Northern Indiana Public Service Co. v. Carbon County Coal Co.
799 F.2d 265 (1986)
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Rule of Law:
A party cannot use the doctrines of force majeure, commercial impracticability, or frustration of purpose to escape a long-term, fixed-price contract when the event making performance unprofitable is a shift in market prices, the very risk that such contracts are designed to allocate. A governmental order that merely makes performance of a contract unprofitable, rather than illegal or impossible, does not trigger a force majeure clause.
Facts:
- In 1978, Northern Indiana Public Service Company (NIPSCO), an electric utility, entered into a 20-year contract with Carbon County Coal Company.
- Under the contract, NIPSCO agreed to buy approximately 1.5 million tons of coal annually at a price that started at $24 per ton and escalated over time, reaching $44 per ton by 1985.
- The contract was a fixed-quantity, fixed-price agreement with a price floor, effectively assigning the risk of falling market prices to NIPSCO.
- In 1983 and 1984, the Indiana Public Service Commission, which regulates NIPSCO's rates, issued "economy purchase orders."
- These orders directed NIPSCO to purchase cheaper electricity from other utilities whenever available, rather than generating more expensive power itself.
- The effect of the orders was that NIPSCO could no longer pass the high costs of the coal purchased under the Carbon County contract on to its ratepayers.
- Consequently, NIPSCO unilaterally decided to stop accepting coal deliveries from Carbon County.
Procedural Posture:
- NIPSCO filed a diversity suit against Carbon County in the U.S. District Court for the Northern District of Indiana, seeking a declaration that its performance under the contract was excused.
- Carbon County counterclaimed for breach of contract and sought damages or, alternatively, specific performance.
- The trial court granted Carbon County a preliminary injunction that required NIPSCO to continue accepting coal deliveries pending trial.
- A jury trial resulted in a verdict for Carbon County, awarding $181 million in damages for breach of contract.
- The district court entered a final judgment for the damages award but denied Carbon County's request for an order of specific performance.
- NIPSCO appealed the damage judgment to the U.S. Court of Appeals for the Seventh Circuit.
- Carbon County cross-appealed the district court's denial of specific performance.
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Issue:
Do changed market conditions, combined with a state regulatory order preventing a utility from passing on the high costs of a long-term, fixed-price contract to its customers, excuse the utility's performance under the contract through the doctrines of force majeure, frustration, or impracticability?
Opinions:
Majority - Posner, Circuit Judge.
No. Changed market conditions and a regulatory order making a fixed-price contract unprofitable do not excuse performance under the contract. NIPSCO's defenses of force majeure, impracticability, and frustration all fail because the contract was designed to allocate the risk of price changes, and the risk that materialized—a drop in market prices making the contract unfavorable—was explicitly assumed by NIPSCO. The purpose of a fixed-price contract is to assign the risk of market price increases to the seller and the risk of decreases to the buyer. The Indiana Public Service Commission's order did not 'prevent' NIPSCO from using the coal; it only prevented NIPSCO from shifting the financial consequences of its bad bet to its customers. A force majeure clause is not intended to shield a party from the normal risks of a contract. Similarly, the doctrines of impracticability and frustration do not apply when a contract explicitly assigns a particular risk to one party, as this fixed-price contract did. Therefore, NIPSCO breached the contract and is liable for damages.
Analysis:
This is a landmark contracts case, famous for Judge Posner's application of law and economics principles, particularly the concept of efficient breach. The decision strongly reinforces the sanctity of contract, especially between sophisticated commercial parties, by holding that market shifts do not justify excusing performance. It clarifies that excuse doctrines like impracticability and frustration are merely default rules for allocating unforeseen risks and are inapplicable when the contract itself, through mechanisms like a fixed-price term, has explicitly allocated the risk that came to pass. The case signals that courts will not rewrite contracts to save a party from a deal that simply turns out to be unprofitable.
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