3 Best & S. 826
122 Eng. Rep. 310 (Q.B. 1863)
TAYLOR
v.
CALDWELL
Queen’s Bench
May 6, 1863

The declaration alleged that by an agreement, bearing date the 27th May, 1861, the defendants agreed to let, and the plaintiffs agreed to take, on the terms therein stated, The Surrey Gardens and Music Hall, Newington, Surrey, for the following days, that is to say, Monday the 17th June, 1861, Monday the 15th July, 1861, Monday the 5th August, 1861, and Monday the 19th August, 1861, for the purpose of giving a series of four grand concerts and day and night fetes, at the Gardens and Hall on those days respectively, at the rent or sum of 100l. for each of those days. It then averred the fulfilment of conditions etc., on the part of the plaintiffs; and breach by the defendants, that they did not nor would allow the plaintiffs to have the use of The Surrey Music Hall and Gardens according to the agreement, but wholly made default therein, etc.; whereby the plaintiffs lost divers moneys paid by them for printing advertisements of and in advertising the concerts, and also lost divers sums expended and expenses incurred by them in preparing for the concerts and otherwise in relation thereto, and on the faith of the performance by the defendants of the agreement on their part, and had been otherwise injured, etc.

Pleas. First. Traverse of the agreement.

Second. That the defendants did allow the plaintiffs to have the use of The Surrey Music Hall and Gardens according to the agreement, and did not make any default therein, etc.

Third. That the plaintiffs were not ready or willing to take The Surrey Music Hall and Gardens.

Fourth. Exoneration before breach.

Fifth. That at the time of the agreement there was a general custom of the trade and business of the plaintiffs and the defendants, with respect to which the agreement was made, known to the plaintiffs and the defendants, and with reference to which they agreed, and which was part of the agreement, that in the event of the Gardens and Music Hall being destroyed or so far damaged by accidental fire as to prevent the entertainments being given according to the intent of the agreement, between the time of making the agreement and the time appointed for the performance of the same, the agreement should be rescinded and at an end; and that the Gardens and Music Hall were destroyed and so far damaged by accidental fire as to prevent the entertainments, or any of them, being given, according to the intent of the agreement, between the time of making the agreement and the first of the times appointed for the performance of the same, and continued so destroyed and damaged until after the times appointed for the performance of the agreement had elapsed, without the default of the defendants or either of them.

Issue on all the pleas. On the trial, before Blackburn J., at the London Sittings after Michaelmas Term, 1861, it appeared that the action was brought on the following agreement:

"Royal Surrey Gardens,

"27th May, 1861.

"Agreement between Messrs. Caldwell & Bishop, of the one part, and Messrs. Taylor & Lewis of the other part, whereby the said Caldwell & Bishop agree to let, and the said Taylor & Lewis agree to take, on the terms hereinafter stated, The Surrey Gardens and Music Hall, Newington, Surrey, for the following days, viz.:

"Monday, the 17th June, 1861,

Monday the 15th July, 1861,

Monday the 5th August, 1861,

Monday the 19th August, 1861,

for the purpose of giving a series of four grand concerts and day and night fetes at the said Gardens and Hall on those days respectively at the rent or sum of £100 for each of the said days. The said Caldwell & Bishop agree to find and provide at their own sole expense, on each of the aforesaid days, for the amusement of the public and persons then in the said Gardens and Hall, an efficient and organised military and quadrille band, the united bands to consist of from thirty-five to forty members; al fresco entertainments of various descriptions; coloured minstrels, fireworks and full illuminations; a ballet or divertissement, if permitted; a wizard and Grecian statues; tight rope performances; rifle galleries; air gun shooting; Chinese and Parisian games; boats on the lake, and (weather permitting) aquatic sports, and all and every other entertainment as given nightly during the months and times above mentioned. And the said Caldwell & Bishop also agree that the before mentioned united bands shall be present and assist at each of the said concerts, from its commencement until 9 o'clock at night; that they will, one week at least previous to the above mentioned dates, underline in bold type in all their bills and advertisements that Mr. Sims Reeves and other artistes will sing at the said gardens on those dates respectively, and that the said Taylor & Lewis shall have the right of placing their boards, bills and placards in such number and manner (but subject to the approval of the said Caldwell & Bishop) in and about the entrance to the said gardens, and in the said grounds, one week at least previous to each of the above mentioned days respectively, all bills so displayed being affixed on boards. And the said Caldwell & Bishop also agree to allow dancing on the new circular platform after 9 o'clock at night, but not before. And the said Caldwell & Bishop also agree not to allow the firework display to take place till a J past 11 o'clock at night. And, lastly, the said Caldwell & Bishop agree that the said Taylor & Lewis shall be entitled to and shall be at liberty to take and receive, as and for the sole use and property of them the said Taylor & Lewis, all moneys paid for entrance to the Gardens, Galleries and Music Hall and firework galleries, and that the said Taylor & Lewis may in their own discretion secure the patronage of any charitable institution in connection with the said concerts. And the said Taylor & Lewis agree to pay the aforesaid respective sum of £100 in the evening of the said respective days by a crossed cheque, and also to find and provide, at their own sole cost, all the necessary artistes for the said concerts, including Mr. Sims Reeves, God's will permitting.(Signed)

"J. CALDWELL."

Witness "CHAS. BISHOP.

(Signed) "S. Denis."

On the 11th June the Music Hall was destroyed by an accidental fire, so that it became impossible to give the concerts. Under these circumstances a verdict was returned for the plaintiff, with leave reserved to enter a verdict for the defendants on the second and third issues.

Petersdorff Serjt., in Hilary Term, 1862, obtained a rule to enter a verdict for the defendants generally.

The rule was argued, in Hilary Term, 1863 (January 28th); before Cockburn C.J., Wightman, Crompton and Blackburn JJ.

H. Tindal Atkinson shewed cause. First. The agreement sued on does not shew a "letting" by the defendants to the plaintiffs of the Hall and Gardens, although it uses the word "let," and contains a stipulation that the plaintiffs are to be empowered to receive the money at the doors, and to have the use of the Hall, for which they are to pay £100, and pocket the surplus; for the possession is to remain in the defendants, and the whole tenor of the instrument is against the notion of a letting. Whether an instrument shall be construed as a lease or only an agreement for a lease, even though it contains words of present demise, depends on the intention of the parties to be collected from the instrument; Morgan d. Dowding v. Bissell (3 Taunt. 65). Christie v. Lewis (2 B. & B. 410) is the nearest case to the present, where it was held that, although a charter party between the owner of a ship and its freighter contains words of grant of the ship, the possession of it may not pass to the freighter, but remain in the owner, if the general provisions in the instrument qualify the words of grant.

Secondly. The destruction of the premises by fire will not exonerate the defendants from performing their part of the agreement. In Paradine v. Jane (Al. 26) it is laid down that, where the law creates a duty or charge, and the party is disabled to perform it without any default in him, and hath no remedy over, there the law will excuse him; but when the party, by his own contract, creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract. And there accordingly it was held no plea to an action for rent reserved by lease that the defendant was kept out of possession by an alien enemy whereby he could not take the profits.

Pearce, in support of the rule. First. This instrument amounts to a demise. It uses the legal words for that purpose, and is treated in the declaration as a demise.

Secondly. The words "God's will permitting" override the whole agreement.

Cur. adv. vult.

The judgment of the Court was now delivered by

BLACKBURN, J. In this case the plaintiffs and defendants had, on the 27th May, 1861, entered into a contract by which the defendants agreed to let the plaintiffs have the use of The Surrey Gardens and Music Hall on four days then to come, viz., the 17th June, 15th July, 5th August and 19th August, for the purpose of giving a series of four grand concerts, and day and night fetes at the Gardens and Hall on those days respectively; and the plaintiffs agreed to take the Gardens and Hall on those days, and pay £100 for each day.

The parties inaccurately call this a "letting," and the money to be paid a "rent;" but the whole agreement is such as to shew that the defendants were to retain the possession of the Hall and Gardens so that there was to be no demise of them, and that the contract was merely to give the plaintiffs the use of them on those days. Nothing however, in our opinion, depends on this. The agreement then proceeds to set out various stipulations between the parties as to what each was to supply for these concerts and entertainments, and as to the manner in which they should be carried on. The effect of the whole is to shew that the existence of the Music Hall in the Surrey Gardens in a state fit for a concert was essential for the fulfilment of the contract,—such entertainments as the parties contemplated in their agreement could not be given without it.

After the making of the agreement, and before the first day on which a concert was to be given, the Hall was destroyed by fire. This destruction, we must take it on the evidence, was without the fault of either party, and was so complete that in consequence the concerts could not be given as intended. And the question we have to decide is whether, under these circumstances, the loss which the plaintiffs have sustained is to fall upon the defendants. The parties when framing their agreement evidently had not present to their minds the possibility of such a disaster, and have made no express stipulation with reference to it, so that the answer to the question must depend upon the general rules of law applicable to such a contract.

There seems no doubt that where there is a positive contract to do a thing, not in itself unlawful, the contractor must perform it or pay damages for not doing it, although in consequence of unforeseen accidents, the performance of his contract has become unexpectedly burthensome or even impossible. The law is so laid down in 1 Roll. Abr. 450, Condition (G), and in the note (2) to Walton v. Waterhouse (2 Wms. Saund. 421 a. 6th ed.), and is recognised as the general rule by all the Judges in the much discussed case of Hall v. Wright (E. B. & E. 746). But this rule is only applicable when the contract is positive and absolute, and not subject to any condition either express or implied: and there are authorities which, as we think, establish the principle that where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless when the time for the fulfilment of the contract arrived some particular specified thing continued to exist, so that, when entering into the contract, they must have contemplated such continuing existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be construed as a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor.

There seems little doubt that this implication tends to further the great object of making the legal construction such as to fulfil the intention of those who entered into the contract. For in the course of affairs men in making such contracts in general would, if it were brought to their minds, say that there should be such a condition. Accordingly, in the Civil law, such an exception is implied in every obligation of the class which they call obligatio de certo corpore. The rule is laid down in the Digest, lib. xlv., tit. l, de verborum obligationibus, 1. 33. "Si Stichus certo die dari promissus, ante diem moriatur: non tenetur promissor." The principle is more fully developed in l. 23. "Si ex legati causa, aut ex stipulatii hominem certum mihi debeas: non aliter post mortem ejus tenearis mihi, quam si per te steterit, quominus vivo eo eum mihi dares: quod ita fit, si aut interpellatus non dedisti, aut occidisti eum." The examples are of contracts respecting a slave, which was the common illustration of a certain subject used by the Roman lawyers, just as we are apt to take a horse; and no doubt the propriety, one might almost say necessity, of the implied condition is more obvious when the contract relates to a living animal, whether man or brute, than when it relates to some inanimate thing (such as in the present case a theatre) the existence of which is not so obviously precarious as that of the live animal, but the principle is adopted in the Civil law as applicable to every obligation of which the subject is a certain thing. The general subject is treated of by Pothier, who in his Traite des Obligations, partie 3, chap. 6, art. 3, § 668 states the result to be that the debtor corporis certi is freed from his obligation when the thing has perished, neither by his act, nor his neglect, and before he is in default, unless by some stipulation he has taken on himself the risk of the particular misfortune which has occurred.

Although the Civil law is not of itself authority in an English Court, it affords great assistance in investigating the principles on which the law is grounded. And it seems to us that the common law authorities establish that in such a contract the same condition of the continued existence of the thing is implied by English law.

There is a class of contracts in which a person binds himself to do something which requires to be performed by him in person; and such promises, e.g. promises to marry, or promises to serve for a certain time, are never in practice qualified by an express exception of the death of the party; and therefore in such cases the contract is in terms broken if the promisor dies before fulfilment. Yet it was very early determined that, if the performance is personal, the executors are not liable; Hyde v. The Dean of Windsor (Cro. Eliz. 552, 553). See 2 Wms. Exors. 1560, 5th ed., where a very apt illustration is given. "Thus," says the learned author, "if an author undertakes to compose a work, and dies before completing it, his executors are discharged from this contract: for the undertaking is merely personal in its nature, and, by the intervention of the contractor's death, has become impossible to be performed."For this he cites a dictum of Lord Lyndhurst in Marshall v. Broadhurst (1 Tyr. 348, 349), and a case mentioned by Patteson J. in Wentworth v. Cock (10 A. & E. 42, 45-46). In Hall v. Wright (E. B. & E. 746, 749), Crompton J., in his judgment, puts another case. "Where a contract depends upon personal skill, and the act of God renders it impossible, as, for instance, in the case of a painter employed to paint a picture who is struck blind, it may be that the performance might be excused."

It seems that in those cases the only ground on which the parties or their executors, can be excused from the consequences of the breach of the contract is, that from the nature of the contract there is an implied condition of the continued existence of the life of the contractor, and, perhaps in the case of the painter of his eyesight. In the instances just given, the person, the continued existence of whose life is necessary to the fulfilment of the contract, is himself the contractor, but that does not seem in itself to be necessary to the application of the principle; as is illustrated by the following example. In the ordinary form of an apprentice deed the apprentice binds himself in unqualified terms to "serve until the full end and term of seven years to be fully complete and ended," during which term it is covenanted that the apprentice his master "faithfully shall serve," and the father of the apprentice in equally unqualified terms binds himself for the performance by the apprentice of all and every covenant on his part. (See the form, 2 Chitty on Pleading, 370, 7th ed. by Greening.) It is undeniable that if the apprentice dies within the seven years, the covenant of the father that he shall perform his covenant to serve for seven years is not fulfilled, yet surely it cannot be that an action would lie against the father? Yet the only reason why it would not is that he is excused because of the apprentice's death.

These are instances where the implied condition is of the life of a human being, but there are others in which the same implication is made as to the continued existence of a thing. For example, where a contract of sale is made amounting to a bargain and sale, transferring presently the property in specific chattels, which are to be delivered by the vendor at a future day; there, if the chattels, without the fault of the vendor, perish in the interval, the purchaser must pay the price and the vendor is excused from performing his contract to deliver, which has thus become impossible.

That this is the rule of the English law is established by the case of Rugg v. Minett (11 East, 210), where the article that perished before delivery was turpentine, and it was decided that the vendor was bound to refund the price of all those lots in which the property had not passed; but was entitled to retain without deduction the price of those lots in which the property had passed, though they were not delivered, and though in the conditions of sale, which are set out in the report, there was no express qualification of the promise to deliver on payment. It seems in that case rather to have been taken for granted than decided that the destruction of the thing sold before delivery excused the vendor from fulfilling his contract to deliver on payment.

This also is the rule in the Civil law, and it is worth noticing that Pothier, in his celebrated Traite du Contrat de Vente (see Part. 4, § 307, etc.; and Part. 2, ch. 1, sect. 1, art. 4, § 1), treats this as merely an example of the more general rule that every obligation de certo corpore is extinguished when the thing ceases to exist. See Blackburn on the Contract of Sale, p. 173.

The same principle seems to be involved in the decision of Sparrow v. Sowyate (W. Jones, 29), where, to an action of debt on an obligation by bail, conditioned for the payment of the debt or the render of the debtor, it was held a good plea that before any default in rendering him the principal debtor died. It is true that was the case of a bond with a condition, and a distinction is sometimes made in this respect between a condition and a contract. But this observation does not apply to Williams v. Lloyd (W. Jones, 179). In that case the count, which was in assumpsit, alleged that the plaintiff had delivered a horse to the defendant, who promised to redeliver it on request. Breach, that though requested to redeliver the horse he refused. Plea, that the horse was sick and died, and the plaintiff made the request after its death; and on demurrer it was held a good plea, as the bailee was discharged from his promise by the death of the horse without default or negligence on the part of the defendant. "Let it be admitted," say the Court, "that he promised to deliver it on request, if the horse die before, that is become impossible by the act of God, so the party shall be discharged, as much as if an obligation were made conditioned to deliver the horse on request, and he died before it." And Jones, adds the report, cited 22 Ass. 41, in which it was held that a ferryman who had promised to carry a horse safe across the ferry was held chargeable for the drowning of the animal only because he had overloaded the boat, and it was agreed, that notwithstanding the promise no action would have lain had there been no neglect or default on his part.

It may, we think, be safely asserted to be now English law, that in all contracts of loan of chattels or bailments if the performance of the promise of the borrower or bailee to return the things lent or bailed, becomes impossible because it has perished, this impossibility (if not arising from the fault of the borrower or bailee from some risk which he has taken upon himself) excuses the borrower or bailee from the performance of his promise to redeliver the chattel. The great case of Coggs v. Bernard (1 Smith's L. C. 171, 5th ed.; 2 L. Raym. 909) is now the leading case on the law of bailments, and Lord Holt, in that case, referred so much to the Civil law that it might perhaps be thought that this principle was there derived direct from the civilians, and was not generally applicable in English law except in the ease of bailments; but the case of Williams v. Lloyd (W. Jones, 179), above cited, shews that the same law had been already adopted by the English law as early as The Book of Assizes. The principle seems to us to be that, in contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance.

In none of these cases is the promise in words other than positive, nor is there any express stipulation that the destruction of the person or thing shall excuse the performance; but that excuse is by law implied, because from the nature of the contract it is apparent that the parties contracted on the basis of the continued existence of the particular person or chattel. In the present case, looking at the whole contract, we find that the parties contracted on the basis of the continued existence of the Music Hall at the time when the concerts were to be given; that being essential to their performance.

We think, therefore, that the Music Hall having ceased to exist, without fault of either party, both parties are excused, the plaintiffs from taking the gardens and paying the money, the defendants from performing their promise to give the use of the Hall and Gardens and other things. Consequently the rule must be absolute to enter the verdict for the defendants.

Rule absolute.

Norman H. Mesnikoff for plaintiff.

Roger J. McLaughlin for defendant (Mangini, Gilroy, Cramer, & McLaughlin,attorneys).

MILBERG, A.J.S.C.

This is an action for breach of contract in which plaintiff, George Seitz, seeks damages from defendant, Mark-O-Lite Sign Contractors, Inc., in the amount of $7,200.

At trial, counsel for the parties agreed to submit the dispute to the court's determination based on the following stipulated facts:

1. Prior to December 1983, plaintiff submitted a bid to the Ocean County Center for the Arts on a contract involving renovations to the Strand Theater in Lakewood, New Jersey.

2. A portion of the Strand Theater project involved the restoration and replacement of a neon sign marquee.

3. Plaintiff was the low bidder on the Strand project.

4. Plaintiff first spoke with a representative of defendant in December 1983, and received a verbal estimate of from $10,000 to $12,000 for the sign work required in connection with the Strand project.

5. No written estimate was rendered by defendant and no contract was executed by plaintiff and defendant as of the end of 1983.

6. Plaintiff signed a contract for the Strand Theater renovation with the Ocean County Center for the Arts on December 26, 1983.

7. Items 1, 2, 3 and 4 of the contract pertain to the sign work and totalled $19,500 of the total contract price for the Strand Theater project of $51,200.

8. Plaintiff obtained quotations from other sign companies in early 1984, including one from Garden State Sign Company dated January 20, 1984, in the amount of $20,228.

9. Plaintiff had further discussions with defendant and on April 18, 1984, a contract was executed between the parties in the total amount of $12,800 for the sign work. On that date plaintiff gave defendant a deposit check in the amount of $3,200.

10. The contract between the parties contained a provision in paragraph (2) which reads as follows: "The Company shall not be liable for any failure in the performance of its obligation under this agreement which may result from strikes or acts of labor union, fires, floods, earthquakes, or acts of God, or other conditions or contingencies beyond its control."

11. Within a few days of the execution of the contract, defendant discovered that its expert sheet metal worker, Al Jorgenson, a diabetic, was required to enter the hospital and would be unable to work for an unknown period of time. Jorgenson was the only employee of defendant capable of performing the expert and detailed sheet metal work required.

12. Defendant advised plaintiff of the situation with its employee by telephone and on May 3, 1984, sent a letter to plaintiff returning the uncashed deposit check offering to complete any portion of the work which defendant was able to perform.

13. Defendant also contacted other sign companies and was advised that the cost of the work would be $18,000 to $20,000 and, therefore, it would have been economically infeasible for defendant to retain the services of another sign company.

14. Plaintiff entered into an agreement with City Sign Service, Inc. to perform the necessary work for the total sum of $20,000. It is to be noted that the items listed for additional rail, additional neon, and a neon border were extra items added to the project and were not encompassed within the specifications which defendant had originally agreed to perform.

15. The total damages claimed by plaintiff are in the amount of $7,200, representing the difference between the City Sign Service price of $20,000 and the price of $12,800 stated in the contract between the parties.

Defendant asserts the defense of impossibility of performance due to the disability of its sheet metal worker, Jorgenson. Specifically, defendant urges that the illness of Jorgenson discharged its obligation of performance pursuant to paragraph 2 of the contract. Paragraph 2, commonly known as a force majeure clause, reads:

The Company shall not be liable for any failure in the performance of its obligations under this agreement which may result from strikes or acts of Labor Union, fires, floods, earthquakes, or acts of God, War or other conditions or contingencies beyond its control. [Emphasis supplied]

Defendant contends that Jorgenson's disability was a "condition or contingency beyond its control," that its obligation of performance was therefore excused under the above-quoted, exculpatory language.

In construing broad, exculpatory language of this type, however, the courts of this State and the majority of jurisdictions invoke the rule of ejusdem generis. See Abeles v. Adams Engineering Co., 64 N.J. Super. 167, 176 (App.Div.), mod. 35 N.J. 411 (1961); 17 Am.Jur.2d, Contracts, § 270 (1964). Under this principle, the catch-all language of the force majeure clause relied upon by defendant is not to be construed to its widest extent; rather, such language is to be narrowly interpreted as contemplating only events or things of the same general nature or class as those specifically enumerated. Buono Sales, Inc. v. Chrysler Motors Corp., 363 F.2d 43, 47 (3 Cir.1966), cert. den. 385 U.S. 971, 87 S.Ct. 510, 17L.Ed.2d 435 1966); 17 Am.Jur.2d, supra, § 409; 24 P.O.F.2d at 291 (1980); see Abeles v. Adams Engineering Co., supra, 64 N.J. Super. at 176.

Jorgenson's disability does not fall into the same class as that of labor strikes, fires, floods, earthquakes or war. Nor can it be termed an "act of God." Jorgenson's condition was not the consequence of a stroke or a heart attack, either of because of its suddenness. See 1 Am.Jur.2d, Act of God, which might, in a particular case, be deemed an "act of God" § 10. Jorgenson is a diabetic. His disability — a partial amputation of his foot — was the result of the progressiveaggravation of an infection, which aggravation was apparently rooted in his diabetes. Jorgenson's affliction was not sudden; indeed, his disability was a reasonably foreseeable consequence of his unfortunate malady. Hence, Jorgenson's incapacitation cannot be classed an "act of God" by any logical stretch of the term. See generally 1 Am.Jur.2d, Act of God, supra, § 3. Defendant's force majeure clause does not apply.

It does not necessarily follow, however, that defendant is bereft of the defense of impossibility of performance; thus far, it has merely been determined that the force majeure clause is unavailing.

There is very little, if any, recent New Jersey case law pertinent to the impossibility defense asserted herein; yet the general principles are well settled and relatively unchanged.

The traditional rule with respect to impossibility by virtue of the death or illness of a particular person is set forth in the Restatement, Contracts, § 459 (1932):

A duty that requires for its performance action that can be rendered only by the promisor or some other particular person is discharged by his death or by such illness as makes the necessary action by him impossible or seriously injurious to his health, unless the contract indicates a contrary intention or there is contributing fault on the part of the person subject to the duty.

See generally 84 A.L.R.2d, § 8[c] at 49 (1962).

A more modern formulation of the doctrine is found in §§ 261 and 262 of the Restatement, Contracts 2d (1981), which speak in terms of "impracticability" rather than "impossibility":

§ 261. Discharge by Supervening Impracticability

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

§ 262. Death or Incapacity of Persons Necessary for Performance

If the existence of a particular person is necessary for the performance of a duty, his death or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.

Section 262 states a specific instance for the application of the rule stated in § 261 and, thus, is subject to the qualifications stated in that preceding section. SeeComment a to § 262, supra.

Regardless of which Restatement is adopted with respect to impossibility, however, the success of the defense in the particular mode asserted herein turns on a determination that the duty in question, as understood by the parties, can be performed only by a particular person. Restatement, Contracts 2d, § 459, Comment c, § 262, Comment b; see Calamari & Perillo, Contracts, § 13-6 at 489 (1977). Such has long been the governing standard in this State, see Ryan v. Brown Motors, Inc., 132 N.J.L. 154, 158 (E. & A. 1944); Schaefer v. Brunswick Laundry, Inc., 116 N.J.L. 268, 271 (E. & A. 1936); Siesel v. Mandeville, 140 N.J. Eq. 490, 492 (Ch. 1947); see also Salvemini v. Giblin, 42 N.J. Super. 1, 5 (App.Div. 1956), aff'd 24 N.J. 123 (1957), as well as in the majority of jurisdictions. See generally 17 Am.Jur.2d, Contracts, supra, § 414; 84 A.L.R.2d, supra, § 8[a], [c].

Thus, it is clear from the foregoing that the primary application of the impossibility defense in the form asserted by defendant is in the area of personal service contracts, that is, contracts which contemplate the peculiar skill or discretion of a particular person. Restatement, Contracts 2d, supra, § 262 Comment b; see Walter E. Heller & Co. v. American Flyers Airline Corp., 459 F.2d 896, 901 (2 Cir.1972); see generally, 17 Am.Jur.2d, Contracts, supra, §§ 413, 414. Where, as here, the agreement is silent as to whether a particular person is or is not necessary for performance, all the circumstances will be considered to determine whether the duty, as understood by the parties, sufficiently involves elements of personal service or discretion as to require performance by a particular individual. Restatement, Contracts 2d, § 262, Comment b.

The real question, therefore, is whether the duty of performance can be delegated to another: If the act to be performed is delegable, then the illness of the promisor or of a third person who is expected to perform the act does not excuse performance. Calamari & Perillo, supra, § 13-6 at 489; see Restatement, Contracts2d, § 262, Comment b ("If an obligor can discharge his duty by the performance of another, his own disability will not discharge him."); Restatement, Contracts 2d, § 459, Comment c ("If a contractor without violation of duty can go abroad and perform by means of another, his death or illness will not make subsequent performance of his contract impossible."). The preceding is merely a corollary of the general rule that, for impossibility to operate as an excuse, it must be objective ("the thing cannot be done") rather than subjective ("I cannot do it"). Calamari & Perillo, supra § 13-12 at 497; see Restatement, Contracts 2d, § 261, Comment e; Duff v. Trenton Beverage Co., 4 N.J. 605, 606 (1950).

It is readily apparent from an application of the foregoing principles that defendant cannot prevail on its claim of impossibility of performance. Nothing in the language of the contract contemplates performance only by Jorgenson; nor do the circumstances demonstrate that the performance to be rendered by Jorgenson was so personal in nature, calling for a peculiar skill or special exercise of discretion, as to make it nondelegable. To be sure, the conduct of defendant — and that of plaintiff — following the advent of Jorgenson's incapacitation belies any claim of special need for his services. Defendant contacted a number of outside shops in an attempt to engage someone else to perform the sheet metal work. Defendant admitted that the sheet metal work could still be performed, albeit through someone other than Jorgenson. Cf. 13 Am.Jur.2d, Building and Construction Contracts, § 63 (A contract to build a house does not involve such a personal relation that it may not be performed by persons other than the contracting parties thereto and, therefore, is not terminated by the death of one of the parties).

At best, defendant's claim is that of subjective impossibility which, as was previously stated, is no excuse for nonperformance. Duff v. Trenton Beverage Co., supra, 4 N.J. at 606.

Any claim by defendant that its obligation of performance should be excused, because to assume the higher cost of subcontracting the sheet metal work would have resulted in a marginal profit or even a loss, must fail. "Where one agrees to do, for a fixed sum, a thing possible to be performed, he will not be excused or become entitled to additional compensation because unforeseen difficulties are encountered." United States v. Spearin, 248 U.S. 132, 136, 39 S.Ct. 59, 61, 63 L.Ed. 166 (1918), quoted in Hartford Fire Ins. Co. v. Riefolo Constr. Co., 81 N.J.514, 524 (1980); see Newark v. North Jersey Dist. Water Supply Comm'n, 106 N.J. Super. 88, 105 (Ch.Div. 1968), aff'd 54 N.J. 258 (1969); Schaefer v. Brunswick Laundry, Inc., supra, 116 N.J.L. at 272.

An anticipatory breach is a definite and unconditional declaration by a party to an executory contract — through word or conduct — that he will not or cannot render the agreed upon performance. Ross Systems v. Linden Dari-Delite, Inc., 35 N.J.329, 340-341 (1961). If the breach is material — that is, if it "goes to the essence of the contract" — the nonbreaching party may treat the contract as terminated and commence suit forthwith. Id. at 341; Miller and Sons Bakery Co. v. Selikowitz,8 N.J. Super. 118, 122 (App.Div. 1950); Young Travelers Day Camps, Inc. v. Felsen, 118 N.J. Super. 304, 310 (Cty.D.Ct. 1972).

Here, defendant's letter of May 3, 1984, and the simultaneous return of plaintiff's deposit constituted a clear and unequivocal declaration that the agreed upon performance would not be forthcoming. Defendant's expression of inability to perform the sheet metal work, without legal excuse, was a repudiation going to the "essence of the contract" and, thus, justified plaintiff in considering the contract at an end and reaching out to another subcontractor. See Ross Systems v. Linden Dari-Delite, Inc., supra, 35 N.J. at 341. Particularly in view of the admitted time constraints which plaintiff was burdened with under his contract with the Ocean County Center for the Arts, it cannot be said that he acted wrongfully, or unreasonably, in subcontracting the entire sign project to another company.

Plaintiff expected to disburse $12,800 toward the completion of the sign project under his contract with defendant; in the end, he paid $20,000 for the contemplated work as a consequence of defendant's breach. His damages are equal to the difference or $7,200. Judgment will be entered in that amount in favor of plaintiff and against defendant.

Plaintiff is hereby directed to submit an appropriate form of judgment.

415 F.Supp. 429 (1975)

EASTERN AIR LINES, INC., Plaintiff,
v.
GULF OIL CORPORATION, Defendant.

No. 74-335-Civ-JLK.
United States District Court, S. D. Fla.
October 20, 1975.

[430] [431] Gambrell, Russell, Killorin & Forbes, Atlanta, Ga., William G. Bell, Jr., Eastern Air Lines, Inc., Miami International Airport, Walton Lantaff Schroeder Carson & Wahl, Miami, Fla., for plaintiff.

Smathers & Thompson, Miami, Fla., W. B. Edwards, Gulf Oil Co., Houston, Tex., for defendant.

OPINION

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JAMES LAWRENCE KING, District Judge.

Eastern Air Lines, Inc., hereafter Eastern, and Gulf Oil Corporation, hereafter Gulf, have enjoyed a mutually advantageous business relationship involving the sale and purchase of aviation fuel for several decades.

This controversy involves the threatened disruption of that historic relationship and the attempt, by Eastern, to enforce the most recent contract between the parties. On March 8, 1974 the correspondence and telex communications between the corporate [432] entities culminated in a demand by Gulf that Eastern must meet its demand for a price increase or Gulf would shut off Eastern's supply of jet fuel within fifteen days.

Eastern responded by filing its complaint with this court, alleging that Gulf had breached its contract^[1] and requesting preliminary and permanent mandatory injunctions requiring Gulf to perform the contract in accordance with its terms. By agreement of the parties, a preliminary injunction preserving the status quo was entered on March 20, 1974, requiring Gulf to perform its contract and directing Eastern to pay in accordance with the contract terms, pending final disposition of the case.

Gulf answered Eastern's complaint, alleging that the contract was not a binding requirements contract, was void for want of mutuality, and, furthermore, was "commercially impracticable" within the meaning of Uniform Commercial Code § 2-615; Fla. Stat. §§ 672.614 and 672.615.^[2]

The extraordinarily able advocacy by the experienced lawyers for both parties produced testimony at the trial from internationally respected experts who described in depth economic events that have, in recent months, profoundly affected the lives of every American.

THE CONTRACT

On June 27, 1972, an agreement was signed by the parties which, as amended, was to provide the basis upon which Gulf was to furnish jet fuel to Eastern at certain specific cities in the Eastern system. Said agreement supplemented an existing contract between Gulf and Eastern which, on June 27, 1972, had approximately one year remaining prior to its expiration.

The contract is Gulf's standard form aviation fuel contract and is identical in all material particulars with the first contract for jet fuel, dated 1959, between Eastern and Gulf and, indeed, with aviation fuel contracts antedating the jet age. It is similar to contracts in general use in the aviation fuel trade. The contract was drafted by Gulf after substantial arm's length negotiation between the parties. Gulf approached Eastern more than a year before the expiration of the then-existing contracts between Gulf and Eastern, seeking to preserve its historic relationship with Eastern. Following several months of negotiation, the contract, consolidating and extending the terms of several existing contracts, was executed by the parties in June, 1972, to expire January 31, 1977.

The parties agreed that this contract, as its predecessor, should provide a reference to reflect changes in the price of the raw material from which jet fuel is processed, i.e., crude oil, in direct proportion to the cost per gallon of jet fuel.

Both parties regarded the instant agreement as favorable, Eastern, in part, because it offered immediate savings in projected escalations under the existing agreement through reduced base prices at the contract cities; while Gulf found a long term outlet for a capacity of jet fuel coming on stream from a newly completed refinery, as well as a means to relate anticipated increased cost of raw material (crude oil) directly to the price of the refined product sold. The previous Eastern/Gulf contracts contained a price index clause which operated to pass on to Eastern only one-half of any increase in the price of crude oil. Both parties knew at the time of contract negotiations that increases in crude oil prices would be expected, were "a way of life", and intended that [433] those increases be borne by Eastern in a direct proportional relationship of crude oil cost per barrel to jet fuel cost per gallon.

Accordingly, the parties selected an indicator (West Texas Sour); a crude which is bought and sold in large volume and was thus a reliable indicator of the market value of crude oil. From June 27, 1972 to the fall of 1973, there were in effect various forms of U.S. government imposed price controls which at once controlled the price of crude oil generally, West Texas Sour specifically, and hence the price of jet fuel. As the government authorized increased prices of crude those increases were in turn reflected in the cost of jet fuel. Eastern has paid a per gallon increase under the contract from 11 cents to 15 cents (or some 40%).

The indicator selected by the parties was "the average of the posted prices for West Texas sour crude, 30.0-30.9 gravity of Gulf Oil Corporation, Shell Oil Company, and Pan American Petroleum Corporation". The posting of crude prices under the contract "shall be as listed for these companies in Platts Oilgram Service—Crude Oil Supplement . . ."

"Posting" has long been a practice in the oil industry. It involves the physical placement at a public location of a price bulletin reflecting the current price at which an oil company will pay for a given barrel of a specific type of crude oil. Those posted price bulletins historically have, in addition to being displayed publicly, been mailed to those persons evincing interest therein, including sellers of crude oil, customers whose price of product may be based thereon, and, among others, Platts Oilgram, publishers of a periodical of interest to those related to the oil industry.

In recent years, the United States has become increasingly dependent upon foreign crude oil, particularly from the "OPEC" nations^[3] most of which are in the Middle East. OPEC was formed in 1970 for the avowed purpose of raising oil prices, and has become an increasingly cohesive and potent organization as its member nations have steadily enhanced their equity positions and their control over their oil production facilities. Nationalization of crude oil resources and shutdowns of production and distribution have become a way of life for oil companies operating in OPEC nations, particularly in the volatile Middle East. The closing of the Suez Canal and the concomitant interruption of the flow of Mid-East oil during the 1967 "Six-Day War", and Libya's nationalization of its oil industry during the same period, are only some of the more dramatic examples of a trend that began years ago. By 1969 "the handwriting was on the wall" in the words of Gulf's foreign oil expert witness, Mr. Blackledge.

During 1970 domestic United States oil production "peaked"; since then it has declined while the percentage of imported crude oil has been steadily increasing. Unlike domestic crude oil, which has been subject to price control since August 15, 1971, foreign crude oil has never been subject to price control by the United States Government. Foreign crude oil prices, uncontrolled by the Federal Government, were generally lower than domestic crude oil prices in 1971 and 1972; during 1973 foreign prices "crossed" domestic prices; by late 1973 foreign prices were generally several dollars per barrel higher than controlled domestic prices. It was during late 1973 that the Mid-East exploded in another war, accompanied by an embargo (at least officially) by the Arab oil-producing nations against the United States and certain of its allies. World prices for oil and oil products increased.

Mindful of that situation and for various other reasons concerning the nation's economy, the United States government began a series of controls affecting the oil industry culminating, in the fall of 1973, with the implementation of price controls known as "two-tier". In practice "two-tier" can be described as follows: taking as the bench mark the number of barrels produced from a given well in May of 1972, that number of barrels is deemed "old" oil. The price of [434] "old" oil then is frozen by the government at a fixed level. To the extent that the productivity of a given well can be increased over the May, 1972, production, that increased production is deemed "new" oil. For each barrel of "new" oil produced, the government authorized the release from price controls of an equivalent number of barrels from those theretofore designated "old" oil. For example, from a well which in May of 1972, produced 100 barrels of oil; all of the production of that well would, since the imposition of "two-tier" in August of 1973, be "old" oil. Increased productivity to 150 barrels would result in 50 barrels of "new" oil and 50 barrels of "released" oil; with the result that 100 barrels of the 150 barrels produced from the well would be uncontrolled by the "two-tier" pricing system, while the 50 remaining barrels of "old" would remain government price controlled.

The implementation of "two-tier" was completely without precedent in the history of government price control action. Its impact, however, was nominal, until the imposition of an embargo upon the exportation of crude oil by certain Arab countries in October, 1973. Those countries deemed sympathetic to Israel were embargoed from receiving oil from the Arab oil producing countries. The United States was among the principal countries affected by that embargo, with the result that it experienced an immediate "energy crises."

Following closely after the embargo, OPEC (Oil Producing Export Countries) unilaterally increased the price of their crude to the world market some 400% between September, 1973, and January 15, 1974. Since the United States domestic production was at capacity, it was dependent upon foreign crude to meet its requirements. New and released oil (uncontrolled) soon reached parity with the price of foreign crude, moving from approximately $5 to $11 a barrel from September, 1974 to January 15, 1974.

Since imposition of "two-tier", the price of "old oil" has remained fixed by government action, with the oil companies resorting to postings reflecting prices they will pay for the new and released oil, not subject to government controls. Those prices, known as "premiums", are the subject of supplemental bulletins which are likewise posted by the oil companies and furnished to interested parties, including Platts Oilgram.

Platts, since the institution of "two-tier" has not published the posted prices of any of the premiums offered by the oil companies in the United States, including those of Gulf Oil Corporation, Shell Oil Company and Pan American Petroleum, the companies designated in the agreement. The information which has appeared in Platts since the implementation of "two-tier" with respect to the price of West Texas Sour crude oil has been the price of "old" oil subject to government control.

Under the court's restraining order, entered in this cause by agreement of the parties, Eastern has been paying for jet fuel from Gulf on the basis of the price of "old" West Texas Sour crude oil as fixed by government price control action, i.e., $5 a barrel. Approximately 40 gallons of finished jet fuel product can be refined from a barrel of crude.

Against this factual background we turn to a consideration of the legal issues.

I

THE "REQUIREMENTS" CONTRACT

Gulf has taken the position in this case that the contract between it and Eastern is not a valid document in that it lacks mutuality of obligation; it is vague and indefinite; and that it renders Gulf subject to Eastern's whims respecting the volume of jet fuel Gulf would be required to deliver to the purchaser Eastern.

The contract talks in terms of fuel "requirements".^[4] The parties have interpreted this provision to mean that any aviation [435] fuel purchased by Eastern at one of the cities covered by the contract, must be bought from Gulf. Conversely, Gulf must make the necessary arrangements to supply Eastern's reasonable good faith demands at those same locations. This is the construction the parties themselves have placed on the contract and it has governed their conduct over many years and several contracts.

In early cases, requirements contracts were found invalid for want of the requisite definiteness, or on the grounds of lack of mutuality. Many such cases are collected and annotated at 14 A.L.R. 1300.

As reflected in the foregoing annotation, there developed rather quickly in the law the view that a requirements contract could be binding where the purchaser had an operating business. The "lack of mutuality" and "indefiniteness" were resolved since the court could determine the volume of goods provided for under the contract by reference to objective evidence of the volume of goods required to operate the specified business. Therefore, well prior to the adoption of the Uniform Commercial Code, case law generally held requirements contracts binding. See 26 A.L.R.2d 1099, 1139.

The Uniform Commercial Code, adopted in Florida in 1965, specifically approves requirements contracts in F.S. 672.306 (U.C.C. § 2-306(1)).

"(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded."

The Uniform Commercial Code Official Comment interprets § 2-306(1) as follows:

"2. Under this Article, a contract for output or requirements is not too indefinite since it is held to mean the actual good faith output or requirements of the particular party. Nor does such a contract lack mutuality of obligation since, under this section, the party who will determine quantity is required to operate his plant or conduct his business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable figure. Reasonable elasticity in the requirements is expressly envisaged by this section and good faith variations from prior requirements are permitted even when the variation may be such as to result in discontinuance. A shut-down by a requirements buyer for lack of orders might be permissible when a shut-down merely to curtail losses would not. The essential test is whether the party is acting in good faith. Similarly, a sudden expansion of the plant by which requirements are to be measured would not be included within the scope of the contract as made but normal expansion undertaken in good faith would be within the scope of this section. One of the factors in an expansion situation would be whether the market price has risen greatly in a case in which the requirements contract contained a fixed price. Reasonable variation of an extreme sort is exemplified in Southwest Natural Gas Co. v. Oklahoma Portland Cement Co., 102 F.2d 630 (C.C.A. 10, 1939)."

Some of the prior Gulf-Eastern contracts have included the estimated fuel requirements for some cities covered by the contract while others have none. The particular contract contains an estimate for Gainesville, Florida requirement.

The parties have consistently over the years relied upon each other to act in good faith in the purchase and sale of the required quantities of aviation fuel specified in the contract. During the course of the contract, various estimates have been exchanged from time to time, and, since the advent of the petroleum allocations programs, discussions of estimated requirements [436] have been on a monthly (or more frequent) basis.^[5]

The court concludes that the document is a binding and enforceable requirements contract.

II

BREACH OF CONTRACT

Gulf suggests that Eastern violated the contract between the parties by manipulating its requirements through a practice known as "fuel freighting" in the airline industry. Requirements can vary from city to city depending on whether or not it is economically profitable to freight fuel. This fuel freighting practice in accordance with price could affect lifting from Gulf stations by either raising such liftings or lowering them. If the price was higher at a Gulf station, the practice could have reduced liftings there by lifting fuel in excess of its actual operating requirements at a prior station, and thereby not loading fuel at the succeeding high price Gulf station. Similarly where the Gulf station was comparatively cheaper, an aircraft might load more heavily at the Gulf station and not load at other succeeding non-Gulf stations.

The court however, finds that Eastern's performance under the contract does not constitute a breach of its agreement with Gulf and is consistent with good faith and established commercial practices as required by U.C.C. §2-306.

"Good Faith" means "honesty in fact in the conduct or transaction concerned" U.C.C. §1-201(19). Between merchants, "good faith" means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade"; U.C.C. §2-103(1)(b) and Official Comment 2 of U.C.C. §2-306. The relevant commercial practices are "courses of performance," "courses of dealing" and "usages of trade."^[6]

Throughout the history of commercial aviation, including 30 years of dealing between Gulf and Eastern, airlines' liftings of fuel by nature have been subject to substantial daily, weekly, monthly and seasonal variations, as they are affected by weather, schedule changes, size of aircraft, aircraft load, local airport conditions, ground time, availability of fueling facilities, whether the flight is on time or late, passenger convenience, economy and efficiency of operation, fuel taxes, into-plane fuel service charges, fuel price, and, ultimately, the judgment of the flight captain as to how much fuel he wants to take.

All these factors are, and for years have been, known to oil companies, including Gulf, and taken into account by them in their fuel contracts. Gulf's witnesses at trial pointed to certain examples of numerically large "swings" in monthly liftings by Eastern at various Gulf stations. Gulf never complained of this practice and apparently accepted it as normal procedure. Some [437] of the "swings" were explained by the fueling of a single aircraft for one flight, or by the addition of one schedule in mid-month. The evidence establishes that Eastern, on one occasion, requested 500,000 additional gallons for one month at one station, without protest from Gulf, and that Eastern increased its requirements at another station more than 50 percent year to year, from less than 2,000,000 to more than 3,000,000 gallons, again, without Gulf objection.

The court concludes that fuel freighting is an established industry practice, inherent in the nature of the business. The evidence clearly demonstrated that the practice has long been part of the established courses of performance and dealing between Eastern and Gulf. As the practice of "freighting" or "tankering" has gone on unchanged and unchallenged for many years accepted as a fact of life by Gulf without complaint, the court is reminded of Official Comment 1 to U.C.C. §2-208:

"The parties themselves know best what they have meant by their words of agreement and their action under that agreement is the best indication of what that meaning was."

From a practical point of view, "freighting" opportunities are very few, according to the uncontradicted testimony, as the airline must perform its schedules in consideration of operating realities. There is no suggestion here that Eastern is operating at certain Gulf stations but taking no fuel at all. The very reason Eastern initially desired a fuel contract was because the airline planned to take on fuel, and had to have an assured source of supply.

If a customer's demands under a requirements contract become excessive, U.C.C. §2-306 protects the seller and, in the appropriate case, would allow him to refuse to deliver unreasonable amounts demanded (but without eliminating his basic contract obligation); similarly, in an appropriate case, if a customer repeatedly had no requirements at all, the seller might be excused from performance if the buyer suddenly and without warning should descend upon him and demand his entire inventory, but the court is not called upon to decide those cases here.

Rather, the case here is one where the established courses of performance and dealing between the parties, the established usages of the trade, and the basic contract itself all show that the matters complained of for the first time by Gulf after commencement of this litigation are the fundamental given ingredients of the aviation fuel trade to which the parties have accommodated themselves successfully and without dispute over the years.

"The practical interpretation given to their contracts by the parties to them while they are engaged in their performance, and before any controversy has arisen concerning them, is one of the best indications of their true intent, and courts that adopt and enforce such a construction are not likely to commit serious error."

Manhattan Life Ins. Co. of New York v. Wright, 126 F. 82, 87 (8th Cir. 1903). Accord, Spindler v. Kushner, 284 So. 2d 481, 484 (Fla. App. 1973).

The court concludes that Eastern has not violated the contract.

III

COMMERCIAL IMPRACTICABILITY

Gulf's commercial impracticability defenses are premised on two sections of the Uniform Commercial Code specifically §§2-614 (F.S. 672.614) and 2-615 (F.S. 672.615). The former does not require notice while the latter does.

Eastern argues that U.C.C. §2-615 is procedurally inapplicable as Gulf did not give Eastern the notice mandated by the section.

"c) The seller must notify the buyer seasonably that there will be delay or nondelivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer."

[438] At worst, however, Eastern had specific notice of Gulf's intention to rely on this section when Gulf filed its memorandum of law in opposition to Eastern's motion for summary judgment in the summer, 1974. Gulf also raised this section as an affirmative defense when it filed its answer in the fall, 1974 and is therefore entitled to a ruling. Official Comments 4 and 8 to U.C.C. §2-615 provide:

"4. Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section. (See Ford & Sons, Ltd., v. Henry Leetham & Sons, Ltd., 21 Com.Cas. 55 (1915, K.B.D.).)"

* * * * * *

"8. The provisions of this section are made subject to assumption of greater liability by agreement and such agreement is to be found not only in the expressed terms of the contract but in the circumstances surrounding the contracting, in trade usage and the like. Thus the exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part of the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances. (See Madeirense Do Brasil, S.A. v. Stulman-Emrick Lumber Co., 147 F.2d, 399 (C.C.A. 2 Cir. 1945).). . . ."

In short, for U.C.C. §2-615 to apply there must be a failure of a pre-supposed condition, which was an underlying assumption of the contract, which failure was unforeseeable, and the risk of which was not specifically allocated to the complaining party. The burden of proving each element of claimed commercial impracticability is on the party claiming excuse. Ocean Air Tradeways, Inc. v. Arkay Realty Corp., 480 F.2d 1112, 1117 (9th Cir. 1973).

The modern U.C.C. §2-615 doctrine of commercial impracticability has its roots in the common law doctrine of frustration or impossibility and finds its most recognized illustrations in the so-called "Suez Cases", arising out of the various closings of the Suez Canal and the consequent increases in shipping costs around the Cape of Good Hope. Those cases offered little encouragement to those who would wield the sword of commercial impracticability. As a leading British case arising out of the 1957 Suez closure declared, the unforeseen cost increase that would excuse performance "must be more than merely onerous or expensive. It must be positively unjust to hold the parties bound." Ocean Tramp Tankers v. V/O Sovfracht (The Eugenia), 2 Q.B. 226, 239 (1964). To the same effect are Tsakiroglou and Co. Ltd. v. Noblee Thore G.m.b.H., 2 Q.B. 348 (1960), aff'd, A.C. 93 (1962), and Caparanoyoti & Co., Ltd. v. E. T. Green, Ltd., 1 Q.B. 131, 148 (1959). These British precedents were followed by the District of Columbia Circuit, which gave specific consideration to U.C.C. 2-615, Comment 4, in Transatlantic Financing Corp. v. United States, 124 U.S.App.D.C. 183, 363 F.2d 312, 319 (1966).

Other recent American cases similarly strictly construe the doctrine of commercial impracticability. For example, one case found no U.C.C. defense, even though costs had doubled over the contract price, the court stating, "It may have been unprofitable for defendant to have supplied the pickers, but the evidence does not establish that it was impossible. A mere showing of unprofitability, without more, will not excuse the performance of a contract." [439] Schafer v. Sunset Packing Co., 256 Or. 539, 474 P.2d 529, 530 (1970).

Recently, the Seventh Circuit has stated: "The fact that performance has become economically burdensome or unattractive is not sufficient for performance to be excused". We will not allow a party to a contract to escape a bad bargain merely because it is burdensome". "[T]he buyer has a right to rely on the party to the contract to supply him with goods regardless of what happens to the market price. That is the purpose for which such contracts are made," Neal-Cooper Grain C. v. Texas Gulf Sulfur Co., 508 F.2d 283, 293, 294 (7th Cir. 1974). To the same effect are American Trading and Production Corporation v. Shell International Marine Ltd., 453 F.2d 939 (2d Cir. 1972); United States v. Wegematic Corp., 360 F.2d 674 (2d Cir. 1966); Whitlock Corp. v. United States, 159 F.Supp. 602, 606, 142 Ct.Cl. 758 (1958); Maple Farms, Inc. v. City School District, 76 Misc.2d 1080, 352 N.Y.S.2d 784 (Sup.Ct. 1974); Perry v. Champlain Oil Co., Inc., 101 N.H. 97, 134 A.2d 65, 67 (1957). See also, Ballou v. Basic Construction Co., 407 F.2d 1137, 1141 (4th Cir. 1969); Natus Corp. v. United States, 371 F.2d 450, 456, 178 Ct.Cl. 1 (1967); and Portland Section of Council of Jewish Women v. Sisters of Charity, 266 Or. 448, 513 P.2d 1183 (1973).

Gulf's argument on commercial impracticability has two strings to its bow. First, Gulf contends that the escalator indicator does not work as intended by the parties by reason of the advent of so-called "two-tier" pricing under Phase IV government price controls.^[7] Second, Gulf alleges that crude oil prices have risen substantially without a concomitant rise in the escalation indicator, and, as a result, that performance of the contract has become commercially impracticable.^[8]

The short and dispositive answer to Gulf's first argument under U.C.C. §2-615, that the price escalation indicator (posting in Platt's Oilgram Crude Oil Supplement) no longer reflects the intent of the parties by reason of the so-called "two-tier" pricing structure, is that the language of the contract is clear and unambiguous. The contract does not require interpretation and requires no excursion into the subjective intention of the parties. The intent of the parties is clear from the four corners of the contract; they intended to be bound by the specified entries in Platt's, which has been published at all times material here, which is published today, and which prints the contract reference prices. Prices under the contract can be and still are calculated^[9] by reference to Platt's publication.^[10]

It should be noted that Platt's Oilgram Crude Oil Supplement states on its face that its postings since the advent of "two-tier" are basically comparable to the postings historically quoted in Platt's, and that postings listed in Platt's were price controlled at the time of negotiation and execution of the contract, just as they are today and have been at all times in between. In addition, Gulf's expert witness Mr. Coates testified that oil companies, including Gulf, continue to use "old oil" prices (the prices reported in Platt's) for contracts between themselves. Finally, as to the indicator crude (West Texas Sour) there is no showing that the Platt's postings do not reflect the market price for that oil today. [440] The testimony is in substantial dispute but the court finds, with respect to domestic oil, some 60 percent of Gulf's 1974 domestic production was old oil. With respect to foreign crude oil, domestic prices were considerably lower than imported price at the beginning of the period in question so that the West Texas Sour Crude postings unquestionably did not reflect foreign crude oil postings. In the absence of any evidence to the contrary it may be reasonably inferred that virtually all transactions in West Texas Sour Crude Oil take place at the postings reflected in Platt's, since most of the production in that field is "old" oil.

With regard to Gulf's contention that the contract has become "commercially impracticable" within the meaning of U.C.C. §2-615, because of the increase in market price of foreign crude oil and certain domestic crude oils, the court finds that the tendered defense has not been proved. On this record the court cannot determine how much it costs Gulf to produce a gallon of jet fuel for sale to Eastern, whether Gulf loses money or makes a profit on its sale of jet fuel to Eastern, either now or at the inception of the contract, or at any time in between. Gulf's witnesses testified that they could not make such a computation. The party undertaking the burden of establishing "commercial impracticability" by reason of allegedly increased raw material costs undertakes the obligation of showing the extent to which he has suffered, or will suffer, losses in performing his contract. The record here does not substantiate Gulf's contention on this fundamental issue.

Gulf presented evidence tending to show that its "costs" of crude oil have increased dramatically over the past two years.

However, the "costs" to which Gulf adverts are unlike any "costs" that might arguably afford ground for any of the relief sought here. Gulf's claimed "costs" of an average barrel of crude oil at Gulf's refineries (estimated by Gulf's witness Davis at about $10.00 currently, and about $9.50 during 1974) include intra-company profits, as the oil moved from Gulf's overseas and domestic production departments to its refining department. The magnitude of that profit was not revealed.

With respect to Gulf's foreign crude oil "costs", the record shows that at the very time Gulf was in the process of repudiating its contract with Eastern (January 1974), Gulf's profit margin on foreign crude oil brought into the United States (Cabindan and Nigerian) was approximately $4.43 to $3.88 per barrel compared with profits of $0.92 and $0.88 respectively, one year earlier.^[11] That margin may now have declined, but the record discloses that Gulf's overseas subsidiaries have enjoyed substantial profits from crude oil transactions and that those profits are included in the "average" crude oil "costs" of which Gulf now complains. The "transfer" prices at which Gulf "sells" its foreign oil to its domestic subsidiaries are set by a pricing committee in Gulf's Pittsburgh home office. Intra-company profit can be and is allocated among those 400-plus corporate subsidiaries of Gulf, largely through the transfer price device, to optimize overall benefit to the corporation, as documents from the committee reveal. Internal memoranda from the pricing committee introduced into evidence showed for instance that the committee had before it the view of one of its tax experts that every $1 increase in Nigerian oil prices resulted in a 50 to 90 cent benefit to the company; other memoranda describe how profits might be assigned, through intercompany sales, to various other offshore subsidiaries to obtain favorable tax treatment for the purpose of maximizing the advantages to the corporation for the benefit of the parent corporation. Similarly, there are memoranda reflecting a policy of charging the highest prices possible to the United States.

In like manner, the "per barrel" cost calculations which Gulf introduced at trial reflect "in house" profits from Gulf's domestic production. During the discovery process, Gulf developed for Eastern certain [441] "cost" figures. Those data show that a Gulf-produced barrel of domestic crude oil is reflected on Gulf's books at a cost of approximately $2.44 for the nine-month period ending September 30, 1974. Yet, for purposes of computing an overall average "cost" to Gulf of a barrel of crude oil for trial purposes (estimated by Gulf's economist witness Davis on the stand at about $9.50 for that period), Gulf used, not the $2.44 actual booked cost, but a "transfer" price, equal to "postings" and including intra-company profit. To the extent "old oil" postings are reflected in the domestic oil "transfer price", the intra-company profit would be on the order of $2.76 per barrel, measured against the $5.20 posting listed in Platt's for West Texas Sour Crude; "new" oil "transfer prices" would include an even larger profit margin. Gulf estimated that some 70 percent of domestic oil going into Gulf's refineries was its own proprietary production.

Again, these are not the kinds of "costs" against which to measure hardship, real or imagined, under the Uniform Commercial Code. Under no theory of law can it be held that Gulf is guaranteed preservation of its intra-company profits, moving from the left-hand to the right-hand, as one Gulf witness so aptly put it. The burden is upon Gulf to show what its real costs are, not its "costs" inflated by its internal profits at various levels of the manufacturing process and located in various foreign countries.

No criticism is implied of Gulf's rational desire to maximize its profits and take every advantage available to it under the laws. However, these factors cannot be ignored in approaching Gulf's contention that it has been unduly burdened by crude oil price increases.

No such hardship has been established. On the contrary, the record clearly establishes that 1973, the year in which the energy crises began, was Gulf's best year ever, in which it recorded some $800 million in net profits after taxes. Gulf's 1974 year was more than 25% better than 1973's record $1,065,000,000 profits were booked by Gulf in 1974 after paying all taxes.^[12]

For the foregoing reasons, Gulf's claim of hardship giving rise to "commercial impracticability" fails.

But even if Gulf had established great hardship under U.C.C. §2-615, which it has not, Gulf would not prevail because the events associated with the so-called energy crises were reasonably foreseeable at the time the contract was executed. If a contingency is foreseeable, it and its consequences are taken outside the scope of U.C.C. §2-615, because the party disadvantaged by fruition of the contingency might have protected himself in his contract, Ellwood v. Nutex Oil Co., 148 S.W.2d 862 (Tex.Civ.App.1941).

The foreseeability point is illustrated by Foster v. Atlantic Refining Co., 329 F.2d 485, 489 (5th Cir. 1964). There an oil company sought release from a gas royalty contract because the royalty provisions of the contract did not contain an escalation clause, with the result that the oil company came to receive a far smaller share of the royalties than it would then have been able to obtain on the market. Citing Ellwood, id., with approval, the Fifth Circuit answered the oil company's argument as follows:

"(O)ne who unconditionally obligates himself to do a thing possible of performance, must be held to perform it (citing cases); and though performance, subsequent to the contract, may become difficult or even impossible, (this) does not relieve the promisor, and particularly where he might have foreseen the difficulty and impossibility (citing cases)."

The record is replete with evidence as to the volatility of the Middle East situation, the arbitrary power of host governments to control the foreign oil market, and repeated interruptions and interference with the normal commercial trade in crude oil. Even without the extensive evidence present in [442] the record, the court would be justified in taking judicial notice of the fact that oil has been used as a political weapon with increasing success by the oil-producing nations for many years, and Gulf was well aware of and assumed the risk that the OPEC nations would do exactly what they have done.

With respect to Gulf's argument that "two-tier" was not "foreseeable", the record shows that domestic crude oil prices were controlled at all material times, that Gulf foresaw that they might be de-controlled, and that Gulf was constantly urging to the Federal Government that they should be de-controlled. Government price regulations were confused, constantly changing, and uncertain during the period of the negotiation and execution of the contract. During that time frame, high ranking Gulf executives, including some of its trial witnesses, were in constant repeated contact with officials and agencies of the Federal Government regarding petroleum policies and were well able to protect themselves from any contingencies.

Even those outside the oil industry were aware of the possibilities. Eastern's principal contract negotiator advised his superior in recommending this contract to him:

"While Gulf is apparently counting on crude price increases, such increases are a fact of life for the future, except as the government may inhibit by price controls, therefore all suppliers have such anticipation."

"1975 is the year during which the full effect of energy shortages will be felt in the United States according to most estimates."

Knowing all the factors, Gulf drafted the contract and tied the escalation to certain specified domestic postings in Platt's. The court is of the view that it is bound thereby.

The court is further of the opinion that U.C.C. §2-614(2) is not applicable to this case. It provides:

"(2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory, oppressive or predatory."

It is clear that this section dealing with "means or manner of payment" speaks, by way of illustration, to the blocking by governmental interference with the contemplated mode of monetary exchange. (e.g., when a contract provides for payment in gold specie and the government subsequently forbids payment in gold). No such issue appears in the case at bar and U.C.C. §2-614 is inapposite here.

IV

REMEDY

Having found and concluded that the contract is a valid one, should be enforced, and that no defenses have been established against it, there remains for consideration the proper remedy.

The Uniform Commercial Code provides that in an appropriate case specific performance may be decreed. This case is a particularly appropriate one for specific performance. The parties have been operating for more than a year pursuant to a preliminary injunction requiring specific performance of the contract and Gulf has stipulated that it is able to perform. Gulf presently supplies Eastern with 100,000,000 gallons of fuel annually or 10 percent of Eastern's total requirements. If Gulf ceases to supply this fuel, the result will be chaos and irreparable damage.

Under the U.C.C. a more liberal test in determining entitlement to specific performance has been established than the test one must meet for classic equitable relief. U.C.C. §2-716(1); Kaiser Trading Co. v. Associated Metals & Minerals Corp., 321 F.Supp. 923, 932 (N.D.Cal.1970), appeal dismissed per curiam 443 F.2d 1364 (9th Cir. 1971).

[443] It has previously been found and concluded that Eastern is entitled to Gulf's fuel at the prices agreed upon in the contract. In the circumstances, a decree of specific performance becomes the ordinary and natural relief rather than the extraordinary one. The parties are before the court, the issues are squarely framed, they have been clearly resolved in Eastern's favor, and it would be a vain, useless and potentially harmful exercise to declare that Eastern has a valid contract, but leave the parties to their own devices. Accordingly, the preliminary injunction heretofore entered is made a permanent injunction and the order of this court herein.

CONCLUSIONS

For the foregoing reasons, the court makes the following ultimate findings of fact and conclusions of law:

1. The court has jurisdiction over the parties and the subject matter of this litigation.

2. The contract at issue is a valid requirements contract.

3. The contract was performed by the parties in accordance with its terms up to and including December 31, 1973, and Eastern has continued so to perform since that time.

4. On December 31, 1973, Gulf breached the contract by declaring it no longer to be in effect.

5. The contract is not lacking in mutuality nor is it commercially impracticable, and Eastern has performed its obligations thereunder.

6. Eastern is entitled to enforcement of the contract, and the preliminary injunction heretofore issued, requiring specific performance according to the terms of the contract, be and the same is hereby made permanent.

DONE and ORDERED in chambers at the United States Courthouse for the Southern District of Florida, Miami, Florida this 20th day of October, 1975.

[1] Eastern's complaint as filed, and as subsequently amended, contained other counts, alleging tort, antitrust, and FEA violations. Gulf successfully moved to strike those counts from the complaint, alleging that because the preliminary injunction was granted as Eastern had prayed, Eastern did not suffer the damages alleged in its complaint.

[2] Gulf also, in addition to answering the complaint, filed a counterclaim, asking the court to set a price for jet fuel to be provided under the contract. By agreement of counsel, consideration of the counterclaim was deferred pending disposition of Eastern's breach of contract count, it being understood that if Eastern prevailed on its claim, Gulf's counterclaim would stand dismissed as moot.

[3] "Organization of Petroleum Exporting Countries"

[4] "Gulf agrees to sell and deliver to Eastern, and Eastern agrees to purchase, receive and pay for their requirements of Gulf Jet A and Gulf Jet A-1 at the locations listed. . . ."

[5] A requirements contract under the U.C.C. may speak of "requirements" alone, or it may include estimates, or it may contain maximums and minimums. In any case, the consequences are the same, as Official Comments 2 and 3 indicate. Comment 2 is set out in the text above. Comment 3 provides:

"3. If an estimate of output or requirements is included in the agreement, no quantity unreasonably disproportionate to it may be tendered or demanded. Any minimum or maximum set by the agreement shows a clear limit on the intended elasticity. In similar fashion, the agreed estimate is to be regarded as a center around which the parties intend the variation to occur."

[6] U.C.C. §2-208(1) defines "course of performance" as those "repeated occasions for performance by either party with knowledge of the nature of the performance and opportunity for objection to it by the other."

U.C.C. §1-205(1) defines "course of dealing" as "a sequence of previous conduct between the parties to a particular transaction which is fairly to be regarded as establishing a common basis of understanding for interpreting their expressions and other conduct."

U.C.C. §1-205(2) defines "usage of trade" as "any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question."

U.C.C. §2-208(2) provides that "express terms shall control course of performance and course of performance shall control both course of dealings and usage of trade."

[7] One tier being "old" price-controlled oil, and the second tier being the unregulated oil.

[8] The average price paid by Eastern to Gulf has risen more than 40% over the life of the contract.

[9] The parties have stipulated that Eastern has been paying prices mandated by the contract terms.

[10] Gulf's contention that the publication of the postings has been "suspended" and therefore that a proviso of Article II of the contract, declaring the consequences of "suspension", has been triggered, is without merit. The Proviso deals, in the clearest of terms, with Platt's ceasing to publish either in toto or in regard to the specified postings, neither of which is the case here. Furthermore, the proviso contains its own prescription for remedial action in the case of suspension, including notice and substitution of other indicators. Gulf has never attempted to follow the prescribed remedy; thus its argument fails for procedural as well as substantive reasons.

[11] Gulf's international oils expert, Mr. Blackledge testified that foreign oil costs were up four-fold during 1973-74 but Gulf's profits also went up four-fold in that period.

[12] Gulf stipulated in the parties' pretrial stipulation that it had the capability to perform the contract.

L.R. 2 K.B. 740
KRELL
v.
HENRY.
IN THE COURT OF APPEAL.
August 11, 1903

Contract—Impossibility of Performance—Implied Condition—Necessary Inference—Surrounding Circumstances—Substance of Contract—Coronation—Procession—Inference that Procession would pass.

By a contract in writing of June 20, 1902, the defendant agreed to hire from the plaintiff a flat in Pall Mall for June 26 and 27, on which days it had been announced that the coronation processions would take place and pass along Pall Mall. The contract contained no express reference to the coronation processions, or to any other purpose for which the flat was taken. A deposit was paid when the contract was entered into, As the processions did not take place on the days originally fixed, the defendant declined to pay the balance of the agreed rent :—

Held (affirming the decision of Darling J.), from necessary inferences drawn from surrounding circumstances, recognised by both contracting parties, that the taking place of the processions on the days originally fixed along the proclaimed route was regarded by both contracting parties as the foundation of the contract; that the words imposing on the defendant the obligation to accept and pay for the use of the flat for the days named, though general and unconditional, were not used with reference to the possibility of the particular contingency which afterwards happened, and consequently that the plaintiff was not entitled to recover the balance of the rent fixed by the contract.

Taylor v. Caldwell, (1863) 3 B. & S. 826, discussed and applied.

APPEAL from a decision of Darling J.

The plaintiff, Paul Krell, sued the defendant, C. S. Henry, for £50, being the balance of a sum of £75, for which the defendant had agreed to hire a flat at 56A, Pall Mall on the days of June 26 and 27, for the purpose of viewing the processions to be held in connection with the coronation of His Majesty. The defendant denied his liability, and counterclaimed for the return of the sum of £25, which had been paid as a deposit, on the ground that, the processions not having taken place owing to the serious illness of the King, there had been a total failure of consideration for the contract entered into by him. The facts, which were not disputed, were as follows. The plaintiff on leaving the country in March, 1902, left instruc [741] tions with his solicitor to let his suite of chambers at 56A, Pall Mall on such terms and for such period (not exceeding six months) as he thought proper. On June 17,1902, the defendant noticed an announcement in the windows of the plaintiff's flat to the effect that windows to view the coronation processions were to be let. The defendant interviewed the housekeeper on the subject, when it was pointed out to him what a good view of the processions could be obtained from the premises, and he eventually agreed with the housekeeper to take the suite for the two days in question for a sum of 751. On June 20 the defendant wrote the following letter to the plaintiff's solicitor:—

“I am in receipt of yours of the 18th instant, inclosing form of agreement for the suite of chambers on the third floor at 56A, Pall Mall, which I have agreed to take for the two days, the 26th and 27th instant, for the sum of £75. For reasons given you I cannot enter into the agreement, but as arranged over the telephone I inclose herewith cheque for £25 as deposit, and will thank you to confirm to me that I shall have the entire use of these rooms during the days (not the nights) of the 26th and 27th instant. You may rely that every care will be taken of the premises and their contents. On the 24th inst. I will pay the balance, viz., £50, to complete the £75 agreed upon."

On the same day the defendant received the following reply from the plaintiff's solicitor:—

“I am in receipt of your letter of to-day's date inclosing cheque for £25. deposit on your agreeing to take Mr. Krell's chambers on the third floor at 56A, Pall Mall for the two days, the 26th and 27th June, and I confirm the agreement that you are to have the entire use of these rooms during the days (but not the nights), the balance, £50, to, be paid to me on Tuesday next the 24th instant."

The processions not having taken place on the days originally appointed, namely, June 26 and 27, the defendant declined to pay the balance of £50 alleged to be due from him under the contract in writing of June 20 constituted by the above two letters. Hence the present action.

[742] Darling J., on August 11, 1902, held, upon the authority of Taylor v. Caldwell^[1] and The Moorcock^[2], that there was an implied condition in the contract that the procession should take place, and gave judgment for the defendant on the claim and counter-claim.

The plaintiff appealed.

Spencer Bower, K.C., and Holman Gregory, for the plaintiff. In the contract nothing is said about the coronation procession, but it is admitted that both parties expected that there would be a procession, and that the price to be paid for the rooms was fixed with reference to the expected procession. Darling J. held that both the claim and the counter-claim were governed by Taylor v. Caldwell^[1], and that there was an implied term in the contract that the procession should take place. It is submitted that the learned judge was wrong. If he was right, the result will be that in every case of, this kind an unremunerated promisor will be in effect an insurer of the hopes and expectations of the promisee.

Taylor v. Caldwell^[1] purports to be founded on two passages in the Digest. But other passages in the Digest are more directly in point, and shew that the implied condition is that there shall not lie a physical extinction of the subject-matter of the contract.

[VAUGHAN WILLIAMS L.J. The English cases have extended the doctrine of the Digest.]

The limits of the extension are—(1.) the not coming into being of a thing which was not in existence at the date of the contract; (2.) the case of a thing, e.g., a ship, or a person in a contract for personal service, being incapacitated from doing the work intended. In order that the person who has contracted to pay the price should be excused from doing so, there must be (1.) no default on his part; (2.) either the physical extinction or the not coming into existence of the subject-matter of the contract; (3.) the performance of the contract must have been thereby rendered impossible.

In the present case there has been no default on the part of [743] the defendant. But there has been no physical extinction of the subject-matter, and the performance of the contract was quite possible. Rule 1, laid down in Taylor v. Caldwell^[3], and not rule 3, is the rule that regulates this case. Rule 1 is directly in the plaintiff's favour, for here the contract was positive and absolute. In that case the music hall which was the subject of the contract had been burnt down, so that performance of the contract by either party had become impossible.

[VAUGHAN WILLIAMS L.J. referred to Wright v. Hall.^[4]]

The cases which will be relied on for the defendant are all distinguishable from the present case.

Appleby v. Meyers^[5], Boast v. Firth^[6], Baily v. De Crespigny^[7], Howell v. Coupland^[8], and Nickoll v. Ashton^[9] are all distinguishable from the present case, in which two of the necessary elements do not exist.

There are a number of authorities in favour of the plaintiff, such as Paradine v. Jane^[10] ; Barker v. Hodgson^[11] ; Marquis of Bute v. Thompson^[12] ; Hills v. Sughrue^[13] ; Brown v. Royal Insurance Co.^[14] These cases were all anterior to Taylor v. Caldwell.^[1] There are other cases subsequent to Taylor v. Caldwell^[1] , such as Kennedy v. Panama & c., Mail Co.^[15] ; In re Arthur^[16] ; The Moorcock.^[17]

The real question is, What was the position of the parties on June 20, and what was the contract then entered into between them? The right possessed by the plaintiff on that day was the right of looking out of the window of the room, with the opportunity of seeing the procession from that window; the only sale to the defendant was of such right as the plaintiff had, and that was all that the plaintiff was parting with by the contract. There was, of course, the risk that the procession, [744] the anticipation or which gave the room a marketable value, might, from some cause or other, never take place; but that risk passed to the defendant by the contract. On entering into the contract with the defendant the plaintiff put it out of his power to let the room to anyone else: he passed the right and the risk at the same time. No implied condition can be imported into the contract that the object of it shall be attained. There can be no implied condition that the defendant shall be placed in the actual position of seeing the procession. This case is closely analogous to that of London Founders' Association, Limited v. Clarke^[18] , where it was held that in a contract for the sale of shares in a company there was no implied covenant that the purchaser should be put into the status of a shareholder by registration. So in Turner v. Goldsmith^[19] , where the defendant contracted to employ the plaintiff for a fixed term as agent in a business which he, the defendant, ultimately abandoned before the expiration of the term, it was held that there was no implied condition for the continued existence of the business, and accordingly the plaintiff was held entitled to damages for breach of contract. And that was so although part of the res had perished; here no part of the res had perished. The rule is that the Court will not imply any condition in a contract except in case of absolute necessity: Hamlyn, v. Wood.^[20] No doubt under the Sale of Goods Act, 1893 (56 & 57 Vict. c. 71), s. 7, where the specific goods, the subject of the contract, perish, the contract is gone; but this is not a case of that kind. And s. 14 enacts that, unless specified, no implied warranty or condition as to the quality or fitness of the goods supplied under a contract shall be imported. Ashmore v. Cox^[21] is an authority in favour of the plaintiff, for it was there held that a buyer under a contract took the risk of the performance of the contract being rendered impossible by unforeseen circumstances.

Blakeley v. Muller^[22] is also in the plaintiff's favour to the extent of the counter-claim.

[745] [Duke, K.C. The defendant abandons his counter-claim for £25 so that the sole question is as to his liability for the £50.

Upon the main question, then, it is submitted that both the decision in Blakeley v. Muller^[23] and of Darling, J. in the present case are opposed to the principle of Taylor v.Caldwell.^[1] The contract here is absolute, and the defendant has not, as he might have done, guarded himself against the risk by suitable words.

Then, if it is said that this was a mere licence to use the room and therefore revocable as not being under seal, it has now been decided that even if such a licence is revoked an action is still maintainable for breach of contract: Kerrison v. Srnith.^[24]

In conclusion it is submitted that the Court cannot imply an express condition that the procession should pass. Nothing should be implied beyond what was necessary to give to the contract that efficacy which the parties intended at the time. There is no such necessity here; in fact, the inference is the other way, for money was paid before the days specified; which shews that the passing of the procession did not really constitute the basis of the contract, except in a popular sense. The truth is that each party had an expectation, no doubt; but the position is simply this: one says, "Will you take the room?" and the other says, "Yes." That is all. The contract did nothing more than give the defendant the opportunity of seeing whatever might be going on upon the days mentioned.

Duke, K.C., and Ricardo, for the defendant. The question is, What was the bargain? The defendant contends that it was a bargain with an implied condition that the premises taken were premises in front of which a certain act of State would take place by Royal Proclamation. A particular character was thus impressed upon the premises; and when that character ceased to be impressed upon them the contract was at an end. It is through nobody's fault, but through an unforeseen misfortune that the premises lose that character. The price agreed to be paid must he regarded: it is equivalent to [746] many thousands a year. What explanation can be given of that, except that it was agreed to be paid for the purpose of enabling the defendant to see the procession? It was the absolute assumption of both parties when entering into the contract that the procession would pass.

The principle of Taylor v. Caldwell^[1] —namely, that a contract for the sale of a particular thing must not be construed as a positive contract, but as subject to an implied condition that, when the time comes for fulfilment, the specified thing continues to exist—exactly applies. The certainty of the coronation and consequent procession taking place was the basis of this contract. Both parties bargained upon the happening of a certain event the occurrence of which gave the premises a special character with a corresponding value to the defendant; but as the condition failed the premises lost their adventitious value. There has been such a change in the character of the premises which the plaintiff agreed the defendant should occupy as to deprive them of their value. When the premises become unfit for the purpose for which they were taken the bargain is off: Taylor v. Caldwell^[25] , the principle of which case was adopted by the Court of Appeal in Nickoll v. Ashton.^[26] What was in contemplation here was not that the defendant should merely go and sit in the room, but that he should see a procession which both parties regarded as an inevitable event. There was an implied warranty or condition founded on the presumed intention of the parties, and upon reason: The Moorcock.^[27] No doubt the observations of the Court in that ca.se were addressed to a totally different subject-matter, but the principle laid down was exactly as stated in Taylor v. Caldwell ^[1]and Nickoll v. Ashton.^[28] In Hamlyn v. Wood^[29] it was held that a contract there must be a reasonable implication in order to give the transaction such efficacy as both parties intended it to have, and that without such implication the consideration would fail. In the case of a demise, collateral bargains do not arise; but here [747] there is an agreement, and what has to be done is to ascertain the meaning and intention the parties had in entering into it.

[STIRLING L.J. In Appleby v. Myers^[30] there was a contract to supply certain machinery to a building, but before the completion of the contract the building was burnt down; and it was held that both parties were excused from performance of the contract.]

In that case the contract had been partly performed; but the defendant's case is stronger than that. When, as here, the contract is wholly executory and the subject-matter fails, the contract is at an end.

[STIRLING L.J. In Baily v. De Crespigny^[31] , where the performance of a covenant woo rendered impossible by an Act of Parliament, it was held that the covenantor was discharged.

VAUGHN WILLIAMS L.J. In Howell v. Coupland^[32] the contract was held to be subject to an implied condition that the parties should-be excused if performance became impossible through the perishing of the subject-matter.]

That applies here: it is impossible for the plaintiff to give the defendant that which he bargained for, and, therefore, there is a total failure of consideration.

To sum up, the basis of the contract is that there would be a procession; that is to say it is a contract based upon a certain thing coming into existence: there is a condition precedent that there shall be a procession. But for the mutual expectation of a procession upon the days mentioned there would have been no contract whatever. The basis of the contract was also the continuance of a thing in a certain condition; for on June 20 the rooms were capable of being described as a place from which to view a procession on two particular days; whereas when those days arrived the rooms were no longer capable of being so described.

Holman Gregory replied.

Cur. adv. vult.

Aug. 11. VAUGHAN WILLIAMS L.J. read the following written judgment:—The real question in this case is the extent [748] of the application in English law of the principle of the Roman law which has been adopted and acted on in many English decisions, and notably in the case of Taylor v. Caldwell.^[1] That case at least makes it clear that

“where, from the nature of the contract, it appears that the parties must from the beginning have known that it could not be fulfilled unless, when the time for the fulfilment of the contract arrived, some particular specified thing continued to exist, so that when entering into the contract they must have contemplated such continued existence as the foundation of what was to be done; there, in the absence of any express or implied warranty that the thing shall exist, the contract is not to be considered a positive contract, but as subject to an implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor."

Thus far it is clear that the principle of the Roman law has been introduced into the English law. The doubt in the present case arises as to how far this principle extends. The Roman law dealt with obligationes de certo corpore. Whatever may have been the limits of the Roman law, the case of Nickoll v. Ashton^[33] makes it plain that the English law applies the principle not only to cases where the performance of the contract becomes impossible by the cessation of existence of the thing which is the subject-matter of the contract, but also to cases where the event which renders the contract incapable of performance is the cessation or non-existence of an express condition or state of things, going to the root of the contract, and essential to its performance. It is said, on the one side, that the specified thing, state of things, or condition the continued existence of which is necessary for the fulfilment of the contract, so that the parties entering into the contract must have contemplated the continued existence of that thing, condition, or state of things as the foundation of what was to be done under the contract, is limited to things which are either the subject-matter of the contract or a condition or state of things, present or anticipated, which is expressly [749] mentioned in the contract. But, on the other side, it is said that the condition or state of things need not be expressly specified, but that it is sufficient if that condition or state of things clearly appears by extrinsic evidence to have been assumed by the parties to be the foundation or basis of the contract, and the event which causes the impossibility is of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made. In such a case the contracting parties will not be held bound by the general words which, though large enough to include, were not used with reference to a possibility of a particular event rendering performance of the contract impossible. I do not think that the principle of the civil law as introduced into the English law is limited to cases in which the event causing the impossibility of performance is the destruction or non-existence of some thing which is the subject-matter of the contract or of some condition or state of things expressly specified as a condition of it. I think that you first have to ascertain, not necessarily from the terms of the contract, but, if required, from necessary inferences, drawn from surrounding circumstances recognised by both contracting parties, what is the substance of the contract, and then to ask the question whether that substantial contract needs for its foundation the assumption of the existence of a particular state of things. If it does, this will limit the operation of the general words, and in such case, if the contract becomes impossible of performance by reason of the non-existence of the state of things assumed by both contracting parties as the foundation of the contract, there will be no breach of the contract thus limited. Now what are the facts of the present case? The contract is contained in two letters of June 20 which passed between the defendant and the plaintiff's agent, Mr. Cecil Bisgood. These letters do not mention the coronation, but speak merely of the taking of Mr. Krell's chambers, or, rather, of the use of them, in the daytime of June 26 and 27, for the sum of £75, £25. then paid, balance £50 to be paid on the 24th. But the affidavits, which by agreement between the parties are to be taken as stating the facts of the case, shew that the plaintiff exhibited on his [750] premises, third floor, 56A, Pall Mall, an announcement to the effect that windows to view the Royal coronation procession were to be let, and that the defendant was induced by that announcement to apply to the housekeeper on the premises, who said that the owner was willing to let the suite of rooms for the purpose of seeing the Royal procession for both days, but not nights, of June 26 and 27.

In my judgment the use of the rooms was let and taken for the purpose of seeing the Royal procession. It was not a demise of the rooms, or even an agreement to let and take the rooms. It is a licence to use rooms for a particular purpose and none other. And in my judgment the taking place of those processions on the days proclaimed along the proclaimed route, which passed 56A, Pall Mall, was regarded by both contracting parties as the foundation of the contract; and I think that it cannot reasonably be supposed to have been in the contemplation of the contracting parties, when the contract was made, that the coronation would not be held on the proclaimed days, or the processions not take place on those days along the proclaimed route; and I think that the words imposing on the defendant the obligation to accept and pay for the use of the rooms for the named days, although general and unconditional, were not used with reference to the possibility of the particular contingency which afterwards occurred. It was suggested in the course of the argument that if the occurrence, on the proclaimed days, of the coronation and the procession in this case were the foundation of the contract, and if the general words are thereby limited or qualified, so that in the event of the non-occurrence of the coronation and procession along the proclaimed route they would discharge both parties from further performance of the contract, it would follow that if a cabman was engaged to take some one to Epsom on Derby Day at a suitable enhanced price for such a journey, say £10, both parties to the contract would be discharged in the contingency of the race at Epsom for some reason becoming impossible; but I do not think this follows, for I do not think that in the cab case the happening of the race would be the foundation of the contract. No doubt the purpose of the engager would be to go to see the Derby, and the price would be proportionately high; but the cab had [751] no special qualifications for the purpose which led to the  selection of the cab for this particular occasion. Any other cab would have done as well. Moreover, I think that, under the cab contract, the hirer, even if the race went off, could have said, "Drive me to Epsom; I will pay you the agreed sum; you have nothing to do with the purpose for which I hired the cab," and that if the cabman refused he would have been guilty of a breach of contract, there being nothing to qualify his promise to drive the hirer to Epsom on a particular day. Whereas in the case of the coronation, there is not merely the purpose of the hirer to see the coronation procession, but it is the coronation procession and the relative position of the rooms which is the basis of the contract as much for the lessor as the hirer; and I think that if the King, before the coronation day and after the contract, had died, the hirer could not have insisted on having the rooms on the days named. It could not in the cab case be reasonably said that seeing the Derby race was the foundation of the contract, as it was of the licence in this case. Whereas in the present case, where the rooms were offered and taken, by reason of their peculiar suitability from the position of the rooms for a view of the coronation procession, surely the view of the coronation procession was the foundation of the contract, which is a very different thing from the purpose of the man who engaged the cab—namely, to see the race—being held to be the foundation of the contract. Each case must be judged by its own circumstances. In each case one must ask oneself, first, what, having regard to all the circumstances, was the foundation of the contract? Secondly, was the performance of the contract prevented? Thirdly, was the event which prevented the performance of the contract of such a character that it cannot reasonably be said to have been in the contemplation of the parties at the date of the contract? If all these questions are answered in the affirmative (as I think they should be in this case), I think both parties are discharged from further performance of the contract. I think that the coronation procession was the foundation of this contract, and that the non-happening of it prevented the performance of the contract; and, secondly, I think that the [752] non-happening of the procession, to use the words of Sir James Hannen in Baily v. De Crespigny^[34] , was an event “of such a character that it cannot reasonably be supposed to have been in the contemplation of the contracting parties when the contract was made, and that they are not to be held bound by general words which, though large enough to include, were not used with reference to the possibility of the particular contingency which afterwards happened." The test seems to be whether the event which causes the impossibility was or might have been anticipated and guarded against. It seems difficult to say, in a case where both parties anticipate the happening of an event, which anticipation is the foundation of the contract, that either party must be taken to have anticipated, and ought to have guarded against, the event which prevented the performance of the contract. In both Jackson v. Union Marine Insurance Co.^[35] and Nickoll v. Ashton^[28] the parties might have anticipated as a possibility that perils of the sea might delay the ship and frustrate the commercial venture: in the former case the carriage of the goods to effect which the charterparty was entered into; in the latter case the sale of the goods which were to be shipped on the steamship which was delayed. But the Court held in the former case that the basis of the contract was that the ship would arrive in time to carry out the contemplated commercial venture, and in the latter that the steamship would arrive in time for the loading of the goods the subject of the sale. I wish to observe that cases of this sort are very different from cases where a contract or warranty or representation is implied, such as was implied in The Moorcock^[36] , and refused to be implied in Hamlyn v.Wood,^[29] But The Moorcock^[36] is of importance in the present case as shewing that whatever is the suggested implication—be it condition, as in this case, or warranty or representation—one must, in judging whether the implication ought to be made, look. not only at the words of the contract, but also at the surrounding facts and the knowledge of the parties of those facts. There seems to rile to be ample [753] authority for this proposition. Thus in Jackson v. Union Marine Insurance Co.^[37] , in the Common Plead, the question of whether the object of the voyage had been frustrated by the delay of the ship was left as a question of fact to the jury, although there was nothing in the charterparty defining the time within which the charterers were to supply the cargo of iron rails for San Francisco, and nothing on the face of the charterparty to indicate the importance of time in the venture; and that was a case in which, as Bramwell B. points out in his judgment at p.148, Taylor v. Caldwell^[1] was a strong authority to support the conclusion arrived at in the judgment—that the ship not arriving in time for the voyage contemplated, but at such time as to frustrate the commercial venture, was not only breach of the contract but discharged the charterer, though he had such an excuse that no action would lie. And, again. in Harris v. Dreesman^[38] the vessel had to be loaded as no particular time was mentioned, within a reasonable time; and, in judging of a reasonable time, the Court approved of evidence, being given that the defendants, the charterers, to the knowledge of the plaintiffs, had no control over the colliery from which both parties knew that the coal was to come; and that, although all that was said in the charterparty was that the vessel should proceed to Spital Tongue's Spout (the spout of the Spital Tongue's Colliery), and there take on board from the freighters a full and complete cargo of coals, and five tons of coke, and although there was no evidence to prove any custom in the port as to loading vessels in turn. Again it was held in Mumford v. Gething^[39] that, in construing a written contract of service under which A. was to enter the employ of B., oral evidence is admissible to shew in what capacity A. was to, serve B. See also Price v. Mouat.^[40] The rule seems to be that which is laid down in Taylor on Evidence, vol. ii. s. 1082:

"It may be laid down as a broad and distinct rule of law that extrinsic evidence of every material fact which will enable the Court to ascertain the nature and qualities of the subject-matter of the instrument, or, in other words, to identify the [754] persons and things to which the instrument refers, must of necessity be received."

And Lord Campbell in his judgment says:

"I am of opinion that, when there is a contract for the sale of a specific subject-matter, oral evidence may be received, for the purpose of shewing what that subject-matter was, of every fact within the knowledge of the parties before and at the time of the contract."

See per Campbell C.J., Macdonald v. Longbottom.^[41] It seems to me that the language of Willes J. in Lloyd v. Guibert^[42] points in the same direction. I myself am clearly of opinion that in this case, where we have to ask ourselves whether the object of the contract was frustrated by the non-happening of the coronation and its procession on the days proclaimed, parol evidence is admissible to shew that the subject of the contract was rooms to view the coronation procession, and was so to the knowledge of both parties. When once this is established, I see no difficulty whatever in the case. It is not essential to the application of the principle of Taylor v. Caldwell^[1] that the direct subject of the contract should perish or fail to be in existence at the date of performance of the contract. It is sufficient if a state of things or condition expressed in the contract and essential to its performance perishes or fails to be in existence at that time. In the present case the condition which fails and prevents the achievement of that which was, in the contemplation of both parties, the foundation of the contract, is not expressly mentioned either as a condition of the contract or the purpose of it; but I think for the reasons which I have given that the principle of Taylor v. Caldwell^[1] ought to be applied. This disposes of the plaintiff's claim for £50 unpaid balance of the price agreed to be paid for the use of the rooms. The defendant at one time set up a cross-claim for the return of the £25 he paid at the date of the contract. As that claim is now withdrawn it is unnecessary to say anything about it. I have only to add that the facts of this case do not bring it within the principle laid down in Stubbs v. Holywell Ry. Co.^[43] ; that in the case of contracts falling directly within the rule of [755] Taylor v. Caldwell^[1] the subsequent impossibility does not affect rights already acquired, because the defendant had the whole of June 24 to pay the balance, and the public announcement that the coronation and processions would not take place on the proclaimed days was made early on the morning of the 24th, and no cause of action could accrue till the end of that day. I think this appeal ought to be dismissed.

ROMER L.J. With some doubt I have also come to the conclusion that this case is governed by the principle on which Taylor v. Caldwell^[1] was decided, and accordingly that the appeal must be dismissed. The doubt I have felt was whether the parties to the contract now before us could be said, under the circumstances, not to have had at all in their contemplation the risk that for some reason or other the coronation processions might not take place on the days fixed, or, if the processions took place, might not pass so as to be capable of being viewed from the rooms mentioned in the contract; and whether, under this contract, that risk was not undertaken by the defendant. But on the question of fact as to what was in the contemplation of the parties at the time, I do not think it right to differ from the conclusion arrived at by Vaughan Williams L.J., and (as I gather) also arrived at by my brother Stirling. This being so, I concur in the conclusions arrived at by Vaughan Williams L.J. in his judgment, and I do not desire to add anything to what he has said so fully and completely.

STIRLING L.J. said he had had an opportunity of reading the judgment delivered by Vaughan Williams L.J., with which he entirely agreed. Though the case was one of very great difficulty, he thought it came within the principle of Taylor v. Caldwell.^[1]

Appeal dismissed.

Solicitors: Cecil Bisgood; M. Grunebaum.

NOTE.—For other cases arising out of the postponement of the coronation, See the next following case; Elliott v. Crutchley, ante, p. 476, and Herne Bay Steam Boat Co. v. Hutton, ante, p. 683.

[1] 3 B. & S. 826.

[2] (1889) 14 P. D. 64.

[3] 3 B. & S. at p. 833.

[4] (1858) E. B. & E. 746.

[5] (1867) L. R. 2 C.P. 651.

[6] (1868) L. R.4 C. P. 1.

[7] (1869) L. R. 4 Q. B. 180.

[8] (1876) 1 Q. B. D. 258.

[9] [1901] 2 K. B. 126.

[10] (1646) Al. 26.

[11] (1814) 3 M. & S. 267; 15 R. R. 485.

[12] (1844) 13 M. & W. 487.

[13] (1846) 15 M. & W. 253.

[14] (1859) 1 E. & E. 853. 

[15] (1867) L. R. 2 Q. B. 580.

[16] (1880) 14 Ch. D. 603.

[17] 14 P. D. 64.

[18] (1888) 20 Q. B. D. 576, 579, 580,582.

[19] [1891] 1 Q. B. 544, 548, 551.

[20] [1891] 2 Q. B. 488, 491-2.

[21] [1899] 1 Q. B. 436, 441

[22] [1903] 88 L.T. 90; 67 J.P. 51: post, p. 760 (note).

[23] 88 L. T. 90; 67 J. P. 51.

[24] [1897] 2 Q. B. 445.

[25] 3 B. & S. at p. 832.

[26] [1901] 2 K. B. 126, 137.

[27] 14 P. D. 64, 68.

[28] [1901] 2 K. B.126.

[29] [1891] 2 Q. B. 488.

[30] L. R. 2 C. P. 651.

[31] L. R. 4, Q. B. 180.

[32] 1 Q. B. D. 258. 

[33] [1901] 2 K. B.126.

[34] L. R. 4 Q. B. 185.

[35] (1873) L. R. 8 C. P. 572.

[36] 14 P. D. 64.

[37] L. R. 8 C. P. 572; (1874) 10 C. P: 125; 42 L. J. (C.P.) 284.

[38] (1854) 23 L. J. (Ex.) 210.

[39] (1859) 7 C. B. (N.S.) 305.

[40] (1862) 11 C. B. (N.S.) 508.

[41] (1859) 1 E. & E. 977, at p. 983.

[42] (1865) 35 L. J. (Q.B.) 74, 75.

[43] (1867) L. R.. 2 Ex. 311.

25 Cal.2d 48, 153 P.2d 47 (1944)
CAROLINE A. LLOYD et al., Respondents,
v.
WILLIAM J. MURPHY, Appellant.
L. A. No. 18738.
Supreme Court of California. In Bank.
Oct. 31, 1944.

ChaS.W. Rollinson and Wm. Roy Ives for Appellant.

Albert W. Leeds for Respondents.

Schultheis & Laybourne and Clifford E. Royston as Amici Curiae on behalf of Respondents.

TRAYNOR, J.

On August 4, 1941, plaintiff leased to defendant for a five-year term beginning September 15, 1941, [25 Cal.2d 51] certain premises located at the corner of Almont Drive and Wilshire Boulevard in the city of Beverly Hills, Los Angeles County, "for the sole purpose of conducting thereon the business of displaying and selling new automobiles (including the servicing and repairing thereof and of selling the petroleum products of a major oil company) and for no other purpose whatsoever without the written consent of the lessor" except "to make an occasional sale of a used automobile." Defendant agreed not to sublease or assign without plaintiffs' written consent. On January 1, 1942, the federal government ordered that the sale of new automobiles be discontinued. It modified this order on January 8, 1942, to permit sales to those engaged in military activities, and on January 20, 1942, it established a system of priorities restricting sales to persons having preferential ratings of A-1-j or higher. On March 10, 1942, defendant explained the effect of these restrictions on his business to one of the plaintiffs authorized to act for the others, who orally waived the restrictions in the lease as to use and subleasing and offered to reduce the rent if defendant should be unable to operate profitably. Nevertheless defendant vacated the premises on March 15, 1942, giving oral notice of repudiation of the lease to plaintiffs, which was followed by a written notice on March 24, 1942. Plaintiffs affirmed in writing on March 26th their oral waiver and, failing to persuade defendant to perform his obligations, they rented the property to other tenants pursuant to their powers under the lease in order to mitigate damages. On May 11, 1942, plaintiffs brought this action praying for declaratory relief to determine their rights under the lease, and for judgment for unpaid rent. Following a trial on the merits, the court found that the leased premises were located on one of the main traffic arteries of Los Angeles County; that they were equipped with gasoline pumps and in general adapted for the maintenance of an automobile service station; that they contained a one-story storeroom adapted to many commercial purposes; that plaintiffs had waived the restrictions in the lease and granted defendant the right to use the premises for any legitimate purpose and to sublease to any responsible party; that defendant continues to carry on the business of selling and servicing automobiles at two other places. Defendant testified that at one of these locations he sold new automobiles exclusively and when asked if he were aware that many new automobile dealers were continuing in business replied: "Sure. It [25 Cal.2d 52] is just the location that I couldn't make a go, though, of automobiles." Although there was no finding to that effect, defendant estimated in response to inquiry by his counsel, that 90 per cent of his gross volume of business was new car sales and 10 per cent gasoline sales. The trial court held that war conditions had not terminated defendant's obligations under the lease and gave judgment for plaintiffs, declaring the lease as modified by plaintiffs' waiver to be in full force and effect, and ordered defendant to pay the unpaid rent with interest, less amounts received by plaintiffs from re- renting. Defendant brought this appeal, contending that the purpose for which the premises were leased was frustrated by the restrictions placed on the sale of new automobiles by the federal government, thereby terminating his duties under the lease.

Although commercial frustration was first recognized as an excuse for nonperformance of a contractual duty by the courts of England (Krell v. Henry [1903] 2 K.B. 740 [C.A.]; Blakely v. Muller, 19 T.L.R. 186 [K. B.]; see McElroy and Williams, The Coronation Cases, 4 Mod. L. Rev. 241) its soundness has been questioned by those courts (see Maritime National Fish, Ltd., v. Ocean Trawlers, Ltd. [1935] A.C. 524, 528-29, 56 L.Q. Rev. 324, arguing that Krell v. Henry, supra, was a misapplication of Taylor v. Caldwell, 3 B. & S. 826 [1863], the leading case on impossibility as an excuse for nonperformance), and they have refused to apply the doctrine to leases on the ground that an estate is conveyed to the lessee, which carries with it all risks (Swift v. McBean, 166 L.T. Rep. 87 [1942] 1 K.B. 375; Whitehall Court v. Ettlinger, 122 L.T. Rep. 540, (1920) 1 K.B. 680, [1919] 89 L.J. [K.B.] N.S. 126; 137 A.L.R. 1199, 1224; see collection and discussion on English cases in Wood v. Bartolino, [48 N.M. 175, 146 P.2d 883, 886-87]. Many courts, therefore, in the United States have held that the tenant bears all risks as owner of the estate (Cusack v. Pratt, 78 Colo. 28 [239 P. 22, 44 A.L.R. 55]; Yellow Cab Co. v. Stafford-Smith Co., 320 Ill. 294 [150 N.E. 670, 43 A.L.R. 1173]), but the modern cases have recognized that the defense may be available in a proper case, even in a lease. As the author declares in 6 Williston, Contracts (rev. ed. 1938), 1955, pp. 5485-87,

"The fact that lease is a conveyance and not simply a continuing contract and the numerous authorities enforcing liability to pay rent in spite of destruction of leased premises, however, have made it difficult to give relief. That the tenant has been relieved, nevertheless, [25 Cal.2d 53] in several cases indicates the gravitation of the law toward a recognition of the principle that fortuitous destruction of the value of performance wholly outside the contemplation of the parties may excuse a promisor even in a lease. . . ."

"Even more clearly with respect to leases than in regard to ordinary contracts the applicability of the doctrine of frustration depends on the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into."

The principles of frustration have been repeatedly applied to leases by the courts of this state (Brown v. Oshiro, 58 Cal.App.2d 190 [136 P.2d 29]; Davidson v. Goldstein, 58 Cal.App.2d Supp. 909 [136 P.2d 665]; Grace v. Croninger, 12 Cal.App.2d 603 [55 P.2d 940]; Knoblaugh v. McKinney, 5 Cal.App.2d 339 [42 P.2d 332]; Industrial Development & Land Co. v. Goldschmidt, 56 Cal.App. 507 [206 P. 134]; Burke v. San Francisco Breweries, Ltd., 21 Cal.App. 198 [131 P. 83]) and the question is whether the excuse for nonperformance is applicable under the facts of the present case.

[1] Although the doctrine of frustration is akin to the doctrine of impossibility of performance (see Civ. Code, 1511; 6 Cal.Jur. 435-450; 4 Cal.Jur. Ten-year Supp. 187-192; Taylor v. Caldwell, supra) since both have developed from the commercial necessity of excusing performance in cases of extreme hardship, frustration is not a form of impossibility even under the modern definition of that term, which includes not only cases of physical impossibility but also cases of extreme impracticability of performance (see Mineral Park Land Co. v. Howard, 172 Cal. 289, 293 [156 P. 458, L.R.A. 1916F 1]; Christin v. Superior Court, 9 Cal.2d 526, 533 [71 P.2d 205, 112 A.L.R. 1153]; 6 Williston, op.cit. supra, § 1935, p. 5419; Rest., Contracts, 454, comment a., and Cal.Ann. p. 254). Performance remains possible but the expected value of performance to the party seeking to be excused has been destroyed by a fortuitous event, which supervenes to cause an actual but not literal failure of consideration (Krell v. Henry, supra; Blakely v. Muller, supra; Marks Realty Co. v. Hotel Hermitage Co., 170 App.Div. 484 [156 N.Y.S. 179]; 6 Williston, op. cit. supra, §§ 1935, 1954, pp. 5477, 5480; Restatement, Contracts, § 288).

[2] The question in cases involving frustration is whether [25 Cal.2d 54] the equities of the case, considered in the light of sound public policy, require placing the risk of a disruption or complete destruction of the contract equilibrium on defendant or plaintiff under the circumstances of a given case (Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd. [1942], 167 L.T.R. [H.L.] 101, 112-113; see Smith, Some Practical Aspects of the Doctrine of Impossibility, 32 Ill. L. Rev. 672, 675; Patterson, Constructive Conditions in Contracts, 42 Columb. L. Rev. 903, 949; 27 Cal. L. Rev. 461), and the answer depends on whether an unanticipated circumstance, the risk of which should not be fairly thrown on the promisor, has made performance vitally different from what was reasonably to be expected (6 Williston, op.cit. supra, § 1963, p. 5511; Restatement, Contracts, 454). The purpose of a contract is to place the risks of performance upon the promisor, and the relation of the parties, terms of the contract, and circumstances surrounding its formation must be examined to determine whether it can be fairly inferred that the risk of the event that has supervened to cause the alleged frustration was not reasonably foreseeable. If it was foreseeable there should have been provision for it in the contract, and the absence of such a provision gives rise to the inference that the risk was assumed.

[3] The doctrine of frustration has been limited to cases of extreme hardship so that businessmen, who must make their arrangements in advance, can rely with certainty on their contracts (Anglo-Northern Trading Co. v. Emlyn Jones and Williams, 2 K.B. 78; 137 A.L.R. 1199, 1216-1221). [4] The courts have required a promisor seeking to excuse himself from performance of his obligations to prove that the risk of the frustrating event was not reasonably foreseeable and that the value of counterperformance is totally or nearly totally destroyed, for frustration is no defense if it was foreseeable or controllable by the promisor, or if counterperformance remains valuable. (La Cumbre Golf & Country Club v. Santa Barbara Hotel Co., 205 Cal. 422, 425 [271 P. 476]; Johnson v. Atkins, 53 Cal.App.2d 430, 434 [127 P.2d 1027]; Grace v. Croninger, 12 Cal.App2d 603, 606-607 [55 P.2d 940]; Industrial Development & Land Co. v. Goldschmidt, 56 Cal.App. 507, 511 [206 P. 134]; Burke v. San Francisco Breweries, Ltd., 21 Cal.App. 198, 201 [131 P. 83]; Megan v. Updike Grain Corp. (C.C.A. 8), 94 F.2d 551, 553; Herne Bay Steamboat Co. [25 Cal.2d 55] v. Hutton [1903], 2 K.B. 683; Leiston Gas Co. v. Leiston Cum Sizewell Urban District Council [1916], 2 K.B. 428; Raner v. Goldberg, 244 N.Y. 438 [155 N.E. 733]; 6 Williston, op. cit. supra, 1939, 1955, 1963; Restatement, Contracts, 288.)

[5] Thus laws or other governmental acts that make performance unprofitable or more difficult or expensive do not excuse the duty to perform a contractual obligation (Sample v. Fresno Flume etc. Co., 129 Cal. 222, 228 [61 P. 1085]; Klauber v. San Diego St. Car Co., 95 Cal. 353 [30 P. 555]; Texas Co. v. Hogarth Shipping Co., 256 U.S. 619, 630 [41 S.Ct. 612, 65 L.Ed. 1123]; Columbus Ry. Power & Light Co. v. Columbus, 249 U.S. 399, 414 [39 S.Ct. 349, 63 L.Ed. 669]; Thomson v. Thomson, 315 Ill. 521, 527 [146 N.E. 451]; Commonwealth v. Bader, 271 Pa. 308, 312 [114 A. 266]; Commonwealth v. Neff, 271 Pa. 312, 314 [114 A. 267]; London & Lancashire Ind. Co. v. Columbiana County, 107 OhioSt. 51, 64 [140 N.E. 672]; see 6 Williston, op. cit. supra, 1955, 1963, pp. 5507-09). [6] It is settled that if parties have contracted with reference to a state of war or have contemplated the risks arising from it, they may not invoke the doctrine of frustration to escape their obligations Northern Pac. Ry. Co. v. American Trading Co., 195 U.S. 439, 467-68 [25 S.Ct. 84, 49 L.Ed. 269]; Primos Chemical Co. v. Fulton Steel Corp. (D.C.N.Y.), 266 F. 945, 948; Krulewitch v. National Importing & Trading Co., 195 App.Div. 544 [186 N.Y.S. 838, 840]; Smith v. Morse, 20 La.Ann. 220, 222; Lithflux Mineral & Chem. Works v. Jordan, 217 Ill.App. 64, 68; Medeiros v. Hill, 8 Bing. 231, 131 Eng.Rep. 390, 392; Bolckow V. & Co. v. Compania Minera de Sierra Minera, 115 L.T.R. [K.B.] 745, 747).

[7] At the time the lease in the present case was executed the National Defense Act (Public Act No. 671 of the 76th Congress [54 Stats. 601], § 2A), approved June 28, 1940, authorizing the President to allocate materials and mobilize industry for national defense, had been law for more than a year. The automotive industry was in the process of conversion to supply the needs of our growing mechanized army and to meet lend-lease commitments. Iceland and Greenland had been occupied by the army. Automobile sales were soaring because the public anticipated that production would soon be restricted. These facts were commonly known and it cannot be said that the risk of war and its consequences necessitating restriction of the production and sale of automobiles [25 Cal.2d 56] was so remote a contingency that its risk could not be foreseen by defendant, an experienced automobile dealer. Indeed, the conditions prevailing at the time the lease was executed, and the absence of any provision in the lease contracting against the effect of war, gives rise to the inference that the risk was assumed. Defendant has therefore failed to prove that the possibility of war and its consequences on the production and sale of new automobiles was an unanticipated circumstance wholly outside the contemplation of the parties.

[8] Nor has defendant sustained the burden of proving that the value of the lease has been destroyed. The sale of automobiles was not made impossible or illegal but merely restricted and if governmental regulation does not entirely prohibit the business to be carried on in the leased premises but only limits or restricts it, thereby making it less profitable and more difficult to continue, the lease is not terminated or the lessee excused from further performance (Brown v. Oshiro, supra, p. 194; Davidson v. Goldstein, supra, p. 918; Grace v. Croninger, supra, p. 607; Industrial Development & Land Co. v. Goldschmidt, supra; Burke v. San Francisco Brewing Co., supra, p. 202; First National Bank of New Rochelle v. Fairchester Oil Co., 267 App.Div. 281 [45 N.Y.S.2d 532, 533]; Robitzek Inv. Co., Inc. v. Colonial Beacon Oil Co., 265 App.Div. 749 [40 N.Y.S.2d 819, 824]; Colonial Operating Corp. v. Hannon Sales & Service, Inc., 265 App.Div. 411 [39 N.Y.S.2d 217, 220]; Byrnes v. Balcom, 265 App.Div. 268 [38 N.Y.S.2d 801, 803]; Deibler v. Bernard Bros. Inc., 385 Ill. 610 [53 N.E.2d 450, 453]; Wood v. Bartolino, [48 N.M. 175,146 P.2d 883, 886, 888, 890]. Defendant may use the premises for the purpose for which they were leased. New automobiles and gasoline continue to be sold. Indeed, defendant testified that he continued to sell new automobiles exclusively at another location in the same county.

Defendant contends that the lease is restrictive and that the government orders therefore destroyed its value and frustrated its purpose. [9] Provisions that prohibit subleasing or other uses than those specified affect the value of a lease and are to be considered in determining whether its purpose has been frustrated or its value destroyed (see Owens, The Effect of the War Upon the Rights and Liabilities of Parties to a Contract, 19 California State Bar Journal 132, 143). It must not be forgotten, however, that

"The landlord has not covenanted that the tenant shall have the right to carry on the [25 Cal.2d 57] contemplated business or that the business to which the premises are by their nature or by the terms of the lease restricted shall be profitable enough to enable the tenant to pay the rent but has imposed a condition for his own benefit; and, certainly, unless and until he chooses to take advantage of it, the tenant is not deprived of the use of the premises."

(6 Williston, Contracts, op. cit. supra, § 1955, p. 5485; see, also, People v. Klopstock, 24 Cal.2d 897, 901 [151 P.2d 641].) [10] In the present lease plaintiffs reserved the rights that defendant should not use the premises for other purposes than those specified in the lease or sublease without plaintiff's written consent. Far from preventing other uses or subleasing they waived these rights, enabling defendant to use the premises for any legitimate purpose and to sublease them to any responsible tenant. This waiver is significant in view of the location of the premises on a main traffic artery in Los Angeles County and their adaptability for many commercial purposes. The value of these rights is attested by the fact that the premises were rented soon after defendants vacated them. It is therefore clear that the governmental restrictions on the sale of new cars have not destroyed the value of the lease. Furthermore, plaintiffs offered to lower the rent if defendant should be unable to operate profitably, and their conduct was at all times fair and cooperative.

[11] The consequences of applying the doctrine of frustration to a leasehold involving less than a total or nearly total destruction of the value of the leased premises would be undesirable. Confusion would result from different decisions purporting to define "substantial" frustration. Litigation would be encouraged by the repudiation of leases when lessees found their businesses less profitable because of the regulations attendant upon a national emergency. Many leases have been affected in varying degrees by the widespread governmental regulations necessitated by war conditions.

The cases that defendant relies upon are consistent with the conclusion reached herein. In Industrial Development & Land Co. v. Goldschmidt, supra, the lease provided that the premises should not be used other than as a saloon. When national prohibition made the sale of alcoholic beverages illegal, the court excused the tenant from further performance on the theory of illegality or impossibility by a change in domestic law. The doctrine of frustration might have been applied, since the purpose for which the property was leased [25 Cal.2d 58] was totally destroyed and there was nothing to show that the value of the lease was not thereby totally destroyed. In the present case the purpose was not destroyed but only restricted, and plaintiffs proved that the lease was valuable to defendant. In Grace v. Croninger, supra, the lease was for the purpose of conducting a "saloon and cigar store and for no other purpose" with provision for subleasing a portion of the premises for bootblack purposes. The monthly rental was $650. It was clear that prohibition destroyed the main purpose of the lease, but since the premises could be used for bootblack and cigar store purposes, the lessee was not excused from his duty to pay the rent. In the present case new automobiles and gasoline may be sold under the lease as executed and any legitimate business may be conducted or the premises may be subleased under the lease as modified by plaintiff's waiver. Colonial Operating Corp. v. Hannon Sales & Service, Inc., 34 N.Y.S.2d 116, was reversed in 265 App.Div. 411 [39 N.Y.S.2d 217, and Signal Land Corp. v. Loecher, 35 N.Y.S.2d 25; Schantz v. American Auto Supply Co., Inc., 178 Misc. 909 [36 N.Y.S.2d 747]; and Canrock Realty Corp. v. Vim Electric Co., Inc., 37 N.Y.S.2d 139, involved government orders that totally destroyed the possibility of selling the products for wich the premises were leased. No case has been cited by defendant or disclosed by research in which an appellate court has excused a lessee from performance of his duty to pay rent when the purpose of the lease has not been totally destroyed or its accomplishment rendered extremely impracticable or where it has been shown that the lease remains valuable to the lessee.

The judgment is affirmed.

Gibson, C.J., Shenk, J., Curtis, J., Edmonds, J., Carter, J., and Schauer, J., concurred.

Error to circuit court, Wayne county.

SHERWOOD, J., dissents. [919] C.J. Reilly, for plaintiff.

Wm. Aikman, Jr., (D.C. Holbrook, of counsel,) for defendants and appellants.

MORSE, J.

Replevin for a cow. Suit commenced in justice's court; judgment for plaintiff; appealed to circuit court of Wayne county, and verdict and judgment for plaintiff in that court. The defendants bring error, and set out 25 assignments of the same.

The main controversy depends upon the construction of a contract for the sale of the cow. The plaintiff claims that the title passed, and bases his action upon such claim. The defendants contend that the contract was executory, and by its terms no title to the animal was acquired by plaintiff. The defendants reside at Detroit, but are in business at Walkerville, Ontario, and have a farm at Greenfield, in Wayne county, upon which were some blooded cattle supposed to be barren as breeders. The Walkers are importers and breeders of polled Angus cattle. The plaintiff is a banker living at Plymouth, in Wayne county. He called upon the defendants at Walkerville for the purchase of some of their stock, but found none there that suited him. Meeting one of the defendants afterwards, he was informed that they had a few head [920] upon their Greenfield farm. He was asked to go out and look at them, with the statement at the time that they were probably barren, and would not breed. May 5, 1886, plaintiff went out to Greenfield, and saw the cattle. A few days thereafter, he called upon one of the defendants with the view of purchasing a cow, known as Rose 2d of Aberlone. After considerable talk, it was agreed that defendants would telephone Sherwood at his home in Plymouth in reference to the price. The second morning after this talk he was called up by telephone, and the terms of the sale were finally agreed upon. He was to pay five and one-half cents per pound, live weight, fifty pounds shrinkage. He was asked how he intended to take the cow home, and replied that he might ship her from King's cattle-yard. He requested defendants to confirm the sale in writing, which they did by sending him the following letter: WALKERVILLE, May 15, 1886.

T.C. Sherwood, President, etc.-DEAR SIR: We confirm sale to you of the cow Rose 2d of Aberlone, lot 56 of our catalogue, at five and half cents per pound, less fifty pounds shrink. We inclose herewith order on Mr. Graham for the cow. You might leave check with him, or mail to us here, as you prefer. Yours, truly, HIRAM WALKER & SONS.

The order upon Graham inclosed in the letter read as follows:

WALKERVILLE, May 15, 1886.

George Graham: You will please deliver at King's cattle-yard to Mr. T.C. Sherwood, Plymouth, the cow Rose 2d of Aberlone, lot 56 of our catalogue. Send halter with the cow, and have her weighed.

Yours truly, HIRAM WALKER & SONS.

On the twenty-first of the same month the plaintiff went to defendants' farm at Greenfield, and presented the order and letter to Graham, who informed him that the defendants had instructed him not to deliver the cow. Soon after, the plaintiff tendered to Hiram Walker, one of the defendants, $80, and demanded the cow. Walker refused to take the money or deliver the cow. The plaintiff then instituted this suit. After he had secured possession of the cow under the writ of replevin, the plaintiff caused her to be weighed by the constable who served the writ, at a place other than King's cattle-yard. She weighed 1,420 pounds.

When the plaintiff, upon the trial in the circuit court, had submitted his proofs showing the above transaction, defendants moved to strike out and exclude the testimony from the case, for the reason that it was irrelevant and did not tend to show that the title to the cow passed, and that it showed that the contract of sale was merely executory. The court refused the motion, and an exception was taken. The defendants then introduced evidence tending to show that at the time of the alleged sale it was believed by both the plaintiff and themselves that the cow was barren and would not breed; that she cost $850, and if not barren would be worth from $750 to $1,000; that after the date of the letter, and the order to Graham, the defendants were informed by said Graham that in his judgment the cow was with calf, and therefore they instructed him not to deliver her to plaintiff, and on the twentieth of May, 1886, telegraphed plaintiff what Graham thought about the cow being with calf, and that consequently they could not sell her. The cow had a calf in the month of October following. On the nineteenth of May, the plaintiff wrote Graham as follows: PLYMOUTH, May 19, 1886.

Mr. George Graham, Greenfield-DEAR SIR: I have bought Rose or Lucy from Mr. Walker, and will be there for her Friday morning, nine or ten o'clock. Do not water her in the morning.

Yours, etc., T.C. SHERWOOD.

Plaintiff explained the mention of the two cows in this letter by testifying that, when he wrote this letter, the order and letter of defendants was at his home, and, writing in a hurry, and being uncertain as to the name of the cow, and not wishing his cow watered, he thought it would do no harm to name them [921] both, as his bill of sale would show which one he had purchased. Plaintiff also testified that he asked defendants to give him a price on the balance of their herd at Greenfield, as a friend thought of buying some, and received a letter dated May 17, 1886, in which they named the price of five cattle, including Lucy, at $90, and Rose 2d at $80. When he received the letter he called defendants up by telephone, and asked them why they put Rose 2d in the list, as he had already purchased her. They replied that they knew he had, but thought it would make no difference if plaintiff and his friend concluded to take the whole herd.

The foregoing is the substance of all the testimony in the case.

The circuit judge instructed the jury that if they believed the defendants, when they sent the order and letter to plaintiff, meant to pass the title to the cow, and that the cow was intended to be delivered to plaintiff, it did not matter whether the cow was weighed at any particular place, or by any particular person; and if the cow was weighed afterwards, as Sherwood testified, such weighing would be a sufficient compliance with the order. If they believed that defendants intended to pass the title by writing, it did not matter whether the cow was weighed before or after suit brought, and the plaintiff would be entitled to recover. The defendants submitted a number of requests which were refused. The substance of them was that the cow was never delivered to plaintiff, and the title to her did not pass by the letter and order; and that under the contract, as evidenced by these writings, the title did not pass until the cow was weighed and her price thereby determined; and that, if the defendants only agreed to sell a cow that would not breed, then the barrenness of the cow was a condition precedent to passing title, and plaintiff cannot recover. The court also charged the jury that it was immaterial whether the cow was with calf or not. It will therefore be seen that the defendants claim that, as a matter of law, the title of this cow did not pass, and that the circuit judge erred in submitting the case to the jury, to be determined by them, upon the intent of the parties as to whether or not the title passed with the sending of the letter and order by the defendants to the plaintiff.

This question as to the passing of title is fraught with difficulties, and not always easy of solution. An examination of the multitude of cases bearing upon this subject, with their infinite variety of facts, and at least apparent conflict of law, ofttimes tends to confuse rather than to enlighten the mind of the inquirer. It is best, therefore, to consider always, in cases of this kind, the general principles of the law, and then apply them as best we may to the facts of the case in hand.

The cow being worth over $50, the contract of sale, in order to be valid, must be one where the purchaser has received or accepted part of the goods, or given something in earnest, or in part payment, or where the seller has signed some note or memorandum in writing. How.St. 6186. Here there was no actual delivery, nor anything given in payment or in earnest, but there was a sufficient memorandum signed by the defendants to take the case out of the statute, if the matter contained in such memorandum is sufficient to constitute a completed sale. It is evident from the letter that the payment of the purchase price was not intended as a condition precedent to the passing of the title. Mr. Sherwood is given his choice to pay the money to Graham at King's cattle-yards, or to send check by mail.

Nor can there be any trouble about the delivery. The order instructed Graham to deliver the cow, upon presentation of the order, at such cattle-yards. But the price of the cow was not determined upon to a certainty. Before this could be ascertained, from the terms of the contract, the cow had to be weighed; and, by the order inclosed with the letter, Graham was instructed to have her weighed. If the cow had been weighed, and this letter had stated, upon such weight, the express and exact price of the animal, there can be no [922] doubt but the cow would have passed with the sending and receipt of the letter and order by the plaintiff. Payment was not to be a concurrent act with the delivery, and therein this case differs from Case v. Dewey, 55 Mich. 116, 20 N.W.Rep. 817, and 21 N.W.Rep. 911. Also, in that case, there was no written memorandum of the sale, and a delivery was necessary to pass the title of the sheep; and it was held that such delivery could only be made by a surrender of the possession to the vendee, and an acceptance by him. Delivery by an actual transfer of the property from the vendor to the vendee, in a case like the present, where the article can easily be so transferred by a manual act, is usually the most significant fact in the transaction to show the intent of the parties to pass the title, but it never has been held conclusive. Neither the actual delivery, nor the absence of such delivery, will control the case, where the intent of the parties is clear and manifest that the matter of delivery was not a condition precedent to the passing of the title, or that the delivery did not carry with it the absolute title. The title may pass, if the parties so agree, where the statute of frauds does not interpose without delivery, and property may be delivered with the understanding that the title shall not pass until some condition is performed.

And whether the parties intended the title should pass before delivery or not is generally a question of fact to be determined by a jury. In the case at bar the question of the intent of the parties was submitted to the jury. This submission was right, unless from the reading of the letter and the order, and all the facts of the oral bargaining of the parties, it is perfectly clear, as a matter of law, that the intent of the parties was that the cow should be weighed, and the price thereby accurately determined, before she should become the property of the plaintiff. I do not think that the intent of the parties in this case is a matter of law, but one of fact. The weighing of the cow was not a matter that needed the presence or any act of the defendants, or any agent of theirs, to be well or accurately done. It could make no difference where or when she was weighed, if the same was done upon correct scales, and by a competent person. There is no pretense but what her weight was fairly ascertained by the plaintiff. The cow was specifically designated by this writing, and her delivery ordered, and it cannot be said, in my opinion, that the defendants intended that the weighing of the animal should be done before the delivery even, or the passing of title. The order to Graham is to deliver her, and then follows the instruction, not that he shall weigh her himself, or weigh her, or even have her weighed, before delivery, but simply, Send halter with the cow, and have her weighed.

It is evident to my mind that they had perfect confidence in the integrity and responsibility of the plaintiff, and that they considered the sale perfected and completed when they mailed the letter and order to plaintiff. They did not intend to place any conditions precedent in the way, either of payment of the price, or the weighing of the cow, before the passing of the title. They cared not whether the money was paid to Graham, or sent to them afterwards, or whether the cow was weighed before or after she passed into the actual manual grasp of the plaintiff. The refusal to deliver the cow grew entirely out of the fact that, before the plaintiff called upon Graham for her, they discovered she was not barren, and therefore of greater value than they had sold her for.

The following cases in this court support the instruction of the court below as to the intent of the parties governing and controlling the question of a completed sale, and the passing of title: Lingham v. Eggleston, 27 Mich. 324;Wilkinson v. Holiday, 33 Mich. 386;Grant v. Merchants' & Manufacturers' Bank, 35 Mich. 527;Carpenter v. Graham, 42 Mich. 194, 3 N.W.Rep. 974;Brewer v. Michigan Salt Ass'n, 47 Mich. 534, 11 N.W.Rep. 370;Whitcomb v. Whitney, 24 Mich. 486;Byles v. Colier, 54 Mich. 1, 19 N.W.Rep. 565;Scotten v. Sutter, 37 Mich. 527, 532; [923] Ducey Lumber Co. v. Lane, 58 Mich. 520, 525, 25 N.W.Rep. 568;Jenkinson v. Monroe, 28 N.W.Rep. 663.

It appears from the record that both parties supposed this cow was barren and would not breed, and she was sold by the pound for an insignificant sum as compared with her real value if a breeder. She was evidently sold and purchased on the relation of her value for beef, unless the plaintiff had learned of her true condition, and concealed such knowledge from the defendants. Before the plaintiff secured the possession of the animal, the defendants learned that she was with calf, and therefore of great value, and undertook to rescind the sale by refusing to deliver her. The question arises whether they had a right to do so. The circuit judge ruled that this fact did not avoid the sale and it made no difference whether she was barren or not. I am of the opinion that the court erred in this holding. I know that this is a close question, and the dividing line between the adjudicated cases is not easily discerned. But it must be considered as well settled that a party who has given an apparent consent to a contract of sale may refuse to execute it, or he may avoid it after it has been completed, if the assent was founded, or the contract made, upon the mistake of a material fact,-such as the subject-matter of the sale, the price, or some collateral fact materially inducing the agreement; and this can be done when the mistake is mutual. 1 Benj. Sales, 605, 606; Leake, Cont. 339; Story, Sales, (4th Ed.) 377, 148. See, also, Cutts v. Guild, 57 N.Y. 229;Harvey v. Harris, 112 Mass. 32;Gardner v. Lane, 9 Allen, 492, 12 Allen, 44; Huthmacher v. Harris' Adm'rs, 38 Pa.St. 491; Byers v. Chapin, 28 Ohio St. 300;Gibson v. Pelkie, 37 Mich. 380, and cases cited; Allen v. Hammond, 11 Pet. 63-71.

If there is a difference or misapprehension as to the substance of the thing bargained for; if the thing actually delivered or received is different in substance from the thing bargained for, and intended to be sold,-then there is no contract; but if it be only a difference in some quality or accident, even though the mistake may have been the actuating motive to the purchaser or seller, or both of them, yet the contract remains binding. The difficulty in every case is to determine whether the mistake or misapprehension is as to the substance of the whole contract, going, as it were, to the root of the matter, or only to some point, even though a material point, an error as to which does not affect the substance of the whole consideration. Kennedy v. Panama, etc., Mail Co., L.R. 2 Q.B. 580, 587. It has been held, in accordance with the principles above stated, that where a horse is bought under the belief that he is sound, and both vendor and vendee honestly believe him to be sound, the purchaser must stand by his bargain, and pay the full price, unless there was a warranty.

It seems to me, however, in the case made by this record, that the mistake or misapprehension of the parties went to the whole substance of the agreement. If the cow was a breeder, she was worth at least $750; if barren, she was worth not over $80. The parties would not have made the contract of sale except upon the understanding and belief that she was incapable of breeding, and of no use as a cow. It is true she is now the identical animal that they thought her to be when the contract was made; there is no mistake as to the identity of the creature. Yet the mistake was not of the mere quality of the animal, but went to the very nature of the thing. A barren cow is substantially a different creature than a breeding one. There is as much difference between them for all purposes of use as there is between an ox and a cow that is capable of breeding and giving milk. If the mutual mistake had simply related to the fact whether she was with calf or not for one season, then it might have been a good sale, but the mistake affected the character of the animal for all time, and for its present and ultimate use. She was not in fact the animal, or the kind of animal, the defendants intended to sell or the plaintiff to buy. She was not a barren cow, and, if this fact had been known, there would have been no contract. The mistake [924] affected the substance of the whole consideration, and it must be considered that there was no contract to sell or sale of the cow as she actually was. The thing sold and bought had in fact no existence. She was sold as a beef creature would be sold; she is in fact a breeding cow, and a valuable one. The court should have instructed the jury that if they found that the cow was sold, or contracted to be sold, upon the understanding of both parties that she was barren, and useless for the purpose of breeding, and that in fact she was not barren, but capable of breeding, then the defendants had a right to rescind, and to refuse to deliver, and the verdict should be in their favor.

The judgment of the court below must be reversed, and a new trial granted, with costs of this court to defendants.

CAMPBELL, C.J., and CHAMPLIN, J., concurred.

SHERWOOD, J., (dissenting.)

I do not concur in the opinion given by my brethren in this case. I think the judgments before the justice and at the circuit were right. I agree with my Brother MORSE that the contract made was not within the statute of frauds, and the payment for the property was not a condition precedent to the passing of the title from the defendants to the plaintiff. And I further agree with him that the plaintiff was entitled to a delivery of the property to him when the suit was brought, unless there was a mistake made which would invalidate the contract, and I can find no such mistake. There is no pretense there was any fraud or concealment in the case, and an intimation or insinuation that such a thing might have existed on the part of either of the parties would undoubtedly be a greater surprise to them than anything else that has occurred in their dealings or in the case.

As has already been stated by my brethren, the record shows that the plaintiff is a banker and farmer as well, carrying on a farm, and raising the best breeds of stock, and lived in Plymouth, in the county of Wayne, 23 miles from Detroit; that the defendants lived in Detroit, and were also dealers in stock of the higher grades; that they had a farm at Walkerville, in Canada, and also one in Greenfield in said county of Wayne, and upon these farms the defendants kept their stock. The Greenfield farm was about 15 miles from the plaintiff's. In the spring of 1886 the plaintiff, learning that the defendants had some polled Angus cattle for sale, was desirous of purchasing some of that breed, and meeting the defendants, or some of them, at Walkerville, inquired about them, and was informed that they had none at Walkerville, but had a few head left on their farm in Greenfield, and asked the plaintiff to go and see them, stating that in all probability they were sterile and would not breed. In accordance with said request, the plaintiff, on the fifth day of May, went out and looked at the defendants' cattle at Greenfield, and found one called Rose, Second, which he wished to purchase, and the terms were finally agreed upon at five and a half cents per pound, live weight, 50 pounds to be deducted for shrinkage. The sale was in writing, and the defendants gave an order to the plaintiff directing the man in charge of the Greenfield farm to deliver the cow to plaintiff. This was done on the fifteenth of May. On the twenty-first of May plaintiff went to get his cow, and the defendants refused to let him have her; claiming at the time that the man in charge at the farm thought the cow was with calf, and, if such was the case, they would not sell her for the price agreed upon. The record further shows that the defendants, when they sold the cow, believed the cow was not with calf, and barren; that from what the plaintiff had been told by defendants (for it does not appear he had any other knowledge or facts from which he could form an opinion) he believed the cow was farrow, but still thought she could be made to breed. The foregoing shows the entire interview and treaty between the parties as to the sterility and qualities of the cow sold to the plaintiff. The cow had a calf in the month of October.

[925] There is no question but that the defendants sold the cow representing her of the breed and quality they believed the cow to be, and that the purchaser so understood it. And the buyer purchased her believing her to be of the breed represented by the sellers, and possessing all the qualities stated, and even more. He believed she would breed. There is no pretense that the plaintiff bought the cow for beef, and there is nothing in the record indicating that he would have bought her at all only that he thought she might be made to breed. Under the foregoing facts,-and these are all that are contained in the record material to the contract,-it is held that because it turned out that the plaintiff was more correct in his judgment as to one quality of the cow than the defendants, and a quality, too, which could not by any possibility be positively known at the time by either party to exist, the contract may be annulled by the defendants at their pleasure. I know of no law, and have not been referred to any, which will justify any such holding, and I think the circuit judge was right in his construction of the contract between the parties.

It is claimed that a mutual mistake of a material fact was made by the parties when the contract of sale was made. There was no warranty in the case of the quality of the animal. When a mistaken fact is relied upon as ground for rescinding, such fact must not only exist at the time the contract is made, but must have been known to one or both of the parties. Where there is no warranty, there can be no mistake of fact when no such fact exists, or, if in existence, neither party knew of it, or could know of it; and that is precisely this case. If the owner of a Hambletonian horse had speeded him, and was only able to make him go a mile in three minutes, and should sell him to another, believing that was his greatest speed, for $300, when the purchaser believed he could go much faster, and made the purchase for that sum, and a few days thereafter, under more favorable circumstances, the horse was driven a mile in 2 min. 16 sec., and was found to be worth $20,000, I hardly think it would be held, either at law or in equity, by any one, that the seller in such case could rescind the contract. The same legal principles apply in each case.

In this case neither party knew the actual quality and condition of this cow at the time of the sale. The defendants say, or rather said, to the plaintiff, they had a few head left on their farm in Greenfield, and asked plaintiff to go and see them, stating to plaintiff that in all probability they were sterile and would not breed. Plaintiff did go as requested, and found there these cows, including the one purchased, with a bull. The cow had been exposed, but neither knew she was with calf or whether she would breed. The defendants thought she would not, but the plaintiff says that he thought she could be made to breed, but believed she was not with calf. The defendants sold the cow for what they believed her to be, and the plaintiff bought her as he believed she was, after the statements made by the defendants. No conditions whatever were attached to the terms of sale by either party. It was in fact as absolute as it could well be made, and I know of no precedent as authority by which this court can alter the contract thus made by these parties in writing,-interpolate in it a condition by which, if the defendants should be mistaken in their belief that the cow was barren, she could be returned to them and their contract should be annulled. It is not the duty of courts to destroy contracts when called upon to enforce them, after they have been legally made. There was no mistake of any material fact by either of the parties in the case as would license the vendors to rescind. There was no difference between the parties, nor misapprehension, as to the substance of the thing bargained for, which was a cow supposed to be barren by one party, and believed not to be by the other. As to the quality of the animal, subsequently developed, both parties were equally ignorant, and as to this each party took his chances. If this were not the law, there would be no safety in purchasing this kind of stock.

I entirely agree with my brethren that the right to rescind occurs whenever the thing actually delivered or received is different in substance from the [926] thing bargained for, and intended to be sold; but if it be only a difference in some quality or accident, even though the misapprehension may have been the actuating motive of the parties in making the contract, yet it will remain binding. In this case the cow sold was the one delivered. What might or might not happen to her after the sale formed no element in the contract. The case of Kennedy v. Panama Mail Co., L.R. 2 Q.B. 587, and the extract cited therefrom in the opinion of my brethren, clearly sustains the views I have taken. See, also, Smith v. Hughes, L.R. 6 Q.B. 597; Carter v. Crick, 4 Hurl. & N. 416.

According to this record, whatever the mistake was, if any, in this case, it was upon the part of the defendants, and while acting upon their own judgment. It is, however, elementary law, and very elementary, too, that the mistaken party, without any common understanding with the other party in the premises as to the quality of an animal, is remediless if he is injured through his own mistake. Leake, Cont. 338; Torrance v. Bolton, L.R. 8 Ch. 118; Smith v. Hughes, L.R. 6 Q.B. 597.

The case cited by my brethren from 37 Mich. I do not think sustains the conclusion reached by them. In that case the subject-matter about which the contract was made had no existence, and in such case Mr. Justice GRAVES held there was no contract; and to the same effect are all the authorities cited in the opinion. That is certainly not this case. Here the defendants claim the subject-matter not only existed, but was worth about $800 more than the plaintiff paid for it.

The case of Huthmacher v. Harris, 38 Pa.St. 491, is this: A party purchased at an administrator's sale a drill-machine, which had hid away in it by the deceased a quantity of notes, to the amount of $3,000, money to the amount of over $500, and two silver watches and a pocket compass of the value of $60.25. In an action of trover for the goods, it was held that nothing but the machine was sold or passed to the purchasers, neither party knowing that the machine contained any such articles.

In Cutts v. Guild, 57 N.Y. 229, the defendant, as assignee, recovered a judgment against D. & H. He also recovered several judgments in his own name on behalf of the T. Co. The defendant made an assignment of and transferred the first judgment to an assignee of the plaintiff,-both parties supposing and intending to transfer one of the T. Co. judgments,-and it was held that such contract of assignment was void, because the subject-matter contained in the assignment was not contracted for.

In the case of Byers v. Chapin, 28 Ohio St. 300, the defendant sold the plaintiffs 5,000 oil barrels. The plaintiffs paid $5,000 upon their purchase, and took some of the barrels. The barrels proved to be unfit for use, and the contract was rescinded by consent of the parties. The defendant, instead of returning all the money paid to the purchaser, retained a portion and gave plaintiffs his note for the remainder. The plaintiffs brought suit upon this note. The defendant claimed that, under the contract of sale of the barrels, they were to be glued by the plaintiffs, which the plaintiffs properly failed to do, and this fact was not known to defendant when he agreed to rescind, and gave the note, and therefore the note was given upon a mistaken state of facts, falsely represented to the defendant, and which were known to the plaintiffs. On the proofs, the jury found for the defendant, and the verdict was affirmed.

In Gardner v. Lane, 9 Mass. 492, it is decided that if, upon a sale of No. 1 mackerel, the vendor delivers No. 3 mackerel, and some barrels of salt, no title to the articles thus delivered passes.

Allen v. Hammond, 11 Pet. 63, decides that if a life-estate in land is sold, and at the time of the sale the estate is terminated by the death of the person in whom the right vested, a court of equity will rescind the purchase.

In Harvey v. Harris, 112 Mass. 32, at an auction, two different grades of flour were sold, and a purchaser of the second claimed to have bought a quantity [927] of the first grade, under a sale made of the second, and this he was not allowed to do, because of the mutual mistake; the purchaser had not in fact bought the flour he claimed. In this case, however, it is said it is true that, if there is a mutual agreement of the parties for the sale of particular articles of property, a mistake of misapprehension as to the quality of the articles will not enable the vendor to repudiate the sale.

The foregoing are all the authorities relied on as supporting the positions taken by my brethren in this case. I fail to discover any similarity between them and the present case; and I must say, further, in such examination as I have been able to make, I have found no adjudicated case going to the extent, either in law or equity, that has been held in this case. In this case, if either party had superior knowledge as to the qualities of this animal to the other, certainly the defendants had such advantage. I understand the law to be well settled that there is no breach of any implied confidence that one party will not profit by his superior knowledge as to facts and circumstances actually within the knowledge of both, because neither party reposes in any such confidence unless it be specially tendered or required, and that a general sale does not imply warranty of any quality, or the absence of any; and if the seller represents to the purchaser what he himself believes as to the qualities of an animal, and the purchaser buys relying upon his own judgment as to such qualities, there is no warranty in the case, and neither has a cause of action against the other if he finds himself to have been mistaken in judgment.

The only pretense for avoiding this contract by the defendants is that they erred in judgment as to the qualities and value of the animal. I think the principles adopted by Chief Justice CAMPBELL in Williams v. Spurr completely cover this case, and should have been allowed to control in its decision. See 24 Mich. 335. See, also, Story, Sales, 174, 175, 382, and Benj. Sales, 430. The judgment should be affirmed.

Frank L. Seamans, John H. Morgan, Richard W. Gladstone, Eckert, Seamans, Cherin & Mellott, Pittsburgh, Pa., for plaintiff.

J. Tomlinson Fort, Reed, Smith, Shaw & McClay, Pittsburgh, Pa., for defendant.

MEMORANDUM OPINION AND ORDER

TEITELBAUM, District Judge.

Plaintiff, Aluminum Company of America (ALCOA), brought the instant action against defendant, Essex Group, Inc. (Essex), in three counts. The first count requests the Court to reform or equitably adjust an agreement entitled the Molten Metal Agreement entered into between ALCOA and Essex. The second count alleges that the Molten Metal Agreement was modified by oral amendment and that Essex has breached the amended agreement. The second count seeks a declaratory judgment that the alleged breach by Essex excuses ALCOA's further performance and seeks as well an award of damages caused by the alleged breach of Essex. The third count asks for a declaratory judgment that ALCOA's prior notice of termination of the Molten Metal Agreement was proper or, in the alternative, that ALCOA may terminate the Molten Metal Agreement if it be determined by this Court to be a contract for the sale of goods. Essex denies all of ALCOA's material allegations. Essex further counterclaims that ALCOA is liable to it for damages based on ALCOA's failure to deliver to Essex the amounts of molten metal ALCOA is contractually obligated to deliver under the Molten Metal Agreement and seeks entry of an order specifically enforcing its right to receive molten aluminum from ALCOA in the amounts requested.

Jurisdiction is based upon diversity of citizenship and amount in controversy and is one of the few issues in the case sub judice not in dispute.

In 1966 Essex made a policy decision to expand its participation in the manufacture of aluminum wire products. Thus, beginning in the spring of 1967, ALCOA and Essex negotiated with each other for the purpose of reaching an agreement whereby ALCOA would supply Essex with its long-term needs for aluminum that Essex could use in its manufacturing operations.

By December 26, 1967 the parties had entered into what they designated as a toll conversion service contract known as the Molten Metal Agreement under which Essex would supply ALCOA with alumina which ALCOA would convert by a smelting process into molten aluminum. Under the terms of the Molten Metal Agreement, Essex delivers alumina to ALCOA which ALCOA smelts (or toll converts) into molten aluminum at its Warrick, Indiana, smelting facility. Essex then picks up the molten aluminum for further processing.

The price provisions of the contract contained an escalation formula which indicates that $.03 per pound of the original price escalates in accordance with changes in the Wholesale Price Index-Industrial Commodities (WPI) and $.03 per pound escalates in accordance with an index based on the average hourly labor rates paid to ALCOA employees at the Warrick plant. The portion of the pricing formula which is in issue in this case under counts one and two is the production charge which is escalated by the WPI. ALCOA contends that this charge was intended by the parties to reflect actual changes in the cost of the non-labor items utilized by ALCOA in the production of aluminum from alumina at its Warrick, Indiana smelting plant. In count one of this suit ALCOA asserts that the WPI used in the Molten Metal Agreement was in fact incapable of reasonably reflecting changes in the non-labor costs at ALCOA's Warrick, Indiana smelting plant and has in fact failed to so reflect such changes.

It is ALCOA's contention in count one of its complaint that the shared objectives of the parties with respect to the use of the WPI have been completely and totally frustrated, that both ALCOA and Essex made a mutual mistake of fact in agreeing to use the WPI to escalate non-labor costs at Warrick. ALCOA is seeking reformation or equitable adjustment of the Molten Metal Agreement so that pursuant to count one of its complaint, the pricing formula with respect to the non-labor portion of the production charge will be changed to eliminate the WPI and substitute the actual costs incurred by ALCOA for the non-labor items used at its Warrick, Indiana smelting plant. Essex opposes relief under count one contending that: 1) ALCOA cannot obtain reformation of the Molten Metal Agreement on the grounds of mutual mistake since ALCOA has failed to establish any antecedent agreement on pricing not expressed in the Molten Metal Agreement; 2) ALCOA assumed the risk that its prediction as to future costs would be incorrect; 3) ALCOA has failed to prove that enforcement of the Molten Metal Agreement would be unconscionable.

ALCOA alleges in the second count of its complaint that when it became evident that the WPI was not accomplishing the objectives of the parties under the Molten Metal Agreement, discussions were begun between ALCOA and Essex which culminated in a meeting held between Mr. Krome George, Chief Executive Officer of ALCOA, and others of ALCOA and Mr. Paul O'Malley, President of Essex, on July 21, 1975. At that time, Mr. George and Mr. O'Malley allegedly orally agreed to reform the Molten Metal Agreement to reflect the original objectives of the parties. The oral agreement allegedly replaced the WPI with the actual costs incurred by ALCOA. Essex denies entering into the alleged oral agreement and has accordingly refused to perform consistent with its terms. In its second count, ALCOA requests that declaratory judgment be entered whereby Essex's breach of its alleged oral agreement to reform the Molten Metal Agreement be declared sufficient grounds to excuse any further performance by ALCOA of that Agreement. In addition, ALCOA seeks that it be awarded damages in excess of $11,900,000 accruing to the date of judgment resulting from Essex's breach, plus interests and costs.

ALCOA asks in its third count that it be excused from further performance of the Molten Metal Agreement. ALCOA alleges that its performance is excused by a clause which is contained in a document referred to as the December 27, 1967 Letter Agreement (the Side Letter Agreement). That clause provides that ALCOA and Essex, acting in good faith, entered into the Molten Metal Agreement with the understanding that it was a contract for the furnishing of services by ALCOA to Essex. The clause further provides that in the event a final decision of a court construed the Molten Metal Agreement as a contract for the sale of goods it could be terminated by either party. The Side Letter Agreement was a product of concern that an admittedly preferential price to Essex would threaten a violation of the Robinson-Patman Act if the various transactions could be lumped together and considered to be in substance the sale of aluminum rather than what appears as a matter of form, the sale of services.

ALCOA argues it should be permitted to terminate the Molten Metal Agreement under the terms of the Side Letter Agreement. ALCOA urges that this Court should determine whether the Molten Metal Agreement is a contract for the sale of goods.

As previously indicated, Essex has filed a counterclaim to the ALCOA complaint. The original counterclaim of Essex contends that under the terms of the Molten Metal Agreement as implemented during the years 1977, 1978 and the first six months of 1979, ALCOA has, on numerous occasions, breached the Molten Metal Agreement by improperly failing to deliver the amounts of molten aluminum required by the contract. This first counterclaim asks that Essex be awarded damages in an amount as to fully compensate it for the failure of ALCOA to deliver molten aluminum in accordance with the terms of the Molten Metal Agreement.

The amended counterclaim of Essex arises as a result of a letter dated June 4, 1979, in which ALCOA informed Essex that it was reducing by 15% the amount of its deliveries of molten aluminum requested by Essex. ALCOA claims to have this authority under the terms of the Molten Metal Agreement. Essex contends that ALCOA does not have any such authority and its amended counterclaim additionally asks for an order enforcing the Molten Metal Agreement and awarding damages accordingly.

Simply put, if possible, ALCOA seeks relief from this Court in a three count complaint, while Essex opposes ALCOA's requests and itself seeks relief via a counterclaim.

The Court finds, based upon consideration of all the evidence, that ALCOA is entitled to reformation of the Molten Metal Agreement. At the same time, ALCOA's requests for relief in counts two and three are denied as is the request for relief by Essex in its counterclaim.

COUNT ONE

ALCOA's first count seeks an equitable modification of the contract price for its services. The pleadings, arguments and briefs frame the issue in several forms. ALCOA seeks reformation or modification of the price on the basis of mutual mistake of fact, unilateral mistake of fact, unconscionability, frustration of purpose, and commercial impracticability.

A.

The facts pertinent to count one are few and simple. In 1967 ALCOA and Essex entered into a written contract in which ALCOA promised to convert specified amounts of alumina supplied by Essex into aluminum for Essex. The service is to be performed at the ALCOA works at Warrick, Indiana. The contract is to run until the end of 1983. Essex has the option to extend it until the end of 1988. The price for each pound of aluminum converted is calculated by a complex formula which includes three variable components based on specific indices. The initial contract price was set at fifteen cents per pound, computed as follows:

A. Demand Charge                               $0.05/lb.
B. Production Charge
     (i) Fixed component                         .04/lb.
    (ii) Non-labor production cost component     .03/lb.
   (iii) Labor production cost component         .03/lb.
                                               _________
Total initial charge                           $0.15/lb.

The demand charge is to vary from its initial base in direct proportion to periodic changes in the Engineering News Record Construction Cost-20 Cities Average Index published in the Engineering News Record. The Non-labor Production Cost Component is to vary from its initial base in direct proportion to periodic changes in the Wholesale Price Index-Industrial Commodities (WPI-IC) published by the Bureau of Labor Statistics of the United States Department of Labor. The Labor Production Cost Component is to vary from its initial base in direct proportion to periodic changes in ALCOA's average hourly labor cost at the Warrick, Indiana works. The adjusted price is subject to an over-all "cap" price of 65% of the price of a specified type of aluminum sold on specified terms, as published in a trade journal, American Metal Market.

The indexing system was evolved by ALCOA with the aid of the eminent economist Alan Greenspan. ALCOA examined the non-labor production cost component to assure that the WPI-IC had not tended to deviate markedly from their non-labor cost experience in the years before the contract was executed. Essex agreed to the contract including the index provisions after an examination of the past record of the indices revealed an acceptable pattern of stability.

ALCOA sought, by the indexed price agreement, to achieve a stable net income of about 4¢ per pound of aluminum converted. This net income represented ALCOA's return (i) on its substantial capital investment devoted to the performance of the contracted services, (ii) on its management, and (iii) on the risks of short-falls or losses it undertook over an extended period. The fact that the non-labor production cost component of ALCOA's costs was priced according to a surrogate, objective index opened the door to a foreseeable fluctuation of ALCOA's return due to deviations between ALCOA's costs and the performance of the WPI-IC. The range of foreseeable deviation was roughly three cents per pound. That is to say that in some years ALCOA's return might foreseeably (and did, in fact) rise to seven cents per pound, while in other years it might foreseeably (and did, in fact) fall to about one cent per pound. See Table I.

Essex sought to assure itself of a long term supply of aluminum at a favorable price. Essex intended to and did manufacture a new line of aluminum wire products. The long term supply of aluminum was important to assure Essex of the steady use of its expensive machinery. A steady production stream was vital to preserve the market position it sought to establish. The favorable price was important to allow Essex to compete with firms like ALCOA which produced the aluminum and manufactured aluminum wire products in an efficient, integrated operation.

In the early years of the contract, the price formula yielded prices related, within the foreseeable range of deviation, to ALCOA's cost figures. Beginning in 1973, OPEC actions to increase oil prices and unanticipated pollution control costs greatly increased ALCOA's electricity costs. Electric power is the principal non-labor cost factor in aluminum conversion, and the electric power rates rose much more rapidly than did the WPI-IC. As a result, ALCOA's production costs rose greatly and unforeseeably beyond the indexed increase in the contract price. Table I illustrates the relation between the WPI-IC and ALCOA's costs over the years of the contract, and the resulting consequences for ALCOA:

                             TABLE I
------------------------------------------------------------------------
             WARRICK NON-LABOR
      BASE   PRODUCTION COSTS     PROFIT/     POUNDS         PROFIT/
YEAR  WPIIC     PER POUND         LOSS     DELIVERED         LOSS
                  ¢       %       PER LB.
------------------------------------------------------------------------
1968  102.5     4.371    110.5    5.799     25,300,000    $1,467,147
1969  106.0     4.010    101.4    7.097     54,694,317     3,881,656
1970  110.0     4.397    111.1    6.517     84,370,265     5,498,410
1971  114.1     5.215    131.8    5.367     65,522,280     3,516,581
1972  117.9     5.309    134.2    5.721     83,128,209     4,755,765
1973  125.9     5.819    147.1    4.535     82,201,940     3,727,857
1974  153.8     9.009    227.1    2.070     86,234,310     1,785,050
1975  171.5    11.450    289.4     .189     76,688,530       144,941
1976  182.4    13.948    352.6   ( .301)   83,363,502       250,924
1977  195.1    17.806    450.1   (4.725)   72,289,722    (3,415,689)
1978  209.4    22.717    574.2  (10.484)   82,235,337    (8,620,504)
------------------------------------------------------------------------

 The contract calls for a recomputation of the WPI-IC, so that
  the "Base Wholesale Price Index" = 100 in 1967.

 Warrick Non-Labor Production Costs 1967 - 100%.

 The profit (loss) shown in years 1976 through 1978 was affected
  by a temporary surcharge agreement. Without the temporary
  surcharge the loss in cents per pound would have been as follows:
  1976 (1.699); 1977 (6.725); 1978 (10.984). The loss each year
  would have been as follows: 1976 ($1,416,346); 1977 ($4,861,484);
  1978 ($9,031,631).

During the most recent years, the market price of aluminum has increased even faster than the production costs. At the trial ALCOA introduced the deposition of Mr. Wilfred Jones, an Essex employee whose duties included the sale of surplus metal. Mr. Jones stated that Essex had resold some millions of pounds of aluminum which ALCOA had refined. The cost of the aluminum to Essex (including the purchase price of the alumina and its transportation) was 36.35 cents per pound around June of 1979. Mr. Jones further stated that the resale price in June 1979 at one cent per pound under the market, was 73.313 cents per pound, yielding Essex a gross profit of 37.043 cents per pound. This margin of profit shows the tremendous advantage Essex enjoys under the contract as it is written and as both parties have performed it. A significant fraction of Essex's advantage is directly attributable to the corresponding out of pocket losses ALCOA suffers. ALCOA has sufficiently shown that without judicial relief or economic changes which are not presently foreseeable, it stands to lose in excess of $75,000,000 out of pocket, during the remaining term of the contract.

B.

ALCOA's Warrick Works, located in Indiana, are the designated source of supply. The Essex plant, where the bulk of the aluminum is used, is also located in Indiana. Essex takes delivery at the Warrick Works.

The contract declares "This Agreement shall be governed and interpreted in accordance with the laws of the State of Indiana." The parties surely have sufficient contacts with the State of Indiana that Pennsylvania courts would enforce their agreement respecting the application of Indiana law. Restatement 2d Conflict of Laws § 187; cf. 13 Pa.C.S.A. § 1105(1) (U.C.C.). This Court must enforce it as well. Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941).

This case presents many issues which are governed by common law principles. Most fall within the interstices of the reported decisions of Indiana courts. Some touch principles announced in hoary Indiana decisions. Where the Indiana law remains undeclared, or where the declaration is far from current, the obligation of this Court is to discern the most probable state of current Indiana law for "the outcome of the litigation in the federal court should be substantially the same, so far as legal rules determine the outcome of a litigation, as it would be if tried in a State court." Guaranty Trust Co. v. York, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079 (1945); see Commissioner v. Estate of Bosch, 387 U.S. 456, 465, 87 S.Ct. 1776, 1782, 18 L.Ed.2d 886, 893-94 (1967); Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S.Ct. 273, 100 L.Ed. 199 (1956); McKenna v. Ortho Pharmaceutical Corp., 622 F.2d 657 (3rd Cir. 1980). In connection with these observations, the Court notes that the appellate courts of Indiana appear to join in the habits of thought and in the assessments of policy which have lately prevailed in most of the fine courts in this nation. The Indiana courts have joined the throng of state courts in (i) declaring that residential landlords are bound by an implied warranty of habitability. Old Town Development v. Langford, 349 N.E.2d 744 (Ind.App.1976); (ii) adopting the rule of strict products liability from the Restatement 2d of Torts § 402A, Perfection Paint & Color Co. v. Konduris, 258 N.E.2d 681 (Ind.App.1970); (iii) adopting the increasingly prevalent view that harsh or unconscionable provisions in contracts of adhesion may be refused enforcement, Weaver v. American Oil Co., 276 N.E.2d 144 (Ind.1971).

C.

ALCOA initially argues that it is entitled to relief on the theory of mutual mistake. ALCOA contends that both parties were mistaken in their estimate of the suitability of the WPI-IC as an objective index of ALCOA's non-labor production costs, and that their mistake is legally sufficient to warrant modification or avoidance of ALCOA's promise. Essex appropriately raised several defenses to these claims. Essex first argues that the asserted mistake is legally insufficient because it is essentially a mistake as to future economic events rather than a mistake of fact. Essex next argues that ALCOA assumed or bore the risk of the mistake. Essex finally argues that the requested remedy of reformation is not available under Indiana law.^[1]

The late Professor Corbin wrote the best modern analysis of the doctrine of mutual mistake. Corbin took pains to show the great number and variety of factors which must be considered in resolving claims for relief founded on the doctrine of mistake, and to show the inappropriateness of any single verbal rule to govern the decision of mistake cases. Corbin on Contracts § 597 at 582-83 (1960).

The present case involves a claimed mistake in the price indexing formula. This is clearly a mistake concerning a factor affecting the value of the agreed exchange. Of such mistakes Corbin concluded that the law must consider the character of the risks assumed by the parties. Id. at § 605. He further concluded:

In these cases, the decision involves a judgment as to the materiality of the alleged factor, and as to whether the parties made a definite assumption that it existed and made their agreement in the belief that there was no risk with respect to it. Opinions are almost sure to differ on both of these matters, so that decisions must be, or appear to be, conflicting. The court's judgment on each of them is a judgment on a matter of fact, not a judgment as to law. No rule of thumb should be constructed for cases of this kind. 3 Corbin on Contracts § 605 at p. 643 (1960).

The new Restatement 2d of Contracts follows a similar approach. After defining "mistake" as "a belief not in accord with the facts," § 293,^[2] the Restatement declares:

§ 294. WHEN MISTAKE OF BOTH PARTIES MAKES A CONTRACT VOIDABLE.

(1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 296.

(2) In determining whether this mistake has a material affect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.^[3]

Both Professor Corbin and the Restatement emphasize the limited place of the doctrine of mistake in the law of contracts. They, along with most modern commentators, emphasize the importance of contracts as devices to allocate the risks of life's uncertainties, particularly economic uncertainties. Where parties to a contract deliberately and expressly undertake to allocate the risk of loss attendant on those uncertainties between themselves or where they enter a contract of a customary kind which by common understanding, sense, and legal doctrine has the affect of allocating such risks, the commentators and the opinions are agreed that there is little room for judicial relief from resulting losses. Corbin on Contracts § 598 and authorities there cited. The new Restatement agrees, § 296. This is, in part, the function of the doctrine of assumption of the risk as a limitation of the doctrine of mistake. Whether ALCOA assumed the risk it seeks relief from is at issue in this case. The doctrine of assumption of the risk is therefore considered below. The important point to note here is that the doctrine of assumption of the risk is not the only risk allocating limitation on the doctrine of mistake. Other important risk allocating limitations are inherent in the doctrine of mistake itself. They find expression in the cases and treatises in declarations that there has been no mistake, or no legally cognizable mistake, or a mistake of the wrong sort.

ALCOA claims that there was a mutual mistake about the suitability of the WPI-IC as an index to accomplish the purposes of the parties. Essex replies that the mistake, if any, was not a mistake of fact, but it was rather a mistake in predicting future economic conditions. Essex asserts that such a mistake does not justify legal relief for ALCOA. The conflicting claims require the Court to resolve three questions: (1) Was the mistake one of "fact" as the cases and commentators use that word? (2) If so, was it of the sort of fact for which relief could be granted? (3) If the mistake was not one of "fact", is relief necessarily foreclosed?

The initial question requires the characterization, as a matter of fact rather than of law, of the claimed mistake. The cases and commentaries contain useful thoughts and analagous problems which aid in this characterization. But the characterization is itself a question of fact. That it may have ultimate legal significance, and that it requires the exercise of judgment does not distinguish this determination from other determinations of fact. The distinction between questions of law and questions of fact is old. Its resolution is often doubtful. No simple and mechanical verbal formula can capture the distinction and resolve the hard cases. Factors affecting the characterization of a question include its suitability for jury or other fact finder determination and its analytical separability from the final determination of legal consequences.^[4] The separation of fact from things which are not fact-opinion, prediction, desire, and the like-is principally a question of common sense or epistemology rather than of law, even when the separation must be done by courts. So it is here. ALCOA calls the mistaken assumption that the index was suitable a factual assumption. Essex calls it a prediction. This is a dispute of facts, not law. Its resolution will affect the decision of this case as factual determinations usually do. The law must be applied to it to yield a result. Neither is this question beyond the usual function and capacity of a jury or other fact finder.

The first restatement of Contracts notes, and the published Tentative Draft No. 10 of the Restatement Second stresses, the distinction between "existing fact" and prediction. See Restatement of Contracts § 502, comment a; Restatement 2d of Contracts § 293. The approved final form of § 293 modifies the emphasis by deleting the word "existing". The Reporter, Professor Farnsworth of the Columbia University School of Law, related the circumstances of that change to the Court when he appeared on behalf of ALCOA.

Q Professor Farnsworth, is there any expression or trend expressed in the new sections on mistake that you have been describing that provide any help in trying to determine the age-old problem of what is an existing fact?

A There has been a change, I don't know how much help it offers. Let me simply tell you the history of it.

In 1975 in May at the annual meeting, the material on mistake was presented, and it led off with a Section 293 which defined the mistake as a belief that is not in accordance with existing facts.

That section was I think not the subject of any discussion, at least not the subject of any discussion involving the word `existing' in that year. The following year there was presented a chapter that is not in the documents that are here in court, but a chapter dealing with, among other things, misrepresentation, and in defining a misrepresentation, there was also a comparable phrase that what you had to misrepresent was an existing fact. At that meeting, there was one speaker who thought that the word `existing' was not desirable and should be deleted. I confess I have re-read the speaker's statement or the transcript of it, and I can provide it if you want it, but I don't find it clear enough that it was helpful to me. I did not think that was a desirable change. I think partly because the preceding year when we had considered `mistake,' the Institute had approved `existing facts,' and I felt rather bound by that earlier decision.

At this point I lose any record in the transcript. My clear recollection is that following the discussion of misrepresentation, a number of people came up to me and later saw me in the hallway and said that they agreed with the speaker that `existing' should be dropped.

It would be fair to say that there were probably as many reasons for dropping it given to me as there were people who had advanced the opinion.

I would suppose at the end at least a dozen people had said they didn't like `existing,' and nobody had defended it. The reporter has the authority to change even the black letter when it is a matter of style, and since I did not bring it back to the Institute for a vote as a matter of substance, I think one would have to say that any change made was considered by the reporter to be a matter of style.

In any event, in response to the small but unanimous body of opinion that didn't like `existing,' it was deleted in the draft that I finally sent off to the editor and it now reads `Belief that is not in accord with the facts.'

I think that there is in the comment still a statement with respect to `existing,' but the deletion from the black letter is at least a change that perhaps permits more flexibility with respect to the line between what is an existing fact or what is a fact and what is a pure presumption which is an extremely difficult line to draw in both cases.

Testimony of E. Allan Farnsworth 20-22 (Emphasis added).

The Comment Professor Farnsworth mentioned declares:

[T]he erroneous belief must relate to the facts as they exist at the time of the making of the contract. A party's prediction or judgment as to events to occur in the future, even if erroneous, is not a `mistake' as that word is defined here.

Corbin and Williston agree in passing, though their analysis emphasizes the various subjects of mistake and the circumstances which influence risk allocation. Cf. Corbin on Contracts § 598; Williston on Contracts § 1541 at 67 (3rd ed. [Jaeger] 1970). Both cite cases declaring erroneous prediction to be beyond the reach of the doctrine of mutual mistake. See Corbin on Contracts § 598; Williston on Contracts § 1543A.

The Court finds the parties' mistake in this case to be one of fact rather than one of simple prediction of future events. Plainly the mistake is not wholly isolated from predictions of the future or from the searching illuminations of painful hindsight. But this is not the legal test. At the time the contract was made both parties were aware that the future was unknown, and their agreed contract was intended to bind them for many years to come. Both knew that Essex sought an objective pricing formula and that ALCOA sought a formula which would cover its out of pocket costs over the years and which would yield it a return of around four cents a pound. Both parties to the contract carefully examined the past performance of the WPI-IC before agreeing to its use. The testimony was clear that each assumed the Index was adequate to fulfill its purpose. This mistaken assumption was essentially a present actuarial error.

The parties took pains to avoid the full risk of future economic changes when they embarked on a twenty-one year contract involving services worth hundreds of millions of dollars. To this end they employed a customary business risk limiting device-price indexing with more than customary sophistication and care. They chose not a single index formula but a complex one with three separate indices. Their care to limit the risk of the future distinguishes this case from cases like Leasco Corporation v. Taussig, 473 F.2d 777 (2nd Cir. 1972). In Leasco the plaintiff corporation contracted to sell to Taussig a subsidiary which engaged in civil engineering and consulting. Taussig was, at the time, the vice-president of the subsidiary. The parties fixed the sales price by capitalizing the anticipated $200,000 earnings of the subsidiary in the year of the sale. Both parties knew that the subsidiary's earnings were volatile. "The civil engineering business is personalized, highly technical, and extremely risky." Id. at 781. But the parties made no provision to limit their risk. In fact the projected $200,000 earnings turned into a $12,000 loss due to a design error in a construction project. The court held that this loss did not make the contract voidable: "[W]e hold that there was no mutual mistake. Both Taussig and Leasco may have hoped, but surely could not have been certain, that [the subsidiary] would earn $200,000 in fiscal 1971.... Neither party could safely assume the projected earnings would be realized." Id.The "fact" which led to the dispute was a prediction. The court characterized the situation as one where the parties realized there was doubt about an important fact and assumed, or more accurately placed on the purchaser, the risk of its existence. See Restatement of Contracts § 502, comment f.

The Taussig decision rested on two legs: the absence of a mistake of "fact" and the assumption of the risk of future uncertainties. The decision was plainly correct. The parties bottomed their agreement on a naked prediction without the protection of conditions or limitations. The only protection for the parties lay in practical matters. Both were well familiar with the business. And the contract was a short term one for the outright sale of the business. In the short term the parties might think they could sensibly risk uncertainties without specific contractual limits. Having made no attempt to limit future uncertainties, the disappointed purchaser could point to no fact which existed when the contract was made which would justify an award of judicial relief.

The contrast between Taussig and the present case is striking. Here the practical necessities of the very long term service contract demanded an agreed risk limiting device. Both parties understood this and adopted one. The capacity of their selected device to achieve the known purposes of the parties was not simply a matter of acknowledged uncertainty like the Taussig prediction. It was more in the nature of an actuarial prediction of the outside limits of variation in the relation between two variable figures-the WPI-IC and the non-labor production costs of ALCOA. Its capacity to work as the parties expected it to work was a matter of fact, existing at the time they made the contract.

This crucial fact was not known, and was scarcely knowable when the contract was made.^[5] But this does not alter its status as an existing fact. The law of mistake has not distinguished between facts which are unknown but presently knowable, e. g. Raffles v. Wichelhaus, 2 H. & C. 906 (1864), and facts which presently exist but are unknowable, e. g. Sherwood v. Walker, 66 Mich. 568, 33 N.W. 919 (1887). Relief has been granted for mistakes of both kinds.

To conclude that the parties contracted upon a mistake of fact does not, by itself, justify an award of judicial relief to ALCOA. Relief can only follow if the mistake was mutual, if it related to a basic assumption underlying the contract, and if it caused a severe imbalance in the agreed exchange.

The doctrine of mistake has long distinguished claims of mutual mistake from claims of unilateral mistake. Corbin on Contracts § 608. The standards for judicial relief are higher where the proven mistake is unilateral than where it is mutual. Compare, e. g. Restatement 2d of Contracts § 294 with § 295.

Essex asserts that ALCOA's mistake was unilateral. Mr. O'Malley, Chairman of the Board of Essex Corporation, testified at trial that he had no particular concern for ALCOA's well-being and that in the negotiations of the contract he sought only Essex's best interests. Essex claims this testimony tends to rebut any possible mutual mistake of fact between the parties. The Court disagrees.

The cases clearly establish that mutual mistake lies in error concerning mutually understood material facts. Leasco Corp. v. Taussig, supra; Baumann v. Florance,267 App.Div. 113, 114, 44 N.Y.S.2d 706 (3d Dept. 1943). The law of mutual mistake is not addressed primarily to motivation or to desire to have a good bargain, such as that credibly testified to by Mr. O'Malley. As Mr. O'Malley struck the bargain for Essex, he understood the function of the Wholesale Price Index, as part of the pricing formula, to be the protection of ALCOA from foreseeable economic fluctuations. He further had every reason to believe that the formula was selected on the factual prediction that it would, within tolerable limits, serve its purpose. While he did not share the motive to protect ALCOA, he understood the functional purposes of the agreement. He therefore shared this mistake of fact. And his mistake was Essex's. The Court recognizes that Mr. O'Malley and Essex would cheerfully live with the benefit of their mistake, but the law provides otherwise. As a matter of law Mr. O'Malley's testimony of Essex's indifference concerning ALCOA's motivation for the use of the Wholesale Price Index as a gauge for tracking non-labor costs is immaterial.

Is it enough that one party is indifferent to avoid a mutual mistake? The Court thinks not. This situation resembles that in Sherwood v. Walker, supra, the celebrated case of Rose of Aberlone. There the owner of a prize breeding cow sold her for slaughter at the going rate for good slaughter cattle. The owner had unsuccessfully tried to breed her and had erroneously concluded she was sterile. In fact she was pregnant at the time of the sale and she was much more valuable for breeding than for slaughter. There as here, the buyer was indifferent to the unknown fact; he would have been pleased to keep the unexpected profit. But he understood the bargain rested on a presumed state of facts. The court let the seller avoid the contract because of mutual mistake of fact.

In Sherwood, the buyer didn't know the highly pedigreed Rose was with calf. He probably could not have discovered it at the time of the sale with due diligence. Here the parties could not possibly have known of the sudden inability of the Wholesale Price Index to reflect ALCOA's non-labor costs. If, over the previous twenty years, the Wholesale Price Index had tracked, within a 5% variation, pertinent costs to ALCOA, a 500% variation of costs to Index must be deemed to be unforeseeable, within any meaningful sense of the word.

Essex has not seriously argued that the mistake does not relate to an assumption which is basic to the contract. The relation is clear. The assumed capacity of the price formula in a long term service contract to protect against vast windfall profits to one party and vast windfall losses to the other is so clearly basic to the agreement as to repel dispute. While the cases often assert that a mistake as to price or as to future market conditions will not justify relief, this is not because price assumptions are not basic to the contracts. Instead, relief is denied because the parties allocated the risk of present price uncertainties or of uncertain future market values by their contract. Where a "price mistake" derives from a mistake about the nature or quantity of an object sold, the courts have allowed a remedy; they have found no contractual allocation of that sort of risk of price error. Indiana cases hold that where land is sold as a tract for a set price, and it later appears that there was a material error in the parties' estimate of the quantity of land conveyed, the court will correct the error by adjusting the price, McMahan v. Terkhorn, 67 Ind.App. 501, 116 N.E. 327 (1917), or by allowing rescission, Earl v. VaNatta, 29 Ind. App. 532, 64 N.E. 901 (1902). See Corbin on Contracts §§ 604-05. Similarly many cases allow relief from unilateral price errors by construction contractors. An Indiana decision reached this result. Board of School Comm'rs v. Bender, 36 Ind.App. 164, 72 N.E. 154 (1904). See Corbin on Contracts § 609. Restatement 2d of Contracts § 295, comment a. These cases demonstrate that price assumptions may be basic to the contract.

Essex concedes that the result of the mistake has a material effect on the contract and that it has produced a severe imbalance in the bargain. See Restatement 2d of Contracts § 294, comment c. The most that Essex argues is this: ALCOA has not proved that enforcement of the contract would be unconscionable. Essex correctly points out that at the time of the trial ALCOA had shown a net profit of $9 million on the contract. Essex further argues that ALCOA has failed to prove that it ever will lose money on the contract, and that such proof would require expert testimony concerning future economic values and costs. These arguments are insufficient.

The evidence shows that during the last three years ALCOA has suffered increasingly large out of pocket losses.^[6] If the contract were to expire today that net profit of $9 million would raise doubts concerning the materiality of the parties' mistake. But even on that supposition, the court would find the mistake to be material because it would leave ALCOA dramatically short of the minimum return of one cent per pound which the parties had contemplated.

But the contract will not expire today. Essex has the power to keep it in force until 1988. The Court rejects Essex's objection to the absence of expert testimony concerning future costs and prices. The objection is essentially based on the traditional refusal of courts to award speculative damages. But Essex presses the argument too far. The law often requires courts to make awards to redress anticipated losses. The reports are filled with tort and contract cases where such awards are made without the benefit of expert testimony concerning future economic trends. Awards are commonly denied because they are too speculative where there is a claim for lost future profits and there is insufficient evidence of present profits to form a basis for protecting future profits.

Similarly the courts often decline to speculate concerning future economic trends in calculating awards for lost future earnings. Many states refuse to consider any possibility of future inflation in calculating such awards despite the presence of expert testimony and the teachings of common experience. Compare Havens v. Tonner, 243 Pa. Super. 371, 365 A.2d 1271 (1976) and Vizzini v. Ford Motor Co.,569 F.2d 754, 768 (3rd Cir. 1977), with Feldman v. Allegheny Airlines, 382 F.Supp. 1271 (D.Conn.1974), aff'd in part, rev'd in part, 524 F.2d 384 (2nd Cir. 1975). This demonstrates the law's healthy skepticism concerning the reliability of expert predictions of economic trends. Where future predictions are necessary, the law commonly accepts and applies a prediction that the future economy will be much like the present (except that inflation will cease). Since some prediction of the future is inescapable in this case, that commonly accepted one will necessarily apply.^[7] On that prediction, ALCOA has proved that over the entire life of the contract it will lose, out of pocket, in excess of $60 million, and the whole of this loss will be matched by an equal windfall profit to Essex.^[8] This proof clearly establishes that the mistake had the required material effect on the agreed exchange. Indeed, if this case required a determination of the conscionability of enforcing this contract in the current circumstances, the Court would not hesitate to hold it unconscionable.

Essex next argues that ALCOA may not be relieved of the consequences of the mistake because it assumed or bore the risk of the market. Essex relies on both Restatements and on a variety of cases fairly typified by Leasco Corp. v. Taussig, supra; McNamara Const. of Manitoba Ltd. v. United States, 509 F.2d 1166 (Ct.Cl.1963), and Flippin Materials Co. v. United States, 312 F.2d 408 (Ct.Cl.1963). McNamara Construction involved a fixed price construction contract which was upset by extensive labor strife. The Court of Claims denied the contractor relief from its extra costs, holding, inter alia, that the contractor had been aware of the risk of labor trouble when it entered the contract; that the contract expressly provided for delay caused by strikes; and that in the absence of some further express provision the contractor bore the risk of the cost of strikes and labor cost increases. The court declared: "What we have in this case is a risk which is known to both parties and results from human inability to predict the future. The authorities are unanimous in distinguishing such risks from bona fide mutual mistakes of fact." Id. at 1168.

In Flippin Materials Co. v. United States, supra, the plaintiff sought relief from unexpected costs it suffered in a contract to quarry limestone from a mountain and to process it into aggregate. The costs derived from the presence of unexpected amounts of waste material at the quarry site. The Court of Claims held that the plaintiff could not claim relief on a mutual mistake theory because the contract clearly put the risk of unknown subsurface conditions on the plaintiff. The contract offer made the government's geological findings available to the bidders and it further provided:

GC-2 SITE INVESTIGATION AND REPRESENTATIONS:

The contractor acknowledges that he has satisfied himself as to the nature and location of the work, the general and local conditions, particularly those bearing upon ... conformation and condition of the ground, the character, quality and quantity of surface and subsurface materials to be encountered ... and all other matters which can in any way affect the work or the cost thereof under this contract. Any failure by the contractor to acquaint himself with all the available information concerning these conditions will not relieve him from responsibility for estimating properly the difficulty or cost of successfully performing the work. Id. at 415.

The court declared that relief for mutual mistake is not available "if the contract puts the risk of such a mistake on the party asking reformation ... or normally if the other party, though made aware of the correct facts, would not have agreed at the outset to the change...." Id.

The Restatements and these cases reveal four facets of risk assumption and risk allocation under the law of mistake. First, a party to a contract may expressly assume a risk. If a contractor agrees to purchase and to remove 114,000 cubic yards of fill from a designated tract for the landowner at a set price "regardless of subsurface soil and water conditions" the contractor assumes the risk that subsurface water may make the removal unexpectedly expensive.

Customary dealing in a trade or common understanding may lead a court to impose a risk on a party where the contract is silent. Often the result corresponds to the expectation of both parties, but this will not always be true. See Berman, Excuse for Nonperformance in the Light of Contract Practices in International Trade, 63 Colum.L.Rev. 1413, 1420-24 (1963). At times legal rules may form the basis for the inferred common understanding. Equity traditionally put the risk of casualty losses on the purchaser of land while the purchase contract remained executory. This allocation was derived from the doctrine of equitable conversion. "Equity regards as done that which ought to be done." The rule could always be modified by express agreement. It survives today—where it does survive^[9] largely by reason of its acceptance as part of the common expectations of real estate traders and their advisors.

Third, where neither express words nor some particular common understanding or trade usage dictate a result, the court must allocate the risk in some reasoned way. Two examples from the Restatement 2d of Contracts § 296 illustrate the principle. A farmer who contracts to sell land may not escape the obligation if minerals are discovered which make the land more valuable. And in the case of the sale of fill stated above, if there is no express assumption of the risk of adverse conditions by the contractor, he may still bear the risk of losing his expected profits and suffering some out of pocket losses if some of the fill lies beneath the water table. These cases rest on policies of high generality. Contracts are-generally-to be enforced. Land sales are-generally-to be treated as final.

Fourth, where parties enter a contract in a state of conscious ignorance of the facts, they are deemed to risk the burden of having the facts turn out to be adverse, within very broad limits. Each party takes a calculated gamble in such a contract. Because information is often troublesome or costly to obtain, the law does not seek to discourage such contracts. Thus if parties agree to sell and purchase a stone which both know may be glass or diamond at a price which in some way reflects their uncertainty, the contract is enforceable whether the stone is in fact glass or diamond. If, by contrast, the parties both mistakenly believe it to be glass, the case is said not to be one of conscious ignorance but one of mutual mistake. Consequently the vendor may void the contract.

In this case Essex raises two arguments. First, it asserts that ALCOA expressly or by fair implication assumed the risk that the WPI-IC would not keep up with ALCOA's non-labor production costs. Second, it asserts that the parties made a calculated gamble with full awareness that the future was uncertain, so the contract should be enforced despite the mutual mistake. Both arguments are correct within limits, and within those limits they affect the relief ALCOA may receive. Both arguments fail as complete defenses to ALCOA's claim.

Essex first asserts that ALCOA expressly or implicitly assumed the risk that the WPI-IC would not track ALCOA's non-labor production costs. Essex asserts that ALCOA drafted the index provision; that it did so on the basis of its superior knowledge of its cost experience at the Warrick Works; and that ALCOA's officials knew of the inherent risk that the index would not reflect cost changes. Essex emphasizes that, during the negotiation of the contract, it insisted on the inclusion of a protective "ceiling" on the indexed price of ALCOA's services at 65% of a specified published market price. Essex implies that ALCOA could have sought a corresponding "floor" provision to limit its risks.

Essex' arguments rely on two ancient and powerful principles of interpretation. The first is reflected in the maxim "expressio unius est exclusio alterius." The second is the principle that a contract is to be construed against its drafter. To agree to an indexed price term subject to a ceiling but without a floor is to make a deliberate choice, Essex argues. It is to choose one principle and to reject another. The argument is plausible but not sufficient. The maxim rules no farther than its reason, and its reason is simply this: often an expression of a rule couched in one form reflects with high probability the rejection of a contradictory rule. Less often it reflects a probable rejection of a supplementary rule. To know if this is true of a particular case requires a scrupulous examination of the thing expressed, the thing not expressed, and the context of the expression. The question here is precisely this: By omitting a floor provision did ALCOA accept the risk of any and every deviation of the selected index from its costs, no matter how great or how highly improbable? The course of dealing between the parties repels the idea. Essex and ALCOA are huge industrial enterprises. The management of each is highly trained and highly responsible. The corporate officers have access to and use professional personnel including lawyers, accountants, economists and engineers. The contract was drafted by sophisticated, responsible businessmen who were intensely conscious of the risks inherent in long term contracts and who plainly sought to limit the risks of their undertaking. The parties' laudable attention to risk limitation appears in many ways: in the complex price formula, in the 65% ceiling, in the "most favored customer" clause which Essex wrote into the contract, and in the elaborate "force majeur" clause favoring ALCOA. It appears as well in the care and in the expense of the negotiations and drafting process. Essex negotiated with several aluminum producers, seeking a long term assured supply, before agreeing to the ALCOA contract. Its search for an assured long term supply for its aluminum product plants itself bespeaks a motive of limiting risks. Essex settled on ALCOA's offer rather than a proffered joint venture on the basis of many considerations including the required capital, engineering and management demands of the joint venture, the cost, and the comparative risks and burdens of the two arrangements. When ALCOA proposed the price formula which appears in the contract, Essex's management examined the past behavior of the indices for stability to assure they would not cause their final aluminum cost to deviate unacceptably from the going market rate. ALCOA's management was equally attentive to risk limitation. They went so far as to retain the noted economist Dr. Alan Greenspan as a consultant to advise them on the drafting of an objective pricing formula. They selected the WPI-IC as a pricing element for this long term contract only after they assured themselves that it had closely tracked ALCOA's non-labor production costs for many years in the past and was highly likely to continue to do so in the future. In the context of the formation of the contract, it is untenable to argue that ALCOA implicitly or expressly assumed a limitless, if highly improbable, risk. On this record, the absence of an express floor limitation can only be understood to imply that the parties deemed the risk too remote and their meaning too clear to trifle with additional negotiation and drafting.

The principle that a writing is to be construed against its maker will not aid Essex here. That principle once sounded as a clarion call to retrograde courts to pervert agreements if they could. Today it is happily domesticated as a rule with diverse uses. In cases involving issues of conscience or of strong policy, such as forfeiture cases, the principle complements the familiar doctrine of strict construction to favor lenient results. In other cases it serves as an aid in resolving otherwise intractable ambiguities. This case presents neither of these problems. The question of defining the risks ALCOA assumed is one of interpretation. It implicates no strong public policy. Neither does it present an intractable ambiguity.

Neither is this a case of "conscious ignorance" as Essex argues. Essex cites many cases which establish the general rule that mistaken assumptions about the future are not the sort of mistaken assumptions which lead to relief from contractual duties. Leasco Corp. v. Taussig, supra, is typical of these cases. The general rule is in fact as Essex states it. But that rule has limited application. The new Restatement notes that the rule does not apply where both parties are unconscious of their ignorance—that is, where both mistakenly believe they know the vital facts. See § 296 Comment C. Compare White v. Stelloh, 74 Wis. 435, 43 N.W. 99 (1889) and Backus v. MacLaury, 278 App.Div. 504, 106 N.Y.S.2d 401 (1951) with Sherwood v. Walker, supra. See Corbin on Contracts §§ 598, 605.

This distinction is sufficient to settle many cases but it is framed too crudely for sensible application to cases like the present one. The distinction posits two polar positions: certain belief that a vital fact is true and certain recognition that a vital fact is unknown. Such certainties are seldom encountered in human affairs. They are particularly rare in the understanding of sophisticated businessmen. In Taussigthe parties anticipated the subsidiary would earn $200,000 in the year of the sale. Had anyone asked them whether they were certain of that prediction, they would surely have answered that such predictions are always made with the recognition of a range of uncertainty. The prediction indicates that the parties believe there is a good chance that the earnings will lie between $175,000 and $225,000 and a very high probability that they will lie between $100,000 and $300,000. If pressed, the parties might agree that there could be a new loss for the year. But they would regard a loss as very highly unlikely.^[10] Of course predictions of future earnings must be viewed skeptically because the people who make them are often vitally interested in their contents and in their uses.

The same notion of a range of uncertainty is not unknown to Indiana law. In McMahan v. Terkhorn, supra, the parties contracted to purchase and to sell a tract of land which they thought to contain 133 acres for $15,000. Before the date for performance the purchaser had the land surveyed. The surveyor reported the tract contained 104.52 acres. The parties then adjusted the purchase price to $12,000 and completed the conveyance on that basis. Later the vendor learned the survey was wrong; the tract contained 129 acres. He then sued for and won the value of the "excess" land conveyed. The court distinguished between the normal range of survey error which parties are deemed to expect and to risk, and gross errors for which a remedy is available. Accord, Harrison v. Talbot, 32 Ky. 258, 2 Dana 258 (Ky.1834); Nelson v. Matthews, 12 Va. 164 (1808); Quesnel v. Woodlief, 10 Va. (5 Call.) 218 (1796).

Once courts recognize that supposed specific values lie, and are commonly understood to lie, within a penumbra of uncertainty, and that the range of probability is subject to estimation, the principle of conscious uncertainty requires reformulation. The proper question is not simply whether the parties to a contract were conscious of uncertainty with respect to a vital fact, but whether they believed that uncertainty was effectively limited within a designated range so that they would deem outcomes beyond that range to be highly unlikely. In this case the answer is clear. Both parties knew that the use of an objective price index injected a limited range of uncertainty into their projected return on the contract. Both had every reason to predict that the likely range of variation would not exceed three cents per pound. That is to say both would have deemed deviations yielding ALCOA less of a return on its investment, work and risk of less than one cent a pound or of more than seven cents a pound to be highly unlikely. Both consciously undertook a closely calculated risk rather than a limitless one. Their mistake concerning its calculation is thus fundamentally unlike the limitless conscious undertaking of an unknown risk which Essex now posits.

What has been said to this point suffices to establish that ALCOA is entitled to some form of relief due to mutual mistake of fact. But the stakes in this case are large, and the chances of review by higher courts are high. Therefore the Court thinks it appropriate to rule on two other theories which ALCOA presented in support of its first count.

D.

ALCOA argues that it is entitled to relief on the grounds of impracticability and frustration of purpose. The Court agrees.

In broad outline the doctrines of impracticability and of frustration of purpose resemble the doctrine of mistake. All three doctrines discharge an obligor from his duty to perform a contract where a failure of a basic assumption of the parties produces a grave failure of the equivalence of value of the exchange to the parties. And all three are qualified by the same notions of risk assumption and allocation. The doctrine of mistake of fact requires that the mistake relate to a basic assumption on which the contract was made. The doctrine of impracticability requires that the non-occurrence of the "event", Restatement 2d of Contracts § 281,^[11] or the non-existence of the "fact", Id. § 286, causing the impracticability be a basic assumption on which the contract is made. The doctrine of frustration of purpose similarly rests on the same "non-occurrence" or "non-existence", "basic assumption" equation. Id. §§ 285,^[12] 286.^[13]

The three doctrines further overlap in time. There may be some residual notion that the doctrine of frustration and impracticability relate to occurrences after the execution of the contract while the doctrine of mistake relates to facts as they stand at the time of execution. But that view has never won general acceptance. The first Restatement does not specifically limit the mistakes of fact for which relief may be granted to facts existing at the time of the contract. §§ 500, 502. Corbin and Williston do not suggest such a limitation. And the new Restatement equivocates on the point. Section 293 defines "mistake" as "a belief that is not in accord with the facts." The word "existing" modified the word "facts" in Tentative Draft Number 10 but was deleted by the Reporter. Comment a to the section does declare:

[T]he erroneous belief must relate to the facts as they exist at the time of the making of the contract. A party's prediction or judgment as to events to occur in the future, even if erroneous, is not a `mistake' as that word is defined here.

This declaration is anomalous and unexplained. The Court believes the definition rather than the comment expresses the better rule. The denial of relief for mistakes of future facts is better understood to rest on policies of risk allocation discussed above than to rest on the definition of "mistake."

National Presto Industries, Inc. v. United States, 338 F.2d 99 (Ct.Cl.1964), is a prime example of the application of the doctrine of mistake to developments after the execution of the contract. There the corporation contracted to produce artillery shells for the Army at a fixed price, using a new and only partially proven production method. The method was contrived to reduce wasted steel by eliminating the need for shaving excess metal from the shells. After the contract was signed, the corporation spent large sums of money in unsuccessful attempts to make the method work. Eventually it became clear that some shaving would be required. The corporation purchased the necessary equipment and paid for the materials and labor. Then it sought and obtained relief in the Court of Claims for its added expense. The court held that there had been an actionable mutual mistake of fact. The assumed capacity of the new method to produce shells without a shaving step proved to be mistaken.^[14] The court based its decision solely on mistake of fact. It does not appear that frustration or impracticability were considered.

Conversely the notion that the doctrines of frustration and impracticability apply only to events occurring after the execution of a contract appear to be drawn more from common experience with their application than from any inherent limitation of those doctrines. Nothing in the language of the first Restatement limits the doctrine to events occurring after the execution of the contract, though all three illustrations involve such supervening events. § 288. The new Restatement recognizes that circumstances existing at the execution of a contract may render performance impracticable or they may frustrate the purpose of one of the parties so as to excuse his performance. § 286.

Thus there is a substantial area of similarity between the three doctrines. Within that area, the findings and holdings with respect to the claim of mistake also apply to the claims of impracticability and frustration. It requires no further discussion to establish that the non-occurrence of an extreme deviation of the WPI-IC and ALCOA's non-labor production costs was a basic assumption on which the contract was made. And it is clear that ALCOA neither assumed nor bore the risk of the deviation beyond the foreseeable limits of risk.

The court must still consider those aspects of doctrines of frustration and impracticability which differ from the doctrine of mistake. In the Foreward to Tentative Draft No. 10 of the New Restatement, Professor Wechsler wrote, "Cases involving impracticability or frustration ... involve mistake but to the extent that the focus is on hardships to the adversely affected party [they receive separate treatment]."

The focus of the doctrines of impracticability and of frustration is distinctly on hardship. Section 281 declares a party is discharged from performing a contract where a supervening event renders his performance impracticable. Comment d discusses the meaning of "impracticability." The comment states the word is taken from Uniform Commercial Code § 2-615(a). It declares that the word denotes an impediment to performance lying between "impossibility" and "impracticality".

Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved....

A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover. Restatement 2nd Contracts § 281 com. (d).

Similarly, § 285 declares a party is discharged from performing his contract where his principal purpose is substantially frustrated by the occurrence of a supervening event. The extent of the necessary frustration is further described in comment a: "[T]he frustration must be substantial. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract."

Professor Corbin explained this requirement of a severe disappointment by relating this doctrine to the broad public policies that parties should generally be required to perform their contracts.

Variations in the value of a promised performance, caused by the constantly varying factors that affect the bargaining appetites of men, are the rule rather than the exception. Bargainers know this and swallow their losses and disappointments, meantime keeping their promises. Such being the business mores, court decisions that are not in harmony with them will not make for satisfaction or prosperity. Relief from duty, outside of the bankruptcy court, can safely be granted on the ground of frustration of purpose by the rise or fall of values, only when the variation in value is very great and is caused by a supervening event that was not in fact contemplated by the parties and the risk of which was not allocated by them. Corbin on Contracts § 1355.

This strict standard of severe disappointment is clearly met in the present case. ALCOA has sufficiently proved that it will lose well over $60 million dollars out of pocket over the life of the contract due to the extreme deviation of the WPI-IC from ALCOA's actual costs.^[15]

Is this, then, a case of impracticability, of frustration, or both? The doctrine of impracticability and of frustration focus on different kinds of disappointment of a contracting party. Impracticability focuses on occurrences which greatly increase the costs, difficulty, or risk of the party's performance. Restatement 2d of Contracts § 281.

The doctrine of frustration, on the other hand, focuses on a party's severe disappointment which is caused by circumstances which frustrate his principal purpose for entering the contract.^[16] Restatement 2d of Contracts § 285. The doctrine of frustration often applies to relieve a party of a contract which could be performed without impediment; relief is allowed because the performance would be of little value to the frustrated party. Illustration 1 of the new Restatement—abstracted from the Coronation Cases—typifies this aspect of the doctrine of frustration.

A and B make a contract under which B is to pay A $1,000 and is to have the use of A's window on January 10 to view a parade that has been scheduled for that day. Because of the illness of an important official, the parade is cancelled. B refuses to use the window or pay the $1,000. B's duty to pay $1,000 is discharged, and B is not liable to A for breach of contract.

Nothing impedes the full performance of this contract. B is able to pay $1,000 and to use the window despite the cancellation of the parade. But B's purpose—to observe the spectacle—has been frustrated.

In the present case ALCOA has satisfied the requirements of both doctrines. The impracticability of its performance is clear. The increase in its cost of performance is severe enough to warrant relief, and the other elements necessary for the granting of relief have been proven. Essex argues that the causes of ALCOA's losses are due to market price increases to which the doctrine of impracticability does not apply. The doctrine of impracticability of the new Restatement is one of recent evolution in the law. The first Restatement used the term as part of the definition of "impossibility." The interesting legal evolution from the strict standards of impossibility, evident at least by dictum in Parradine v. Jane, Aleyn, 26 (1647, K.B.), to modern standards of impracticability is traced in Professor Gilmore's The Death of Contract 35-90 (1974). The drafters of the Uniform Commercial Code adopted this line of development, particularly in § 2-615. The new Restatement expressly draws upon § 2-615 in defining the scope of the doctrine. § 281 comments reporter's notes. The official comment to § 2-615 lends strength to Essex's claim.

1. This section excuses a seller from timely delivery of goods contracted for, where his performance has become commercially impracticable because of unforeseen supervening circumstances not within the contemplation of the parties at the time of contracting.

. . . . .

However,

4. Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance is within the contemplation of this section.

Several of the cases cited by Essex rely on comment 4 in denying claims for relief. Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C.Cir.1966); Publicker Industries, Inc. v. Union Carbide Corp., 17 UCC Rep. 989 (E.D.Pa.1975); Eastern Air Lines, Inc. v. Gulf Oil Corp., 415 F.Supp. 429 (S.D.Fla.1975); Maple Farms, Inc. v. City School District, 76 Misc.2d 1080, 352 N.Y.S.2d 784 (1974); Iowa Elec. Light & Power Co. v. Atlas Corp., supra. Each is distinguishable from the present case in the absolute extent of the loss and in the proportion of loss involved.

In Publicker Industries, the defendant Union Carbide had contracted in 1972 to sell ethanol in specified quantites over a three year period to the plaintiff. The price was set by a formula, adjusted annually to reflect the seller's cost for raw materials, and subject to a ceiling on adjustment increases. The raw materials were derivatives of natural gas; their price soared beginning in 1973 as did ALCOA's energy costs. The seller's costs for ethanol rose from 21.2 cents a gallon in 1973 to 37.2 cents per gallon in mid-1974. The ceiling contract sales price was then 26.5 cents per gallon. The seller's loss of 10.7 cents per gallon led to a projected aggregate loss of $5.8 million. The court refused to relieve the seller. It found that the ceiling provision constituted an intentional allocation of the "risk of a substantial and unforeseen rise in cost" to the seller. It based this finding in part on the twenty-five percent rise in prices by OPEC in 1971 which made future cost increases highly foreseeable. The court addressed the degree of loss issue, declaring:

We are not aware of any cases where something less than a 100% cost increase has been held to make a seller's performance `impracticable.'

... `[T]here must be more of a variation between expected cost and the cost of performing by an available alternative than is present in this case, where the promisor can legitimately be presumed to have accepted some degree of abnormal risk, and where impracticability is urged on the basis of added expense alone.'^[17] Id. at 992.

Publicker Industries is clearly distinguishable from the present case respecting the degree of loss which the seller suffered in comparison to what it foresaw at the time of contracting. The fact that the Publicker contract was made after the substantial price increase of 1971 may justify the court's finding that the seller had assumed the risk of further large price increases. The contract in the present case antedated the 1971 price increase. There is no similar factual basis for finding that ALCOA assumed the risk of the full loss which it is experiencing.

Transatlantic Financing Corp. v. United States, supra, was one of the "Suez" cases. The carrier had contracted to transport a cargo from the United States to Iran for a specified price. The contract did not specify the route, but both parties knew the most direct route was by way of Suez. When the Canal was closed the carrier had to divert its ships around Cape Horn, adding three thousand miles to the expected ten thousand mile voyage, and adding an expense of about $44,000 to the contract price of about $306,000. Judge J. Skelly Wright, for a unanimous panel, found that "circumstances surrounding the contract indicate that the risk of the Canal's closure may be deemed to have been allocated to Transatlantic." But he found this conclusion doubtful enough to cause him to reject a direct application of the risk allocation rule. He went on:

The surrounding circumstances do indicate, however, a willingness by Transatlantic to assume abnormal risks, and this fact should legitimately cause us to judge the impracticability of performance by an alternate route in stricter terms than we would were the contingency unforeseen. Id. at 318-19.

Judge Wright then held, in the passage quoted in Publicker Industries, supra, that there must be more than a twelve percent cost increase to constitute impracticability.

Here ALCOA's loss is more than a thousand times greater than the carrier's loss. And the circumstances surrounding the contract show a deliberate avoidance of abnormal risks.

Maple Farms, Inc. v. City School District, supra, follows much the same pattern. The plaintiff contracted to supply milk to the school district for the 1973-74 school year at a fixed price. During the three years prior to the contract, the price of raw milk had increased twelve percent. It had increased 9.5% from a 1972 low to the making of the contract. Consumer prices generally had increased even more. From the making of the contract in June, 1973 until December, 1973 the price increased another 23% resulting in an over-all loss to the plaintiff of $7,350.55. The plaintiff's total cost in December, 1973 exceeded the contract price per half-pint by 10.4%. The court relied on Comment 4 to § 2-615 and on Transatlantic Financing in denying the plaintiff relief. The court emphasized that the price increase was foreseeable when the contract was made, and that the contract was intended to guard against price fluctuation. The court concluded:

There is no precise point, though such could conceivably be reached, at which an increase in the price of raw goods above the norm would be so disproportionate to the risk assumed as to amount to `impracticality' [sic] in a commercial sense. However we cannot say on these facts that the increase here has reached the point of `impracticality' in performing this contract in light of the risks that we find were assumed by the plaintiff. Id. at 790.

Eastern Air Lines Inc. v. Gulf Oil Corp., supra, follows the pattern of these cases except in one detail. Gulf had contracted to furnish jet fuel to Eastern in designated cities from June 1972 until January 31, 1977. The price was tied to a specific trade journal report of posted prices for a specified type of domestic oil. During the contract the price of imported oil soared. Domestic oil was subjected to a complex and shifting body of regulations including a "two-tier" price control scheme regulating the price of "old oil" but not the price of "new oil." The specified trade journal reacted to the new system by publishing prices only for the regulated "old oil." Gulf sought to escape the burden of its contract and Eastern sued to compel Gulf to perform it.

The court required Gulf to perform the contract. It found that Gulf had failed to prove its defense. The "cost" figures in evidence included built in intra-company profits such that the court could not "determine how much it costs Gulf to produce a gallon of jet fuel for sale to Eastern, whether Gulf loses money or makes a profit on its sale of jet fuel to Eastern, either now or at the inception of the contract, or at any time in between." Id. at 440. Thus Gulf failed to prove it had suffered losses on the contract.

In the course of the decision the court declared that relief was available under § 2-615 for an unforeseeable failure of a pre-supposed condition. It inferred this requirement from Comment 8 to § 2-615^[18] and from the Suez cases. If it were generally adopted, this requirement would reduce the occasions for excusing performance under § 2-615. Judge Wright rejected such a requirement in Transatlantic Financing, declaring:

Foreseeability or even recognition of a risk does not necessarily prove its allocation.... Parties to a contract are not always able to provide for all the possibilities of which they are aware, sometimes because they cannot agree, often simply because they are too busy. Moreover, that some abnormal risk was contemplated is probative but does not necessarily establish an allocation of the risk of the contingency which actually occurs. 363 F.2d at 318.

The question is important in the developing doctrine of impracticability. The Indiana cases are silent on it. The Court believes that Indiana courts would find Judge Wright's approach is more in keeping with the spirit and purpose of the Uniform Commercial Code than is the strict approach of Judge King in Eastern Air Lines.The Code, embodied in Title 26, Burns Ind.Stat. Ann. (1974) seeks to accommodate the law to sound commercial sense and practice. Courts must decide the point at which the community's interest in predictable contract enforcement shall yield to the fact that enforcement of a particular contract would be commercially senseless and unjust. The spirit of the Code is that such decisions cannot justly derive from legal abstractions. They must derive from courts sensitive to the mores, practices and habits of thought in the respectable commercial world.

If it were important to the decision of this case, the Court would hold that the foreseeability of a variation between the WPI-IC and ALCOA's costs would not preclude relief under the doctrine of impracticability. But the need for such a holding is not clear, for the Court has found that the risk of a wide variation between these values was unforeseeable in a commercial sense and was not allocated to ALCOA in the contract.

The Court holds that ALCOA is entitled to relief under the doctrine of impracticability. The cases Essex relies on and the other cases discovered by the Court are all distinguishable with respect to the gravity of harm which the aggrieved contracting party was liable to suffer. Except for Transatlantic Financing,they are also distinguishable with respect to the question of allocation of the risk, inferred from the circumstances known to the parties at the time of the contract and from the contract terms.

ALCOA's claim of frustration requires more discussion. ALCOA's "principal purpose" in making the contract was to earn money. This purpose has plainly been severely disappointed. The gravity of ALCOA's loss is undisputably sufficient to meet the stern standard for relief. But the question remains whether the law will grant relief for the serious frustration of this kind of purpose, i. e., for the conversion of an expected profit into a serious loss. All of the new Restatement illustrations center on purposes other than making a profit. However most of them bear on some stage of a profit oriented activity. Illustrations 2-7 describe profit oriented business activities which contribute to the success of enterprises though they are not themselves directly profitable. In each, the question is whether the immediate end of this discrete contract is frustrated, without regard to the impact of the frustration on the more remote end of earning profits. Thus illustration 4 involves a lease of a neon sign to a business. A subsequent governmental regulation prohibits illuminating the sign. The Restatement declares the lessee's duty to pay rent to be discharged. Here the lessee's most immediate principal purpose is night-time advertising.

Illustration 6^[19] involves a gasoline station lease. A change in traffic regulations reduces the lessee's business that he can operate only at a substantial loss. The Restatement declares: "If B can still operate a station ... his principal purpose of operating a gasoline station is not substantially frustrated." Here the profit is not deemed the principal purpose of the lessee. The operation of the gas station is that purpose. Why should a court or the Restatement prefer one characterization to the other? Perhaps it is due to the fact that the dispute involves a lease. Professor Corbin notes that this result is generally supported by the leasehold cases but that the reason for the result has changed over the years.

It was formerly thought to be a sufficient reason for making the lessee pay the agreed rent that he promised in general and unlimited terms, when he might have provided against such contingencies in his contract. He has "assumed the risk" by not having the foresight to exclude it in express terms. This reason has long since ceased to be convincing, as is shown by the multitude of cases holding that a promisor's duty is discharged by the supervening events that make his performance impossible. Whether the frustration of the tenant's purposes operates in discharge of his duty depends upon all the circumstances, especially upon the extent of that frustration and the prevailing practices of men in like cases. Professor Corbin clearly associates the result in such cases with the concept of judicial risk allocation. Among the factors entitled to serious consideration by the courts are the lessee's alternative uses of the premises; whether the lease is for a long term or a short term; whether the lessee's special intended use was known to the lessor, and whether that special use was reflected in the rental terms. The common understanding of business people who enter such leases is also important. A business lease is, among other things, the conveyance of a possessory interest in property for a term. Lessors are not commonly understood to insure the success of the business to be conducted on the premises. Williston does not wholly disagree, though he insists that relief should be granted only for "the total or nearly total destruction of the purpose for which, in the contemplation of both parties, the transaction was entered into." Williston on Contracts §§ 1955, 1961 (3d ed. 1978) (Jaeger). In light of this commentary, the Court infers that illustration 6 rests on the particular circumstances of the lease rather than on an implicit limitation of the general language of § 285 which precludes the earning of profits and avoidance (or limitation) of losses from being "the principal purpose" of a party.

In § 1360 Professor Corbin demonstrates that at times courts should treat loss avoidance as a principal purpose of a party. That section deals with frustration of purpose caused by inflationary depreciation of money. Corbin demonstrates that the decisions are not uniform on this subject, but he rejects as reprehensible the nominalist rule that a dollar's a dollar no matter how small. The injustice of the nominalist position was clearly recognized in the case of Anderson v. Equitable Life Assurance Society, 134 L.T. 557, 42 T.L.R. 302 (1926). The facts in Andersonwere these: In 1887 an Englishman in Russia took out a twenty-premium life insurance policy with premiums and benefits payable in German marks. The policy benefit was 60,000 marks. The premiums were paid from 1887 to 1907 and were converted, as both parties understood they would be, into pounds. Their value came to £2,377. The insured died in 1922 at the height of the German hyperinflation. At that time the value of 60,000 marks was less than an English penny. The insurer argued that it owed nothing on the contract, for it could not be required to pay a fraction of a cent. Astonishingly, the court agreed. Under English law the obligation to pay in foreign currency was absolute and unqualified by variations in exchange rates. The judges noted the harshness of the result and pressed upon the company its moral obligation to make some payment which they held the law would not compel.

Happily some American cases and the law of many foreign countries take a different view of the problem. The problem of serious, sustained inflation is not unique to modern America. During the Revolution and the Civil War, America witnessed serious inflation. And several other nations have recently experienced more severe inflation than America has. When the problem has arisen, here and abroad, courts and legislatures have repeatedly acted to relieve parties from great and unexpected losses. See Mann, The Legal Aspect of Money (1938); Corbin on Contracts § 1360 and cases there cited.^[20] The exact character of the relief granted is not important here. Neither is the exact explanation of the decisions found in the cases, because even the Civil War cases antedate the evolution of the distinct doctrine of frustration. What is important is this: first, the results of those decisions would be readily explained today in terms of frustration of purpose. Corbin discusses them in his chapter on Frustration of Purpose. And second, the frustration which they involved was a frustration of the purpose to earn money or to avoid losses. Thus it appears that there is no legitimate doctrinal problem which prevents relief for frustration of this sort. There remain the customary strictures concerning risk allocation and gravity of injury. Those have been addressed above and need not be considered again here. The Court holds ALCOA is entitled to relief on its claim of frustration of purpose.

E.

This leaves the question of framing a remedy for ALCOA. Essex argues that reformation is not available. It cites many Indiana cases declaring that reformation is only available to correct writings which, through mistake, do not reflect the agreement of the parties. The declarations to that effect are clear. E. g., Citizens Nat'l Bank v. Judy, 146 Ind. 322, 43 N.E. 259 (1896); Board of Comm'rs v. Owens,138 Ind. 183, 37 N.E. 602 (1894); Sunman-Dearborn Community Corp. v. Kral-Zepf-Freitag & Associates, 338 N.E.2d 707 (Ind.App. 1975).

But the point is immaterial here. This case does not fall within reformation as a traditional head of equity jurisprudence. It does fall within the more general rules of equitable restitution. Courts have traditionally applied three remedial rules in cases of mistake, frustration and impracticability. In some cases courts declare that no contract ever arose because there was no true agreement between the parties, Raffles v. Wichelhaus, supra, or because the parties were ignorant of existing facts which frustrated the purpose of one party or made performance impracticable. Restatement 2d of Contracts § 286. In some other cases the courts hold that a contract is voidable on one of the three theories. In these cases the customary remedy is rescission. In both classes of cases where one or both parties have performed under the supposed contract, the courts award appropriate restitution in the light of the benefits the parties have conferred on each other. The aim is to prevent unjust enrichment. The courts in such cases often call this remedy "reformation" in the loose sense of "modification." See III Palmer, Law of Restitution § 13.9 (1978). In Schwaderer v. Huron-Clinton Metropolitan Authority, 329 Mich. 258, 45 N.W.2d 279 (1951), the plaintiff contracted to clear a tract of land of trees and brush. The parties mistakenly believed the tract contained 239 acres, and on that belief the plaintiff bid $59,000 for the job. In fact the land contained 545 acres. The court "reformed" the contract to award the plaintiff the value of the extra work it had performed. Professor Palmer says this of Schwaderer and similar cases:

[T]he judgment is aimed at carving out and leaving intact an exchange that approximates or is in substance the one the parties had in mind, and at the same time readjusting the contract or its consequences so as to prevent unjust enrichment.

The cases ... demonstrate that many situations do not fit neatly into a general scheme of classification. There are many typical cases for which a standard remedy is appropriate; there are also cases for which the relief given should be responsible to the particular facts. III Palmer, Law of Restitution § 13.9 at 61-62.

Indiana has accepted this remedial theory. In McMahan v. Terkhorn, supra, the parties had purchased and sold a tract of land at a price less than their contract price in reliance on a survey which erroneously showed there was less land in the tract than the parties had believed. After the sale and before the survey error was discovered the purchaser resold part of the land, making rescission inappropriate. The court "reformed" or modified the contract to require the purchaser to pay for the extra land which had been conveyed. There, in a fully executed contract, a price adjustment was necessary to protect the fair expectation of the parties and to prevent unjust enrichment.

The same ends can be achieved under a long term executory contract by a similar remedy. To decree rescission in this case would be to grant ALCOA a windfall gain in the current aluminum market. It would at the same time deprive Essex of the assured long term aluminum supply which it obtained under the contract and of the gains it legitimately may enforce within the scope of the risk ALCOA bears under the contract. A remedy which merely shifts the windfall gains and losses is neither required nor permitted by Indiana law.

To frame an equitable remedy where frustration, impracticability or mistake prevent strict enforcement of a long term executory contract requires a careful examination of the circumstances of the contract, the purposes of the parties, and the circumstances which upset the contract. For some long term executory contracts rescission with or without restitution will be the only sensible remedy. Where developments make performance of the contract economically senseless or purposeless, to modify the contract and to enforce it as modified would be highly inappropriate. But in cases like the present one modification and enforcement may be the only proper remedy.^[21] See Parev Products Co. v. I. Rokeach and Sons, Inc., 124 F.2d 147 (2nd Cir. 1941). In this case Essex sought an assured long term supply of aluminum at a price which would let it earn a profit on its finished products. ALCOA, facing ordinary market risks in 1967, sought a long term, limited risk use for its Warrick Works. A remedy modifying the price term of the contract in light of the circumstances which upset the price formula will better preserve the purposes and expectations of the parties than any other remedy. Such a remedy is essential to avoid injustice in this case.

During the trial the parties agreed that a modification of the price term to require Essex to pay ALCOA the ceiling price specified in the contract would be an appropriate remedy if the Court held for ALCOA. The Court understands from the parties that ALCOA will continue to suffer a substantial but smaller out of pocket loss at this price level. But ALCOA has not argued that the ceiling price term is subject to the same basic assumptions about risk limitation as is the indexed price term. Accordingly the Court adopts the ceiling price term as part of the remedy it grants to ALCOA.

The Court must recognize, though, that before the contract expires economic changes may make this remedy excessively favorable to ALCOA. To deal with that possibility, the Court must frame a remedy which is suitable to the expectations and to the original agreement of the parties. A price fixed at the contract ceiling could redound to ALCOA's great profit and to Essex's great loss in changed circumstances. Therefore the Court adopts the following remedial scheme. For the duration of the contract the price for each pound of aluminum converted by ALCOA shall be the lesser of the current Price A or Price B indicated below.

Price A shall be the contract ceiling price computed periodically as specified in the contract.

Price B shall be the greater of the current Price B1 or Price B2. Price B1 shall be the price specified in the contract, computed according to the terms of the contract. Price B2 shall be that price which yields ALCOA a profit of one cent per pound of aluminum converted. This will generally yield Essex the benefit of its favorable bargain, and it will reduce ALCOA's disappointment to the limit of risk the parties expected in making the contract. The profit shall be computed using the same accounting methods used for the production of plaintiff's exhibit 431. The profit and the resulting price shall be computed once each calendar quarter, as soon after the close of the quarter as the necessary information may be assembled. When Price B2 applies, ALCOA shall bill Essex periodically, as specified in the contract at the price specified at the last quarterly price computation. Essex shall pay those bills according to the payment terms previously observed by the parties. When the next quarterly price computation is completed, that price shall be applied retroactively to the aluminum converted during the previous quarter. ALCOA shall refund any surplus payment by Essex upon the computation of the price or shall bill Essex for any additional money due.

ALCOA shall keep detailed records of the pertinent costs, indices and computations used to calculate Prices A, B1 and B2 and shall preserve them for two years beyond the termination of the contract. ALCOA shall send Essex, in the manner and at the times specified in the contract, the price information called for in the contract, as well as a quarterly statement of Price B2 whether or not that price then applies. The statement of Price B2 need not specify the elements from which it was calculated.^[22]

COUNT TWO

Another issue before this Court is whether the Molten Metal Agreement (MMA) was orally modified. And if so, is that a valid modification under the statute of frauds?

On July 21, 1975, Mr. George, Mr. O'Malley and others had a brief meeting in a hangar maintained by Essex Group Inc. at Deer Field in Fort Wayne, Indiana. At this meeting Mr. George, on behalf of ALCOA, presented a proposal to revise the MMA by substituting for the wholesale price index, terms more favorable to ALCOA.^[23] During the meeting all the participants, except Mr. George and Mr. O'Malley, withdrew so that at the conclusion of the meeting only these two men remained.^[24]

Differing testimony as to what occurred at this meeting presents the factual issue of whether the contract was orally modified. Plaintiff's representative has testified that defendant's representative agreed to the proposal^[25] while defendant's representative has testified he only agreed to consider the proposal.^[26]

ALCOA bears the burden of proof that the parties agreed to modify their 1967 contract, for ALCOA here seeks to enforce the claimed modification. ALCOA has not proved by a preponderance of the evidence that the parties agreed to it. Mr. O'Malley and Mr. George credibly testified to their respective recollections of their conversation. Mr. George's version does not seem more credible than Mr. O'Malley's. Neither do the surrounding circumstances make it so.

In the instant case a number of factors need to be considered. Essex was under no duty or pressure to agree to revise the contract. The negotiations on modification were entered into by Mr. O'Malley to ensure a cordial and compatible working relationship between the two companies.^[27] This lack of motivation extends to the making of such an agreement by Mr. O'Malley during such a short meeting. At the same time Mr. George, having suddenly become burdened with an onerous contract, was undoubtedly desirous to renegotiate the MMA. In addition the pressures on Mr. George were intensified for he and other members of his party had only a brief period to speak with Mr. O'Malley before departing on another business meeting.^[28] Having considered the motives and pressures on each side, the Court finds the differing testimony, beyond question offered in good faith by all witnesses, is quite understandable. In resolving the contradiction the Court finds that the plaintiff has failed by a preponderance of the evidence to have established the contractual necessity, "meeting of the minds." Having found no oral modification of the MMA, the Court does not reach the issue of whether any alleged oral modification is made unenforceable by the statute of frauds.

COUNT THREE

In the third count of its complaint, ALCOA asks to be excused from further performance under the Molten Metal Agreement. Under the provisions of paragraph B of the Side Letter Agreement (SLA) which modified the MMA, ALCOA asserts the right to seek a judicial determination that the MMA is a contract for the sale of goods, a determination which would permit either party to terminate the MMA. Consistent with the assertion of this right, ALCOA has asked this Court to determine that the MMA is a contract for the sale of goods. This raises two issues for this Court to determine; is the MMA a contract for the sale of goods, and may ALCOA now ask this Court to make such a determination or is ALCOA estopped from doing so. In order for ALCOA to prevail both issues must be resolved in its favor. This Court holds that on neither issue does ALCOA prevail.

BACKGROUND OF THE MOLTEN METAL AGREEMENT

During the mid 1960's both Essex, a large wire and cable manufacturer and ALCOA, a large aluminum producer, anticipated an increased demand for aluminum wire and cable products. Essex with its manufacturing and distribution network in copper wire and cable sought to expand its line of business. ALCOA, though a competitor in the aluminum wire and cable business, sought to expand its sales of aluminum by cultivating current manufacturers of wire and cable.

After Essex exhausted the possibility of obtaining an aluminum supply, by various means, from other producers, Essex entered into serious negotiations with ALCOA over a source of supply. These negotiations began in earnest with a meeting May 29, 1967, between Mr. Paul O'Malley, then President of Essex, and Mr. Favorite, Vice President and Sales Manager for ALCOA, who was accompanied by Mr. Krome George, ALCOA's Vice President-Finance. At the meeting Mr. George outlined a long term toll conversion proposal.

The toll conversion proposal required Essex to obtain alumina for delivery to ALCOA. ALCOA would then process the alumina into aluminum delivering the refined product to Essex. This proposal was consistent with the trend in the aluminum industry toward toll conversion when alumina was in large supply and aluminum in short supply. Since both ALCOA and Essex had existing toll conversion contracts, the proposal was not a unique concept to either party.

Mr. O'Malley who was seeking a long term supply of aluminum raised the issue of where he could obtain alumina on a long term basis to complement the toll conversion contract. He was informed by Mr. George that Essex would be put in touch with Australian alumina firms seeking just such contracts.

From this oral discussion, Mr. Joseph Fisher, an ALCOA attorney, prepared a draft contract. This was submitted on July 21, 1967 to Essex. The draft provides for a toll conversion process as outlined above. This concept is also the essence of the Molten Metal Agreement (MMA) which was eventually signed.

Several aspects of this draft and the contract delineate that toll conversion is the foundation for the contract. They are:

(a) Essex must maintain certain specified levels of alumina inventory;

(b) The alumina delivered to ALCOA is deemed to be stored in Indiana, and Essex is required to pay (and has in fact, paid) personal property taxes on such alumina to Indiana;

(c) Essex bears the risk of availability and performance of the carriers, the risk of cost fluctuations in providing transport and the risk of casualty loss in transit; and

(d) Essex bears the risk with regard to the price, availability and quality of the alumina.

THE ALUMINA PURCHASE AGREEMENT

Essex, recognizing its need for a long term source of alumina if it entered into a toll conversion contract, entered into simultaneous negotiations with an alumina producer. That producer was Alcoa of Australia Proprietary Ltd. (Alcoa Ltd.). Alcoa Ltd. is an Australian corporation in which ALCOA has a 51% stock interest, and majority representation on the board of directors. The remaining interests are held by three (3) Australian based mining companies. Consistent with the laws of Australia, and in recognition of fiduciary duties owed to the minority interests, Alcoa Ltd. has been maintained as a separate and distinct entity by ALCOA. In fact, ALCOA and Alcoa Ltd. are competitors for sales of many aluminum products.

On July 8, 1967, Mr. O'Malley met with Mr. Allen Sheldon, Managing Director of Alcoa Ltd. to discuss a possible alumina supply contract. Mr. Sheldon offered alumina at the then prevailing world price of fifty seven dollars ($57.00) per ton.

Further discussions were held on October 17, 1967. Essex requested a ceiling price of seventy dollars ($70.00) per ton and a most favored customer clause. These discussions were attended by Mr. O'Malley, Essex counsel Mr. Seifert, Mr. Sheldon, and Mr. Bank Smith, who was introduced as a legal representative assisting Mr. Sheldon. Mr. Smith was in charge of drafting the precise contract language of what eventually became the Alumina Purchase Agreement (APA). Though assigned to work on behalf of Alcoa Ltd., he was actually employed by ALCOA not Alcoa Ltd. However, with due deference to antitrust considerations, Mr. Smith was assigned this work by persons other than those involved in the Molten Metal Agreement negotiations, and all knowledge obtained by the participants in negotiation of one contract was intentionally kept from the participants in the other.

Mr. George, a member of the board of Alcoa Ltd., in addition to his duties with ALCOA, refrained, on advice of counsel, from becoming involved in the Alumina Purchase Agreement negotiations. Further, the Economic Analysis and Planning Department of ALCOA, which reported to Mr. George, provided no material on pricing or escalation provisions for Alcoa Ltd.

On January 4, 1968, eventual agreement was reached. On January 30, 1968 the Alumina Purchase Agreement was approved, by the board of directors of Alcoa Ltd., without judging the price negotiated by their agents.

THE FINALIZATION OF THE MOLTEN METAL AGREEMENT WITH THE SIDE LETTER AGREEMENT

Before the MMA had become finalized, Mr. Fisher did learn that Alcoa Ltd. might be supplying the alumina to Essex and that shipment from Australia of the alumina might also be via Alcoa Steamship Co. This caused him to express some concern about potential illegality under the Robinson-Patman Act. He expressed these concerns to Mr. Seifert and Mr. Downing, Essex house counsel. Mr. Fisher suggested that a cancellation clause should be included in the MMA. Such a clause would provide that should the MMA be construed as a sale of goods, or be found illegal, either party could cancel at will. Since the Essex attorneys had previously negotiated for a most favored customer clause in fear that they would be locked into a price higher than that obtained by others, they had few concerns that the MMA would be illegal under the Robinson-Patman Act for granting Essex a discriminatory price advantage. However they did agree to the inclusion of a cancellation clause, as drafted by Mr. Fisher. This provision was made part of the Molten Metal Agreement by its inclusion as paragraph B of the Side Letter Agreement.

With this history, the cancellation clause was never the focus of intense negotiations. It was included without having been brought to the attention of Mr. O'Malley. All parties, while acting in good faith, agreed that the agreement was the sale of service not goods. No discussion ever occurred that either party could attempt to terminate the MMA by seeking a judicial determination against the other. At the time of execution both sides contemplated that the cancellation clause would become operative only upon a sale of goods determination made at the initiation of a Robinson-Patman claim by a third party.

THE RELATION BETWEEN THE MMA AND THE APA

The performance of the Molten Metal Agreement and the Alumina Purchase Agreement have steadfastly been kept separate. The chairman of the ALCOA committee to administer the MMA, Mr. Favorite, has never responded to problems or concerns Essex has had with Alcoa Ltd. but rather has referred Essex to Alcoa Ltd. The accounting under the MMA has consistently been done on a toll conversion basis. ALCOA's bookkeeping indicates Essex owns the alumina until converted, and appropriate deductions are made from Essex's alumina inventory on delivery of the aluminum.

Two periods of contract administration indicate the separate status of these two contracts. During 1968, Alcoa Ltd. in order to fulfill its obligations to Essex borrowed alumina from ALCOA. This loan was made at seven percent (7%) interest. Although ALCOA often makes transfers of materials between plants, interest is not charged, as it was here. Alcoa Ltd. continued to bill Essex for delivery of alumina and Essex paid freight equalization charges under the MMA. In this period, ALCOA and Alcoa Ltd. maintained their separate identity.

On October 22, 1973, Essex and ALCOA agreed to a cancellation of Block C and D of the MMA. This did not relieve Essex of its contract with Alcoa Ltd. Alcoa Ltd. indicated it would not relieve Essex because of its banking arrangements but suggested that ALCOA purchase the alumina under these Blocks. ALCOA agreed to this. However, the intervention of the Australian government required ALCOA to purchase the alumina at a higher price than that paid by Essex. This extraction of additional funds by Alcoa Ltd. from ALCOA shows the bona fide separation that existed between these two firms.

Essex maintains one other contract with ALCOA. All alumina has been shipped by ALCOA's one hundred percent (100%) owned subsidiary, Alcoa Steamship Co. Essex has been under no obligation either under the MMA or the APA to use such transport, but has independently contracted with that firm.

The history of the negotiations of the MMA indicates that ALCOA and Essex were at all times discussing toll conversion not the sale of goods. This concept originated for valid business considerations not at the behest of lawyers seeking to avoid the appearances of illegality. The language of the MMA is the language of toll conversion. The MMA operates as a service contract requiring Essex to pay personal property taxes to Indiana on the alumina stored there. Although the alumina to be toll converted was obtained from an ALCOA subsidiary, this Court views that fact as little more than coincidence. ALCOA had the power to influence the APA negotiations, but it scrupulously refrained from exercising any portion of that power. The negotiations were conducted separately. ALCOA and Alcoa Ltd. remained consciously ignorant of the terms of their respective offers to Essex. This separate stance was maintained even on the approval of the APA by the Alcoa Ltd. board of directors. It has steadfastly been maintained over the period of contract administration. To collapse the MMA and APA is therefore unwarranted. This Court thus finds the MMA a toll conversion contract, not a contract for the sale of goods.

ESTOPPEL IN COUNT III

Having decided ALCOA is not entitled to be excused from the MMA, this Court is not obliged to resolve whether ALCOA had the right to seek that determination. However, the Court will address that issue to provide an alternative basis for the result reached. As noted previously the Court is obliged under Erie to look to law of Indiana. The Court must follow the pronouncements of the Indiana courts, particularly when they are of continuing validity. Following this approach ALCOA must be estopped from seeking a determination under the MMA of whether there has been a sale of goods.

In Lebo v. Bowlin, 100 Ind.App. 75, 189 N.E. 397 (1934) (en banc) (unanimous decision), the Court recognized the doctrine of estoppel by contract. This form of estoppel is in many ways similar to estoppel by deed, 31 C.J.S. Estoppel § 55. Both estoppel by contract and estoppel by deed are technical estoppels in which at least one party having made a statement in writing is prevented from taking a position inconsistent with his prior statement. Thus there is no inconsistency between Lebo and Simpson v. Pearson, 31 Ind. 1 (1869), which recognized three kinds of estoppel, by deed, by record, and in pais; for estoppel by contract is interrelated with estoppel by deed.

The technical nature of estoppel by deed was recognized in McAdams v. Bailey,169 Ind. 518, 82 N.E. 1057 (1907).^[29] Relying on Habig v. Dodge, 127 Ind. 31, 25 N.E. 182 (1890); Ayer v. Philadelphia, 159 Mass. 84, 34 N.E. 177 (1893) (Holmes, J.) and other cases, the court found that it was solely the statement of warranty in the deed that provided the basis for the estoppel. The scope of the statement in the warranty, regardless of its accuracy, controlled the extent of the estoppel. The estoppel would operate without reference to the moral qualities of either party's conduct. This has been echoed by a respected commentator speaking of estoppel by contract; "[t]he estoppel in this class of cases is fixed by the execution of the contract; nothing further need be shown...." M. Bigelow, A. Treatise on the Law of Estoppel 496 (6th ed. 1913). Unlike estoppel in pais, where an affirmative showing of good faith is required, Goodwin v. Hartford Life Ins. Co., 491 F.2d 332 (3rd Cir. 1974) (applying Pa. law), all that need be shown to establish estoppel by contract is that the writing settled or, treated as settled, a fact.

The central issue remaining is whether the SLA treats a fact as settled. The SLA states: As you know, acting in good faith, we have entered into the [MMA] with the understanding that it is a contract for the furnishing of services by Alcoa in connection with a bailment of alumina by Essex and intend that it be so construed."

ALCOA now urges this Court that its understanding and intentions were not settled facts. While mindful of this argument, the Court considers the context in which the statements were made essential to understanding this language. ALCOA believed that the MMA was a permissible contract under the Robinson Patman Act. ALCOA desired to inhibit attacks on the legality of the MMA. One element providing a defense to a Robinson Patman suit was that the MMA was a service contract. The single purpose of the SLA was to provide a method for settling the respective rights of the parties should the MMA be found illegal or face that threat from a threshold determination of a sale of goods. In this light the language, understanding and intend, operates solely to provide a suggestion that the parties might be incorrect in determining that the MMA was a contract for the sale of services. When that is understood the statement in the SLA that the contract is one for the furnishing of services becomes an admission by ALCOA which in fairness to Essex, ALCOA may not now contradict.

Two minor points also need to be mentioned. Though the Court has found a mutual mistake in Count I with regard to the selection of the WPI, that mistake did not extend to the question of whether or not the MMA was a contract for the sale of goods. Thus the operation of estoppel by contract remains unaffected by the mistake. Finally there was no conduct by Essex to warrant an estoppel in paispreventing Essex from contending that ALCOA should be estopped. Essex may have referred to the APA and MMA as the purchase of aluminum in internal documents but papers exchanged by persons not versed in the distinctions between one contract for aluminum and two coordinated contracts for alumina and alumina conversion should not affect a carefully drafted multi million dollar contract.

COUNTERCLAIM

As previously indicated, the counterclaim of Essex is comprised of two parts. The first part contends that under the terms of the Molten Metal Agreement as implemented during the years 1977, 1978, and the first six months of 1979, ALCOA has, on numerous occasions, breached the Molten Metal Agreement by improperly failing to deliver the amounts of molten aluminum required by the contract. This aspect of the counterclaim asks that Essex be awarded damages in an amount as to fully compensate it for the failure of ALCOA to deliver molten aluminum in accordance with the terms of the Molten Metal Agreement. It is ALCOA's position with respect to this part of the counterclaim that events beyond the control of ALCOA which occurred in 1977 and 1978 were sufficient to excuse part of ALCOA's performance under Section 24 of the Molten Metal Agreement.^[30]

On January 11, 1977, frigid weather conditions caused an interruption in the operation of the electrical generating plant which supplied electrical power to the ALCOA smelting plant at Warrick, Indiana. Prior to the events of January 11, 1977, the Warrick smelting plant was operating at 100% of its capacity. The frigid weather conditions caused such severe shortages of electrical power at the Warrick smelting plant that for a period of time all production of aluminum was interrupted and the entire effort of the work force was directed toward saving the entire smelting plant from going out of operation. The production level of the Warrick smelting plant was reduced by 50% and this reduction was expected to continue at this level for at least the balance of the month of January, 1977.

Pursuant to paragraph 24 of the Molten Metal Agreement, ALCOA notified Essex by letter dated January 17, that a partial interruption of smelting plant operations at ALCOA's Warrick Works occurred on January 11, 1977, and that this interruption was estimated to reduce operations for the balance of the month to approximately 50%. On January 31, 1977, an additional breakdown occurred at the power plant which supplies electrical energy to the Warrick smelter. This resulted in a further interruption of smelting plant operations. By letter dated February 1, 1977, pursuant to paragraph 24 of the Molten Metal Agreement, ALCOA notified Essex of this additional breakdown and informed Essex that it was estimated that the average level of operations through the month of February, 1977, would be at approximately 40% of capacity. ALCOA notified Essex that it would be able to supply Essex with molten metal through the month of February at about 40% of the quantity ordered by Essex.

Operating conditions improved during February, 1977. As a result of that improvement, ALCOA notified Essex by letter dated February 28, 1977, that beginning March 1, 1977, ALCOA would be able to deliver 50% of the quantity of aluminum ordered by Essex for delivery in March. By letter dated March 22, 1977, ALCOA advised Essex that beginning April 1, 1977, it would be able to deliver 67% of the quantity which Essex ordered for delivery in April. By letter dated May 9, 1977, ALCOA advised Essex that effective May 23, 1977, curtailment of deliveries would terminate. As of May 23, 1977, ALCOA resumed full deliveries to Essex.

In January, 1978, a series of events relating to electrical failure in a generator at the power plant which supplies electrical energy to the Warrick smelter resulted in a partial interruption of smelting plant operations on January 28, 1978. This generator outage was estimated to result in a reduction of smelting plant operations of approximately 8.1% from the level of operations prior to January 28, 1978. Pursuant to paragraph 24 of the Molten Metal Agreement, ALCOA notified Essex by letter dated February 6, 1978 of the partial interruption in smelting plant operations and that this interruption would require a reduction of the supply of molten metal to Essex by approximately 8.1%. The power plant which supplies electrical energy to the Warrick smelter is a coal-fired power plant. During the early months of 1978, a strike by the United Mine Workers interrupted the normal supply of fuel for that power plant and also made it impossible to purchase power from other utilities which were similarly affected by the coal strike. In addition, expiration of the labor contract with those employees working at the power plant at Warrick caused uncertainty as to the availability of power for the Warrick smelter. As a result of both the coal strike and the potential strike at the power plant, the reduction of 8.1% in deliveries of molten metal to Essex continued from January 28, 1978 to mid-July 1978.

Based upon the foregoing facts, this Court concludes that the events which occurred in 1977 and 1978 were beyond the control of ALCOA and sufficient to excuse part of ALCOA's performance under Section 24 of the Molten Metal Agreement.

ALCOA acted fairly and reasonably in reducing deliveries to Essex in 1977 and 1978 by the same percentage as the percentage of forced reduction from the operating level of ALCOA's Warrick smelting plant existing just prior to the occurrence of the reduction of deliveries.^[31] Several factors suggest such a conclusion. First, the parties contracted for ALCOA's Warrick smelting plant to be the exclusive source of supply, thereby allowing a partial reduction in deliveries to Essex equal to the percentage of forced reduction in the operating level of the Warrick smelting plant, even though significant amounts of aluminum produced from other ALCOA smelters were in inventory at ALCOA's Warrick ingot plant and rolling mill.^[32] Secondly, by its course of performance under Section 24 of the Molten Metal Agreement, Essex had previously established the principle of excusing performance by the same percentage as the percentage of forced reduction.^[33] Thirdly, the burdens of a forced reduction in the operating level of ALCOA's Warrick smelting plant were shared equally between the two customers of the Warrick smelting plant (i. e., Essex and ALCOA's Warrick ingot plant). A forced reduction in the operating level of the Warrick smelter caused a reduction in deliveries to ALCOA's Warrick ingot plant from the Warrick smelting plant by the same percentage as the reduction in deliveries made to Essex. Accordingly, the first part of the Essex counterclaim will be dismissed.

The second part of the Essex counterclaim arises as a result of a letter dated June 4, 1979, in which ALCOA informed Essex that it was reducing by 15% the amount of its deliveries of molten aluminum requested by Essex. ALCOA claims to have this authority under the terms of the Molten Metal Agreement. Essex contends that ALCOA does not have any such authority and asks for an order enforcing the Molten Metal Agreement and awarding damages accordingly.

The disputed provisions of the Molten Metal Agreement in this regard are paragraphs 7a and 15. Paragraph 7a provides in pertinent part as follows:

Essex shall give Alcoa notice at least 90 days before the first day of each calendar year during the term of this agreement, except 1968, setting forth the quantity of aluminum it desires Alcoa to produce for Essex from alumina during such year .... Subject to and in accordance with the terms and conditions of this agreement, Alcoa shall deliver and Essex shall take delivery of the quantity of aluminum to be produced from alumina as specified in each notice given or deemed to be given by Essex pursuant to this paragraph 7, plus or minus 15%.

Paragraph 15 of the Molten Metal Agreement provides in pertinent part as follows:

On the first day of each calendar month during the term of this agreement. Essex shall submit a notice to Alcoa requesting delivery of a definite quantity of aluminum during the next calendar month, separately specifying the quantity to be delivered as to each block. During each calendar month of such calendar year during the term of this agreement, Alcoa shall deliver and Essex shall take delivery of approximately 1/12th of the quantity of aluminum to be produced from alumina as specified by Essex in each notice given or deemed to be given pursuant to paragraph 7 hereof for such calendar year ..., plus or minus 15%, ....

The meaning to be attributed to the language "plus or minus 15%" is determinative of the outcome of this portion of the Essex counterclaim.

ALCOA's position is that sections 7a and 15 of the final Molten Metal Agreement give both Essex and ALCOA a plus or minus 15% flexibility whereby Essex first specifies in its notice given to ALCOA an amount to be delivered within plus or minus 15% of the nominal amount and ALCOA may deliver within plus or minus 15% of the amount specified in Essex's notice as long as deliveries are not more than the plus 15% amount nor less than the minus 15% amount of nominals. Under this interpretation where a dispute arises as to the amount to be delivered under the Molten Metal Agreement, the two step plus or minus 15% tolerance provisions in sections 7a and 15 of the Molten Metal Agreement result in deliveries being at the nominal amount. Essex, on the other hand, contends that only it can exercise the plus or minus 15% provided for in sections 7a and 15 of the Molten Metal Agreement.

It is important initially to look at the circumstances under which sections 7a and 15 of the Molten Metal Agreement were created in determining the intention of the parties with respect to these sections. ALCOA prepared a draft of the Molten Metal Agreement dated July 18, 1967. The response of Essex to the July 18, 1967 ALCOA draft gave the plus or minus 15% tolerance to Essex alone with the Essex draft stating that the tolerance should be determined in Essex's discretion and that Essex may in its sole discretion increase the amounts of aluminum to be tolled. Upon receipt of this Essex redraft of the Molten Metal Agreement, Mr. Fisher of ALCOA indicated in September of 1967 that the plus or minus 15% tolerance provision could not be in Essex's sole discretion and that ALCOA would also need to have a plus or minus 15% tolerance on the delivery side. At an October 3, 1967 meeting between Mr. Seifert of Essex and Mr. Fisher of ALCOA, the question of whether the plus or minus 15% tolerance should be a one-way or two-way provision was again discussed, and Mr. Fisher reiterated ALCOA's position that the 15% tolerance could not be one-way, but instead, both Essex and ALCOA each should be given a plus or minus 15% flexibility. Mr. Fisher additionally told Mr. Seifert that he, Mr. Fisher, would be sending Mr. Seifert a draft that had a two-way plus or minus 15% provision. The draft which Mr. Fisher eventually forwarded to Mr. Seifert contained language identical to that found in the final Molten Metal Agreement. The final Molten Metal Agreement deleted the language of Essex's draft making the plus or minus 15% tolerance in Essex's discretion. The history of negotiations leading up to the execution of the Molten Metal Agreement tends to indicate that the parties intended each of them to have a plus or minus 15% option.

A disturbing factor, however, is the fact that ALCOA did not immediately exercise its alleged minus 15% option as soon as it became dissatisfied with the contract price. It was not until approximately one year after institution of the instant law suit that ALCOA notified Essex that it intended to exercise its minus 15% option. From this set of facts, Essex concludes that ALCOA never really believed it had a plus or minus 15% option. The position of ALCOA is urged upon this Court to be an afterthought resulting from close scrutiny of the Molten Metal Agreement during the course of the instant litigation. Why did ALCOA suffer the loss of several million additional dollars rather than immediately exercise its minus 15% option?

Testimony at trial indicated that ALCOA chose as its strategy throughout the 1975 through 1978 period not to invoke its minus 15% tolerance because ALCOA believed such a move would be counter-productive to ALCOA's over-all goal of reaching an amicable solution with Essex on the long-range pricing problem. In 1978 ALCOA was incurring the loss of approximately 10¢ per pound on the aluminum being delivered to Essex. Unless the pricing problem were resolved, ALCOA was facing a loss of at least $75 million or more over the remaining potential life of the Molten Metal Agreement. Under these circumstances, ALCOA chose the strategy of continuing to attempt an amicable solution to the pricing problem rather than exercising its prerogative under the plus or minus 15% tolerance. That ALCOA's failure to promptly exercise the minus 15% tolerance it allegedly possesses was not an afterthought but rather a preconceived strategy is further reinforced by the fact that ALCOA raised the minus 15% option as a defense to the counterclaim in pleadings filed in the instant litigation approximately one full year prior to the actual utilization of the minus 15% provision by ALCOA.

Considering all of the evidence, this Court concludes that ALCOA had the right to restore deliveries back to the nominal amount. Under section 15 of the Molten Metal Agreement Essex first gives a monthly notice in an amount within plus or minus 15% of the nominal amount and ALCOA may then deliver each month an amount within plus or minus 15% of the amount noticed by Essex. Accordingly, the second part of the Essex counterclaim will also be dismissed.

CONCLUSION

This case is novel. The sums of money involved are huge. The Court has been considerably aided by the thorough and commendable work of all of the counsel who have participated in the case. There remains a need for a few concluding remarks concerning the theory of Count One of this case and its limitations.

One of the principal themes in the development of commercial contract doctrines since the 1920's has been the need for a body of law compatible with responsible commercial practices and understandings. The old spirit of the law manifest in Parradine v. Jane, supra, is gone. The new spirit of commercial law in Indiana and elsewhere appears in the Uniform Commercial Code, in new developments of implied covenants, and in the new Restatement.^[34]

At stake in this suit is the future of a commercially important device—the long term contract. Such contracts are common in many fields of commerce. Mineral leases, building and ground leases, and long term coal sales agreements are just three examples of such contracts. If the law refused an appropriate remedy when a prudently drafted long term contract goes badly awry, the risks attending such contracts would increase. Prudent business people would avoid using this sensible business tool. Or they would needlessly suffer the delay and expense of ever more detailed and sophisticated drafting in an attempt to approximate by agreement what the law could readily furnish by general rule.

Another aspect of the new spirit of commercial law is important in this case. Much of the story of modern business law and of modern management concerns deals with the problem of risk limitation. The development of the concept of limited liability in the modern corporation illustrates this development. So do the proliferation of insurance, the development of no-fault auto insurance, and the recurring analysis of a party's capacity to anticipate losses and spread them or insure against them. Force majeur clauses, price indexing agreements and "double net" leases all aim to clarify and to limit the risk of long term contracts. Responsible business managers are attentive to risk control.

Corporate managers are fiduciaries. Law, founded on good sense, requires them to act with care in the management of businesses owned by other people. Attention to risk limitation is essential to the fiduciary duty of corporate managers. Courts must consider the fiduciary duty of management and the established practice of risk limitation in interpreting contracts and in the application of contract doctrines such as mistake, frustration and impracticability. Corporate managers should not gamble with corporate funds. Generally they do not. Courts should not presume that they do, nor should they frame rules founded on such a presumption. Instead, courts should be alert to indications that the parties to a commercial contract sought to limit their risks, and should interpret the contracts and frame remedies to protect that purpose.

Parev Products Co. v. I. Rokeach & Sons, Inc., supra, decided by Judges Clark, Frank and Learned Hand, illustrated an aspect of this point. There Parev, the plaintiff, by contract gave the defendant the exclusive right to produce and to market its product, Nyafat, a cooking oil, for fifty years for a specified royalty. The defendant had the option to cancel the contract at any time for a fee. The plaintiff agreed not to market the product or any similar product during the contract, and the defendant agreed not to market the product or any similar product after the end of the contract. In 1939 competitors began to sell Crisco and Spry, white semi-solid cooking oils which reduced the sales of the plaintiff's oil. The defendant responded to the falling sales by introducing a new product of its own, Kea, similar to Crisco and Spry. The plaintiff sued to enjoin this further competition with its product. Since the express negative covenants did not forbid this competition, the plaintiff argued that the court should imply a negative covenant to forbid it.

The court rejected the defendant's argument that only covenants intended by the parties may be implied. The court noted the then traditional "reluctance of courts to admit that they were to a considerable extent `remaking' a contract in situations where it seemed necessary and appropriate to do so." 124 F.2d at 149. The court acknowledged that a discernible intent of the parties should control the case, but it found no sufficient indication of intent respecting this problem:

Of course, where intent though obscure, is nevertheless discernible, it must be followed; but a certain sophistication must be recognized-if we are to approach the matter frankly—where we are dealing with changed circumstances, fifteen years later, with respect to a contract which does not touch this exact point and which has at most only points of departure for more or less pressing analogies. Id.

Thus the question of whether to imply some sort of covenant to protect the plaintiff did not rest on the parties' intent. It rested on the status, expectations and needs of the parties to preserve the mutual benefit of the long term contract under changed circumstances.

Here defendant has a strong point in stressing the various extensive grants to it of the contract, as well as the express negative covenants which do not touch the present case. Undoubtedly extensive freedom of action was intended it. And yet that could not have been wholly unlimited, as indeed, defendant properly concedes when it admits that at least tortious competition or destruction of the Nyafat market was not open to it. And we must consider that in the period of time since the making of the contract there have been various developments which present a situation not clearly, if at all, within the contemplation of the parties at the time. Here a status exists upon which each party should be entitled to rely. What we should seek is therefore that which will most nearly preserve the status created and developed by the parties.

If we thus emphasize the situation existing today, two facts stand out. Plaintiff must clearly rely on defendant for any future benefit to be derived from its original formula; and defendant, if it is to continue to remain in the vegetable oil market, must be able to prevent the inroads of outside products, such as Crisco and Spry. So far as the plaintiff is concerned, it has long since lost its hold on its own formula. Nyafat is known to the public as a Rokeach product. Even were the defendant to release the formula, plaintiff would have some difficulty. This is not the controlling factor, for if it were, defendant might very well terminate the contract. Instead, the sales of Nyafat continue. And yet if no covenant is found, defendant to some extent can let Nyafat slip in sales, while Kea is boosted. In other words, if the defendant does not terminate the contract, it can keep Nyafat under its control until Kea is successfully built up, and then it can safely forget Nyafat. The advantage is all to defendant. But a court of equity should grant some protection to a person who parts with his formula for exploitation. Thus, a court would hardly have permitted the defendant from the inception of this contract to lock up the plaintiff's formula in a vault and freely market Kea. There is no reason to do so now.

But defendant has an equally justifiable complaint to make. Kea, it asserts, is marketed only to compete with other products; and no attempt is made to injure Nyafat's market. Certainly we cannot say that defendant must market Nyafat, come what may, down to the sale of a mere can a year, while the vegetable oil business goes to outsiders. That would as violently alter the status of the parties as would a decree of complete freedom to defendant. It is thus clear that a strict injunction against any marketing of Kea is unjustified. Yet a complete denial of relief to the plaintiff under any circumstances would not be fair either." Id. at 149-150.

The court protected the "status" of both parties by implying a term requiring the defendant to compensate the plaintiff for royalties lost due to competition with the defendant's new product.

The court gave close attention to the legitimate business aims of the parties, to their purpose of avoiding the risks of great losses, and to the need to frame a remedy to preserve the essence of the agreement. To that extent the decision exemplifies the new spirit of contract law.

This attitude toward contract law and toward the work of the courts will disturb some people even at this late date. It strains against half-remembered truths and remembered half-truths from the venerated first year course in Contract Law. The core of the trouble lies in the hoary maxim that the courts will not make a contract for the parties. The maxim requires three replies. First, courts today can indeed make contracts for the parties. Given certain minimal indicators of an intent to contract, the courts are today directed to impose on the parties the necessary specific provisions to complete the process. See U.C.C. §§ 2-204, 2-207, 2-208; U.L.T.A. §§ 2-201-2-204. Second, a distinction has long been noted between judicial imposition of initial terms and judicial interpretations and implications of terms to resolve disputes concerning contracts the parties have made for themselves. The maxim bears less weight when it is applied to dispute resolution than it does when it is applied to questions of contract formation. This case is plainly one of dispute resolution. Third, the maxim rests on two sensible notions: (1) Liability under the law of contract rests on assent, not imposition. (2) Judges are seldom able business men; they seldom have the information, ability, or time to do a good job of contracting for the parties. Neither of these notions applies here. The parties have made their own contract. The Court's role here is limited to framing a remedy for a problem they did not foresee and provide for. And while the Court willingly concedes that the managements of ALCOA and Essex are better able to conduct their business than is the Court, in this dispute the Court has information from hindsight far superior to that which the parties had when they made their contract. The parties may both be better served by an informed judicial decision based on the known circumstances than by a decision wrenched from words of the contract which were not chosen with a prevision of today's circumstances. The Court gladly concedes that the parties might today evolve a better working arrangement by negotiation than the Court can impose. But they have not done so, and a rule that the Court may not act would have the perverse effect of discouraging the parties from resolving this dispute or future disputes on their own. Only a rule which permits judicial action of the kind the Court has taken in this case will provide a desirable practical incentive for businessmen to negotiate their own resolution to problems which arise in the life of long term contracts.^[35]

Finally, the Court notes that this case presents a problem of the appropriate legal response to problems of inflation. There are many long term contracts extant where inflation has upset the basic equivalence of the agreement. Courts will increasingly have to attend to problems like the present one. Bearing in mind the hazards of premature generalization, the Court would suggest that four factors considered in this decision will likely prove to be of durable importance in deciding whether to modify contracts: (1) the parties' prevision of the problems which eventually upset the balance of the agreements and their allocation of the associated risks; (2) the parties' attempts at risk limitation; (3) the existence of severe out of pocket losses and (4) the customs and expectations of the particular business community.

The problem of inflation is most frequently encountered as a change in the value of money to purchase things of all sorts. Long term fixed price contracts are most apt to be deranged by the process of inflation and are most apt to require judicial remedies. But inflation is not a coherent phenomenon. Prices of different things change at different rates. The record in this case shows clearly that the price of energy-intensive services has increased since 1973 much more rapidly than has the general Wholesale Price Index. An indexed price term in a contract may prevent or minimize the hardship of inflation, but if it fails to do so, as was true in this case, a court should look beyond the fact of the parties' prevision of the general problem of inflation and should ask if the deviation between the index and the pertinent costs of the parties was adequately foreseen and its risk allocated in the contract. Indexing may speak more forcefully of a general purpose to limit the risks of a long term contract than of the prevision of the specific problem which the parties encounter.

The existence of severe out of pocket losses should be essential to the award of relief. Inflation will often increase the value of goods so that a seller could sell his goods for more than the stipulated contract price. This causes the seller disappointment and brings the purchaser a profit. But within a broad range this sort of market risk is assumed by parties to a long term contract. It would probably be highly disruptive to commercial relations and to transaction plans to allow parties to escape their contracts generally on this ground. Only a showing of unusual circumstance strongly suggesting the parties intended to allow the seller an excuse for performing in these circumstances should justify relief. This problem is hardly fanciful. In long term leases the landlord's principal cost is the value of the land and buildings. These are settled costs fixed before the lease or early in the leasing process. The landlord's variable costs that are subject to inflation will usually be limited to maintenance, taxes, and utilities. Many leases put some or all of these costs on the lessee. Under these circumstances the landlord may suffer little or no out of pocket loss due to inflation, but he may suffer serious disappointment if his rent receipts fall greatly behind the current rental value of his property. This sort of disappointment seems less serious and relief from it seems more destructive of contract expectations than the disappointment of serious out of pocket losses and the destruction of expectations incident to their relief.

The limitation of judicial relief to cases where the parties evidence a desire to limit their risks, where one party suffers severe out of pocket losses not adequately foreseen and provided for by the parties seems adequate to prevent a general disruption of commercial life by inflation. This limitation also seems generally compatible with the fair needs and understanding of responsible businessmen. Little more can be asked of the courts in the development of the law.

The foregoing shall constitute findings of fact and conclusions of law as required by Federal Rule of Civil Procedure 52(a). An appropriate Order will issue.

APPENDIX

Although the facts in this case do not require us to address the problem, the Court has studied various remedies utilized by courts in foreign countries, when beset with contracts that are no longer deemed "fair" in light of changed circumstances: that is, when it is determined that fairness requires a change in a contract because events occurring subsequent to the execution of the contract have made its performance unfair. These approaches 1) try to establish the original economic position and intent of the parties; 2) try to distribute the consequences of the unforeseen burden equally between the parties; 3) try to determine what the parties would have agreed to had they been aware of what was going to happen, and 4) order termination unless the party against whom relief is sought makes an equitable offer to modify the contract.

Germany: In the Federal Republic of Germany, which considers the law of the Weimar Republic to be a part of its legal system, there has been relatively extensive experience, both between and since the wars, with the problem of the approach to be taken in reforming contracts because of changed circumstances. A number of ideas have appeared. Initially, if the doctrine of reformation applies, the other party is bound to negotiate an equitable revision in view of the effects of the changed circumstances on both parties. Refusal can lead to cancellation of the contract. When a court makes the adjustment, there is some tendency to split the effects evenly between the parties. In a number of cases, the appellate court remanded with instructions to make an "equitable" adjustment.

Switzerland: The relevant provision of the Swiss Code of Obligations allows a court to increase the price or to rescind the contract. Two approaches have developed as to the theory of readjustment. One, called the "subjective" approach, is that "the missing regulation [provision] must be completed in such a way as the parties would have chosen had they known what was going to happen." (ATF 47 II 317-18 (1921)). The other, or "objective", approach supported by some leading commentators would more simply look to equity and good faith.

Argentina: In Argentina inflation has been such that most all contracts have been renegotiated. However, Argentine law does recognize the concept of "Rebus Sic Stantibus", or changed circumstances. Article 1198 of the Civil Code provides that the proper remedy is termination, except that the other party may prevent termination by offering an equitable improvement to the effects of the contract.

In contracts with the Government, price variation is allowed by law (Law 12910 and 15285). The Procurator Nacional Del Tesoro has ruled that the "economic and financial equation" of the contract is to be preserved.

Brazil: In Brazil, reformation of contracts is permitted due to unforeseen circumstances.

Japan: Disputes in Japan tend to be settled without litigation, reflecting the marked tendency of the Japanese to avoid judicial proceedings. Much emphasis is placed on the concept of trust and sincerity of the parties in dealing with and solving problems that arise in connection with contracts.

The doctrine of JIJO HENKO (changed circumstances), however, declares that the party seeking relief must request adjustment of the contract from the other party, and if the request for renegotiation is denied, the proper remedy is termination of the contract. The courts thus place great importance on the good faith effort of the parties to compromise their differences. See J. Toshiro Sawada, Subsequent Conduct and Supervening Events, pp. 132 et seq. (University of Tokyo Press 1968).

Italy: The Italian Civil Code (§ 1467) recognizes the concept of "Rebus Sic Stantibus" as "excessive onerousness", and provides that the proper remedy is dissolution of the contract unless the party against whom dissolution is demanded offers to modify equitably the conditions of the contract.

Israel: Almost no authority on the question has been found under Israeli law.

Chile: We have found little helpful information in Chile beyond an indication that in some cases courts have applied concepts of equity and unjust enrichment in mitigating the effects of unforeseen circumstances. Apparently, the usual practice in Chilean long-term contracts is to provide for arbitration.

Sweden: No cases have been found under Sweden's new law liberalizing the availability of reformation in the event of changed circumstances. Under the older, more stringent rule, the court in one case adopted the compromise offer of the party injured by the changed circumstances as an alternative to be preferred to cancellation of the contract.

[1] This argument is discussed in section E.

[2] This language appears in the final form of the Restatement. A copy of the master draft was presented to the court by the Reporter, Professor E. Allen Farnsworth, as Appendix B to his oral brief for ALCOA. The circulated Tentative Draft No. 10 used a different word, "existing facts." The possible significance of this change in the definition of "mistake" is considered below.

[3] The quoted language in subsection (2), and in some of the Comments which will be quoted contains variations from the published language. See n. 6. Those variations are not material to the decision of this case.

[4] In this connection the court quotes the Restatement 2d § 293 Comment:

"Mistake alone, in the sense in which the word is used here, has no legal consequences. The legal consequences of mistake in connection with the creation of contractual liability are determined by the rule stated in the rest of this chapter."

[5] Clear hindsight suggests the flaw might have been anticipated and cured by a "floor" resembling the 65% "cap" that Essex wrote into the price formula. To the extent this possibility might be thought material to the case, the Court specificially finds that when the contract was made, even people of exceptional prudence and foresight would not have anticipated a need for this additional limitation to achieve the purpose of the parties.

[6] The Court recognizes that ALCOA has suffered even larger losses of potential profits which it might have earned, but for the contract, in the strong aluminum market in recent years. Essex, rather than ALCOA, has enjoyed those profits. But their existence is immaterial to the questions raised in this case.

[7] Since the effect of this decision is to modify the contract but to keep it in force, both parties may be adequately protected against severe and surprising economic developments. Each continues to have recourse to the courts.

[8] The equivalence of ALCOA's loss and Essex's gain may distinguish this case from the concededly more difficult "Suez cases." Transatlantic Financing Corp. v. United States, 363 F.2d 312 (D.C.Cir.1966); American Trading and Production Corp. v. Shell International Marine, 453 F.2d 939 (2nd Cir. 1972); Glidden Co. v. Hellenic Lines, 275 F.2d 253 (2nd Cir. 1960); Ocean Tramp Tankers Corp. v. V/U Sorracht (The Eugenia), [1964] 1 All E.R. 161 (C.A.1963). In those cases an unexpected closing of the canal materially increased the cost of performing the contract leaving the courts to determine the allocation of a loss not balanced by an equal profit. Those cases might also be distinguished in that they involved the doctrine of frustration of purpose rather than the doctrine of mistake. However, the similarity of these doctrines renders this distinction doubtful.

[9] Several states have modified it by adopting the Uniform Vender and Purchaser Risk Act.

[10] The S.E.C. now recognizes that predictions may be validly used in this way by investors. This recognition underlies the S.E.C.'s departure from the traditional rule forbidding the inclusion of predictions in S.E.C. filings to the new rule permitting their inclusion. S.E.C. recognition of the range of uncertainty principle appears in the proposal of "safe harbor" provisions. See S.E.C. Release No. 33-5362, Disclosure of Projections of Future Economic Performance, 38 F.R. 7220 (Mar. 19, 1973); S.E.C. Release No. 33-5592 Disclosure of Projections of Future Economic Performance, 43 F.R. 53250 (Nov. 7, 1978).

[11] 281. DISCHARGE BY SUPERVENING IMPRACTICABILITY.

Where, after a contract is made, a party's performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

[12] 285. DISCHARGE BY SUPERVENING FRUSTRATION.

Where, after a contract is made, a party's principle purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

[13] 286. EXISTING IMPRACTICABILITY OR FRUSTRATION.

(1) Where, at the time a contract is made, a party's performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.

(2) Where, at the time a contract is made, a party's principal purpose is substantially frustrated without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty of that party to render performance arises, unless the language or circumstances indicate the contrary.

[14] The court further held that the corporation had not assumed the risk of the experiment by entering into an unconditional fixed price contract. The court found that the parties did not contemplate the hazard and did not assign its risk. 338 F.2d at 109-110. The court further found that the actual cost of testing and development in attempting to perfect the new method exceeded the testing expense implicitly risked by the corporation. 338 F.2d at 109.

[15] The Court recognizes the additional requirement that the frustration or impracticability must not be the fault of the party who seeks relief. Restatement 2d of Contracts §§ 281, 285. Essex has not claimed or shown that ALCOA's dealings during the contract caused or contributed to ALCOA's losses. The record sufficiently proves that the great cost increases of some of the non-labor cost components (power, electrolytes, carbon) were beyond ALCOA's control. This distinguishes the present case from Iowa Elec. Light & Power Co. v. Atlas Corp., 467 F.Supp. 129 (N.D.Iowa 1978) where the court concluded that it was not clear that Atlas, a uranium supplier, could not have protected itself contractually from some of the risk which caused its loss. Id. 129.

[16] Professor Corbin primely observed, "A `contract' never has a purpose or object. Only the contracting persons have purposes; and the purpose of any one of these persons is different from the purpose of any other. The hopes and purposes and objects of one of the parties may be frustrated by supervening events, although the purposes of the other party may not be at all affected by those events." Corbin on Contracts § 1353.

[17] Quoting Transatlantic Financing Corp. v. United States, supra.

[18] 8. The provisions of this section are made subject to assumption of greater liability by agreement and such agreement is to be found not only in the expressed terms of the contract but in the circumstances surrounding the contracting, in trade usage and the like. Thus the exemptions of this section do not apply when the contingency in question is sufficiently foreshadowed at the time of contracting to be included among the business risks which are fairly to be regarded as part of the dickered terms, either consciously or as a matter of reasonable, commercial interpretation from the circumstances ....

[19] This illustration appears as Illustration 7 to § 285 in Tentative Draft No. 9.

[20] During the trial of this case, the Court asked counsel to provide it with information about the treatment of this problem in countries which have suffered prolonged and serious inflation including Argentina, Brazil, Germany, Israel and Japan. Each of these countries allows legal adjustments to contracts to alleviate windfall losses and to reduce related windfall profits by legislation, by judicial declaration or both. An abstract of those foreign laws prepared by counsel appears as an appendix to this decision. That all of these countries provide relief from inflationary losses strongly suggests the propriety of the earlier American decisions. The time of the Law Merchant is past, and our legal system differs from theirs, but America has no monopoly on wisdom and may well profit from the experience and learning of other nations.

[21] The remedial provisions of the new Restatement agree. Section 296(2) declares that a court may frame a remedy by supplying a term which is reasonable in the circumstances to avoid injustice. The same provision appears in § 300(2).

[22] The Court recognizes that certain cost information of ALCOA may be appropriately treated as a trade secret, disclosure of which is not necessary to the framing and enforcement of this remedy. The Court believes that the statement here required, coupled with the mandatory private record maintenance will assure the enforceability of the remedy while accommodating ALCOA's legitimate needs.

[23] Transcript of trial testimony at 1271.

[24] Id. at 214, 1273.

[25] Id. at 211.

[26] Id. at 1274.

[27] Id. at 1266.

[28] Id. at 1274.

[29] Without estoppel by deed it would have been impossible for the McAdams court to have held that it was permissible to assign an expectant interest in land. This result remains part of the law of Indiana. Kuhn v. Kuhn, 385 N.E.2d 1196 (Ind.App.1979) (citing favorably McAdams v. Bailey.)

[30] Section 24 of the Molten Metal Agreement provides in pertinent part as follows:

"If the performance of this agreement by either party hereto (other than the giving of any notice required to be given by Essex or payment of monies due Alcoa from Essex under this agreement) is delayed, interrupted or prevented by reason of any breakdown of machinery, strike, labor difficulty, walkout, differences with workmen, labor shortages, accidents, fire, explosions, flood, mobilization, war (declared or undeclared), hostilities, riots, rebellion, revolution, blockade, priorities required or requested by the federal or state government or any subdivision or agency thereof, or any other acts of any government or governments or any subdivision or agency thereof, acts of public enemies, acts of God, inability to secure or delay in securing machinery, equipment, materials, supplies, transportation, transportation facilities, fuel or power or any other cause whether or not of the nature or character specifically enumerated above which is beyond the control of such party (a) such party shall be excused from the performance of this agreement (other than the giving of any notice required to be given by Essex or the payment of monies due Alcoa from Essex under this agreement) while and to the extent that such party is delayed, interrupted or prevented from so performing by one or more of such causes and (b) the performance of this agreement shall be resumed as soon as practicable after such disability is removed."

[31] See U.C.C. § 2-615(b).

[32] Trial transcript, pp. 2214-2218.

[33] Trial transcript, pp. 2219-2222.

[34] The essential unity of the new spirit of commercial contract law appears in the recurring adoption of new statutory principles from the Code into the body of the common law by the Restatement and by the courts. See J. Murray, Intention Over Terms: An Exploration of UCC 2-207 and New Section 60, Restatement of Contracts, 37 Fordham L.Rev. 317 (1969); J. Murray, Behaviorism Under the Uniform Commercial Code, 51 Ore.L.Rev. 269, 272 (1972); D. Murray, Under the Spreading Analogy of Article 2 of the Uniform Commercial Code, 39 Fordham L.Rev. 447 (1971).

[35] The Court is aware of the practical incentive to negotiation which lies in the delay, expense and uncertainty of litigation. This case shows that at times these burdens are insufficient to prompt settlements.