INTERNATIONAL MINERALS & CHEMICAL CORP. v. LLANO, INC., United States Court of Appeals (1986)
Facts: International Minerals and Chemical Corporation (IMC), the manufacturer of fertilizer, signed a natural gas contract with Llano, Inc. (Llano), agreeing to buy a minimum daily average of 4800 million BTU’s of gas needed to operate its production from 1972 to June 30, 1982. They agreed that, if the buyer does not take this minimum amount, the buyer is obligated to pay for the minimum amount of gas anyway (“take or pay” provisions). IMC, however, did not take its minimum obligation of natural gas during the last eighteen months of the contract’s duration because IMC voluntarily cooperated with the New Mexico Environmental Improvement Board (EIB) to limit emissions from its potash processing equipment in compliance with the new Regulation 508. In its action for declarative judgment, IMC claimed that it was excused from its obligation to “take or pay” by the provisions of “force majeure” and “adjustment of minimum bill” in paragraphs 15 and 16 of the contract. The trial court, construing the provisions to excuse performance only if it became absolutely impossible or illegal to purchase the minimum amount of gas, denied the defense and found that IMC was liable to pay Llano for the full value of the gas not taken. IMC appealed.
Issue: Did the environmental regulations and resulting changes in IMC's operations excuse IMC from its obligation to purchase the minimum amount of gas under the "force majeure" and "adjustment of minimum bill" provisions of the contract?
Rule:
The "force majeure" clause in a contract can excuse a party from performance if unforeseen events beyond their control prevent them from fulfilling their obligations. Additionally, the "adjustment of minimum bill" provision can reduce the minimum purchase requirements if the party is unable to receive gas due to reasons beyond their control. The common law doctrine of impracticability, codified in Section 2-615 of the Uniform Commercial Code, applies if performance becomes impracticable due to unforeseen events that alter the essential nature of the contract.
“Unable” is synonymous with “impracticable,” as that is used in the common law and in Section 2-615. Strict impossibility is no longer required. See Restatement of Contracts (Second) § 261, comment d (1981).
Application:
1.Force Majeure Clause:
The court agreed that IMC's notice to Llano was inadequate as it did not specify that the reduction in gas consumption was due to environmental regulations.
Even if environmental regulations prevented gas consumption, IMC could still pay for the gas, thus the "take or pay" clause was not excused.
2.Adjustment of Minimum Bill Clause:
Paragraph 16 of the contract allowed adjustments if IMC was unable to receive gas due to uncontrollable circumstances.
IMC's compliance with Regulation 508 rendered it unable to use the minimum amount of gas. Compliance was necessary to avoid severe penalties and protect public health.
The court held that IMC's cooperation with environmental regulations did not equate to stalling tactics but demonstrated good faith efforts to comply with mandatory requirements.
3.Common Law Impracticability:
The court applied the common law doctrine of impracticability, noting that strict impossibility was not required; impracticability due to unreasonable difficulty or expense sufficed.
IMC's need to comply with Regulation 508 made performance impracticable. The court found that compliance efforts made IMC unable to take the minimum gas, thus triggering the adjustment provision.
Conclusion: For these reasons, IMC was unable, for reasons beyond its reasonable control, to receive its minimum purchase obligation of natural gas between January 1, 1981 and June 30, 1982. As a result, the adjustment provision of paragraph 16 of the contract was triggered. The minimum bill should have been adjusted appropriately, and IMC should not be required to pay for any natural gas it did not take under the contract.
The court reversed the district court's decision and held that IMC was excused from purchasing the minimum amount of gas due to the environmental regulations. The case was remanded for entry of a declaratory judgment consistent with this opinion, relieving IMC of the obligation to pay for the unused gas.
Feedback:
Meaning of take or pay contract
The "take or pay" provision in a contract is designed to mitigate the seller's risk and ensure compensation for their readiness to supply a product.
1.Compensation for Readiness: The seller commits resources to be able to deliver the maximum contracted amount of gas to the buyer at any given time. This includes maintaining infrastructure, staff, and supply chains. Even if the buyer doesn't actually take the gas, the seller incurs costs to ensure the gas is available.
2.Risk Elimination: In a pure requirements contract, the buyer purchases only what they need, which can vary widely and unpredictably. If the buyer's requirements drop significantly, the seller might be left with unsold gas and associated losses. The "take or pay" clause reduces this risk by guaranteeing a minimum payment, regardless of actual usage.
3.Financial Stability: For the seller, this provision provides financial predictability and stability. It assures that they will receive payment that covers their costs and provides profit, even if the buyer reduces their consumption.
Court’s interpretation of force majeure
Force majeure is not considered absolute immunity.
Force majeure is about physical impossibility; no language about the change in government regulation
However, change in circumstances can be an immunity for liability when the party did not perform his duty.
Ex) unexpected situations such as Covid-19, Ukraine-Russia War
Damages caused by nobody’s fault; the new government regulation.
Meeting impracticability is sufficient; impossibility =/ impracticability to perform one’s duties