Louisiana Power & Light Co. v. Allegheny Ludlum Industries, Inc.
1981 U.S. Dist. LEXIS 9832, 517 F. Supp. 1319, 32 U.C.C. Rep. Serv. (West) 847 (1981)
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Rule of Law:
An increase in a seller's costs, even if substantial enough to cause a significant loss on a contract, does not excuse performance under the doctrine of commercial impracticability unless the increase is so severe and unreasonable that it alters the essential nature of the performance.
Facts:
- In March 1974, Louisiana Power & Light Company (LP&L) entered into a contract with Allegheny Ludlum Industries, Inc. (Allegheny) for the supply of stainless steel condenser tubing for a total price of $1,127,387.82.
- The contract contained escalation clauses applicable only if LP&L delayed shipment, but no clause to adjust the price for Allegheny's own cost increases before the delivery date.
- In May 1975, Allegheny informed LP&L that its costs for raw materials and labor had risen dramatically—by as much as 185% for ferrochrome—and sought 'additional compensation'.
- Allegheny projected that performing the contract at the agreed-upon price would result in a loss of $428,500.
- While this loss would reduce the planned profit for Allegheny's relevant division, the division would still remain profitable overall for the year.
- LP&L refused to renegotiate the price.
- In November 1975, Allegheny communicated to LP&L that it 'might be well advised not to perform under the contract.'
- After LP&L demanded assurances of performance and received none, Allegheny offered in February 1976 to supply the tubing at its 'full cost,' a price higher than specified in the contract, which LP&L rejected.
Procedural Posture:
- Louisiana Power & Light Company (LP&L) filed a breach of contract lawsuit against Allegheny Ludlum Industries, Inc. (Allegheny) in the U.S. District Court for the Eastern District of Louisiana.
- Allegheny asserted affirmative defenses, including commercial impracticability, mutual mistake, unconscionability, and bad faith.
- LP&L moved for summary judgment on the issue of liability.
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Issue:
Does a 38% increase in a seller's production costs, which would cause a projected loss of $428,500 on a $1.1 million contract but would not cause the seller's division to be unprofitable for the year, constitute commercial impracticability under UCC § 2-615 sufficient to excuse performance?
Opinions:
Majority - Judge Jack M. Gordon
No. A substantial but not catastrophic increase in a seller's costs does not make performance commercially impracticable so as to excuse a breach of contract. The court reasoned that Allegheny failed to meet its burden of proof for the defense of commercial impracticability under UCC § 2-615. While Allegheny's costs increased by 38%, resulting in a projected loss, this was not sufficient to meet the high standard for impracticability. Citing precedent from the 'Suez Cases' like Transatlantic Financing Corp. v. United States, the court explained that performance must be rendered 'especially severe and unreasonable,' not merely unprofitable. The court held that market fluctuations and cost increases are foreseeable business risks that a party assumes when entering a fixed-price contract, and Allegheny's loss did not rise to the level of altering the essential nature of the performance. The court also rejected Allegheny's defenses of mutual mistake, finding it was an erroneous prediction of future events, not a mistake of existing fact, and bad faith, as LP&L had no legal obligation to renegotiate the contract.
Analysis:
This decision solidifies the high threshold required to successfully invoke the commercial impracticability defense under UCC § 2-615. It underscores the principle that fixed-price contracts allocate the risk of market fluctuations to the seller, and courts are reluctant to reallocate that risk simply because a contract becomes unprofitable. The ruling promotes contractual certainty by making it clear that only extreme, unforeseeable circumstances causing severe losses, well beyond the normal range of business risk, will excuse performance. This precedent forces parties who wish to protect themselves from cost volatility to explicitly negotiate for price escalation clauses rather than relying on a judicial escape hatch.
