Missouri Public Service Co. v. Peabody Coal Co.
27 U.C.C. Rep. Serv. (West) 103, 1979 Mo. App. LEXIS 2214, 583 S.W.2d 721 (1979)
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Rule of Law:
A seller is not excused from performance under the doctrine of commercial impracticability (UCC § 2-615) due to significant financial loss when the events causing the loss, such as market shifts, inflation, or new regulations, were foreseeable business risks at the time the contract was executed.
Facts:
- In 1967, Missouri Public Service Co. (Public Service), a public utility, and Peabody Coal Co. (Peabody) executed a ten-year contract for Peabody to supply coal to a power plant.
- The contract set a base price per ton, which included a price adjustment clause and an inflation escalator tied to the Industrial Commodities Index (ICI).
- During negotiations, Public Service had rejected Peabody's initial proposal to base the inflation escalator on the more comprehensive Consumer Price Index (CPI).
- The contract was profitable for Peabody for the first two years of performance.
- Subsequently, events including the 1973 oil embargo, significant inflation, and new mine safety regulations caused Peabody's production costs to rise dramatically, far outpacing the adjustments provided by the ICI escalator.
- By 1974, Peabody was incurring substantial losses on the contract, which it claimed exceeded $3.4 million.
- Peabody requested a price modification to cover its losses, but Public Service refused to agree to the proposed changes.
- Peabody then announced its intention to cease all coal shipments unless Public Service agreed to its price modification demands.
Procedural Posture:
- Public Service sued Peabody in the Circuit Court of Jackson County, Missouri (trial court), seeking a decree of specific performance to enforce the coal supply contract.
- Peabody moved to dismiss for improper venue, arguing the alleged breach did not occur in Jackson County.
- The trial court found that Peabody had committed an anticipatory repudiation of the contract during a meeting in Jackson County, thereby establishing proper venue.
- After a trial, the court ruled in favor of Public Service and entered a decree of specific performance ordering Peabody to continue supplying coal under the contract's terms.
- Peabody, as the appellant, appealed the trial court's judgment to the Missouri Court of Appeals, Western District.
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Issue:
Does a substantial increase in a seller's performance costs, leading to significant financial loss, render performance of a long-term, fixed-price supply contract commercially impracticable under UCC § 2-615, thereby excusing the seller's duty to perform?
Opinions:
Majority - Swofford, Chief Judge
No. A substantial increase in a seller's performance costs does not render performance commercially impracticable when such increases result from foreseeable business risks. The court held that refusing to modify the price terms of an enforceable, untainted contract does not constitute bad faith. To be excused under UCC § 2-615, a party must show that performance was made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made. Here, market fluctuations, inflation, and the Arab oil embargo were foreseeable business risks that a fixed-price contract is intended to cover. While Peabody made a bad bargain that became unprofitable, this alone does not alter the essential nature of the performance, which was to supply coal, and therefore does not rise to the level of commercial impracticability.
Analysis:
This case reinforces the high threshold required to successfully invoke the commercial impracticability defense under UCC § 2-615. The court's decision clarifies that mere unprofitability, even if severe and caused by dramatic market shifts, is insufficient to excuse performance. The ruling emphasizes the principle that parties to a commercial contract are presumed to have allocated foreseeable risks, and courts will be reluctant to reallocate those risks after the fact. This precedent serves as a strong caution for parties entering into long-term contracts to draft price escalation clauses carefully to account for a wide range of potential economic contingencies.
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