precise conduct alleged to be illegal under antitrust law; the promise to pay is a lawful, intelligible economic transaction in itself. Furthermore, the doctrines of commercial impracticability and frustration of purpose do not apply because a change in profitability, regardless of the cause, is not a basis for excusing performance, as the continuation of existing market conditions is not a basic assumption of a fixed-price contract. Finally, the liquidated damages provision was upheld as a reasonable and enforceable measure, not an unconscionable penalty, given the difficulty of calculating actual damages at the time of contracting, the substantial capital investments Hemlock made in reliance on the contract, and the equitable consideration that Sachsen had previously benefited from the fixed price when market conditions were favorable.
Analysis:
This decision strongly reinforces the enforceability of long-term, fixed-price supply agreements, particularly in volatile markets. It clarifies that the defenses of commercial impracticability and frustration of purpose are narrowly construed and will not excuse performance due to market shifts, even when those shifts are extraordinary and caused by illegal third-party conduct. The ruling provides significant protection for suppliers who make substantial capital investments in reliance on such contracts, signaling that courts will uphold bargained-for risk allocation. Future litigants seeking to void contracts based on market changes will face a very high bar, as this case establishes that even allegedly illegal market manipulation is treated as a foreseeable business risk.
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