Roth Steel Products v. Sharon Steel Corp.

Brief Fact Summary. Roth Steel Products (Plaintiff) sued Sharon Steel Corp. (Defendant) for breach of contract, with emphasis on a modification contract.  Defendant appeals from the judgment of the District Court for the Plaintiff. 

Synopsis of Rule of Law. A party may modify a contract without consideration as long as it is modified in good faith. 

Facts. Plaintiff contracted to purchase 200 tons of steel per month from Defendant at a price of $148 per ton.  Defendant also stated that it would sell the steel on an open schedule basis for $140.  At that time the steel market was operating at 70% capacity and Plaintiff has a price that was substantially lower than Defendant’s book price for steel.  Then the market was operating at full capacity and steel producers were experiencing delays in filling orders.  Defendant then notified its customers including Plaintiff that it was discontinuing its price concessions.   The parties then agreed to a contract modification that Plaintiff would pay the agreed on a specific price which Plaintiff was reluctant to do but had to do due to necessity.  Then the parties operated on a different basis where Plaintiff would order the steel and Defendant would accept the order at the price prevailing at the time of shipment.  Defendant had many late deliveries, but Plaintiff acquiesced to this pattern.  However, Plaintiff’s acquiesce ended when Plaintiff learned Defendant was allocating substantial quantities of steel to a subsidiary for sale at premium prices.  Plaintiff sued Defendant for breach of contract, with special emphasis on the modification contract after the original agreement.  Defendant raised defenses including impracticability and in the alternative the agreed modification.  The District Court held that the Defendant was not excused form the modified contract on the grounds of impracticability and the modification was unenforceable.  Defendant appeals. 

Issue. Whether the modification of the contract is enforceable?

Held. No.  Judgment affirmed in part and reversed in part. 
•    Defendant was not entitled to relief under UCC 2-615(a).  The contract modification is invalidated because of Defendant’s bad faith rather than because of economic duress.  Defendant asserted that it properly increased the price because the parties had modified the original contact to reflect changed market conditions.  However, the District Court found that Defendant did not seek a modification to avoid a loss on the contract.  Defendant also used its position as the Plaintiff’s chief supplier of steel to extract the price modification. 
•    A party may modify a contact under the Uniform Commercial Code without consideration and it will still be binding, it is only limited by Article Two’s obligation of good faith.  In order to determine whether a modification was obtained in good faith, the court must look at whether the party’s conduct is consistent with reasonable commercial standards of fair dealing in the trade and whether the parties were in fact motivated to seek modification by an honest desire to compensate for commercial exigencies. 
•    Here, the findings of the District Court are not sufficient to support a finding that Defendant did not observe reasonable commercial standards by seeking a modification.  The findings do not support a conclusion that a reasonable merchant would not have sought a modification in order to avoid a loss.  The findings regarding Defendant’s profits also are insufficient to warrant a conclusion that Defendant was not justified in seeking the contract modification.  A party who has not actually suffered a loss on the contact may still seek a modification if a future loss on the agreement was reasonably foreseeable. 
•    The most important inquiry to determine whether the decision to seek a modification is justified is whether because of changes in the market performance of the contract has come to involve a loss.  Unforeseen economic exigencies existed which would prompt an ordinary merchant to seek a modification to avoid a loss on the contract. 
•    Honesty in fact also has to be determined.  Here, Defendant acted in bad faith by using coercive conduct to extract the price modification.  Therefore, Defendant attempted to modify the contract in order to compensate for increased costs which made performance come to involve a loss, is ineffective because Defendant did not act in a manner consist with Article Two’s honesty in fact when it refused to perform its remaining obligations under the contract.

Discussion. In this case, the Court of Appeals affirmed the decision on impracticability and modification but remanded the case for factual findings on whether Plaintiff gave Defendant timely notice of breach.  On the impracticability defense, the court held that Defendant’s inability to perform was a result of its policy accepting far more orders than it was capable of filling.