In December of 2015, the Michigan Court of Appeals handed down a decision which spells caution for parties entering into a long-term contract for the supply of goods at a fixed price which requires the buyer to order a preset amount of goods or pay the difference if the buyer falls short of that quota. In Kyocera Corp. v. Hemlock Semiconductor, LLC, a Japanese solar panel manufacturer attempted to shed its contractual obligation to purchase large amounts of polysilicon from a Michigan manufacturer due to the fact that the pre-negotiated fixed price of the product was well above the going market price.
Kyocera attempted to get out of its fixed-price contract by invoking the force majeure clause contained within it. A force majeure clause is a standard element of a contract which relieves a party of its contractual obligations in cases in which an unpredictable event renders the completion of the contract impossible. Examples of this include: war, natural disasters, acts of terrorism, acts of God, or acts of Government (i.e. having the contracted-for action declared illegal).
In this case, the plaintiff asserted that a “trade war” between the United States and China, in which the American government imposed anti-dumping measures against the Chinese government, caused it to no longer be able to pay the prices negotiated in the contract. It also argued that the illegal subsidies provided by the Chinese government caused the market price of polysilicon to fall dramatically below the fixed price negotiated between the two parties in this case. The plaintiff contended that these two events constituted acts of Government preventing it from fulfilling its contractual obligations, relieving it from completing the contract under the force majeure clause.
The Court in this case determined these acts of government did not constitute events sufficient to trigger the force majeure clause. The Court stated that the purpose of this fixed-price contract was to have the supplier assume the risk that the market price of the product would rise above the negotiated price while having the buyer assume the risk that it would fall below the negotiated price. Furthermore, the Court stated that a force majeure clause was intended to relieve a party of its contractual obligation in cases where it simply cannot perform, not in cases where performance ceases to be profitable or financially advantageous.
This case issues caution to parties entering into a long-term, fixed-price contracts. Many factors can change market conditions unpredictably. A fixed price is a gamble which may or may not pay off. One way to mitigate the risks in such a contract is to negotiate contractual limitations to the fixed price such as a price floor or ceiling. The Court in this case even commented that the parties could have done this exact thing. Nonetheless, long-term, fixed-price, take-or-pay contracts must be carefully negotiated and drafted and warrant as much time and effort as needed to ensure the prevention of catastrophic effects to a business.
This article was written by Tyler Kemper, law clerk.
