Plaintiff agreed to supply Essex with aluminum over a long period of time. A portion of the price for the aluminum factored in the Wholesale Price Index, which could possibly make the price increase too excessively. After the price increased too excessively, Plaintiff sought to reform the contract.
Contracting parties may reform the terms of a contract when performance under the original terms becomes impracticable.
Aluminum Company of America (Plaintiff) and Essex Group Inc. (Essex) made an agreement that Plaintiff would supply Essex with aluminum for a long period of time. The aluminum price was based on a formula that had a portion of the price increase according to the Wholesale Price Index (WPI). The contract contained the maximum price for aluminum that Essex would pay if the WPI caused the price to increase too excessively. Over time, Plaintiff’s costs increased excessively; the price specified according to the WPI was insufficient to cover those costs. As a result, Plaintiff sought reformation or adjustment of the contract and filed suit. According to Plaintiff, the doctrines of frustration of purpose and impracticability applied and entitled Plaintiff to relief.
May a party’s performance under a contract be excused when performance under the contract would be impracticable?
Yes. A party’s performance under a contract may be excused when performance under the contract becomes impracticable. A contract is considered impracticable when “extreme and unreasonable difficulty, expense, injury, or loss to one of the parties” would occur as a result of the original terms. In this case, Plaintiff will incur an extreme and unreasonable expense (more than 60 million dollars) if it is required to perform under the contract based on the WPI. Since this extreme expense is not due to market price increases and Plaintiff established a deliberate avoidance of such an increase, Plaintiff is entitled to relief under the doctrine of impracticability. Therefore, Plaintiff is entitled to have the contract reformed so that the reference to the WPI would be removed.
The doctrine of impracticability allows for contracting parties to reform a contract under certain conditions. Case law has established that there must be more than a 12 percent increase in cost to constitute impracticability. Also, a party is not excused from performance if that party cannot show a deliberate avoidance of irregular risks. Foreseeability of an irregular risk alone by one contracting party is not determinative of which party should bear the cost of the risk. Under the impracticability doctrine, the following relief is available to parties seeking to be excused from performance of a contract: declaring the contract void or voidable or modifying the contract. Although modifying the contract is a disfavored remedy, it is the more appropriate for contracts that are long-term.