931 F.2d 1112 (6th Cir. 1991)
In the fall of 1974, Karl Wendt Farm Equipment Company entered into a Dealer Sales and Service Agreement with International Harvester Company establishing Wendt as a dealer of IH goods in the area of Marlette, Michigan.1
The agreement set forth methods of sale, servicing provisions, dealer operating requirements, and specific conditions for termination.2 International Harvester faced a dramatic recession in the farm equipment market and substantial losses.3 It negotiated an agreement to sell its farm equipment division to J.I. Case Co. and Tenneco Inc. in the form of an asset sale with a base purchase price of $246,700,000.00 in cash and $161,300,000.00 in participating preferred stock.4 IH reported a paper loss of $479,000,000.00 on the transaction.5
Case/Tenneco received access to IH dealers but not the existing franchise network, creating approximately 400 conflicted areas in which only one franchise would be offered.6 Marlette, Michigan was a conflicted area, and Wendt was not offered a Case franchise.7 Wendt filed this action alleging breach of the Dealer Agreement and several other causes of action that were disposed of before trial.8 IH filed a counter-claim against Wendt for debts arising out of farm equipment and parts advanced on credit.9
At trial the district court allowed IH's defense of impracticability of performance to go to the jury on the contract action, and the jury returned a verdict of no cause of action.10 The court granted a directed verdict for Wendt on IH's defenses of frustration of purpose, an implied covenant limiting the duration of the contract, and a defense relating to whether Section 2 of the agreement permitted IH to cease production of all product lines.11
After trial the court issued an order dated April 1, 1988 stating that Wendt was indebted to IH in the amount of $253,839.69 and requiring Wendt to turn over its inventory including four tractors.12 When Wendt refused to tender the goods until the court determined credit under the Michigan Farm and Utility Equipment Franchise Act, IH moved for contempt.13 The court ruled the Farm Act irrelevant to the replevin order but relevant to any deficiency calculation and ordered return of the goods.14 In November 1988, IH received the equipment from Wendt and after selling it, asked the court for a deficiency judgment.15 Later the parties stipulated the amount of the deficiency at $180,379.21, as suggested by Wendt.16 On August 18, 1989, the court entered a judgment in that amount.17 Wendt appealed claiming error in not applying the Farm Act and other rulings, while IH cross-appealed the directed verdicts.18
Whether the defense of impracticability of performance was properly submitted to the jury under Michigan law in light of the market downturn and asset sale?19
Under Michigan law, economic unprofitableness is not the equivalent to impossibility of performance.20 Subsequent events which in the nature of things do not render performance impossible, but only render it more difficult, burdensome, or expensive, will not operate to relieve a party of its contractual obligations.21 The doctrine of impracticability under Restatement (Second) of Contracts section 261 requires that the non-occurrence of the supervening event must have been a basic assumption on which the contract was made.22 Mere market shifts or financial inability of one of the parties do not usually effect discharge.23
No. The established facts demonstrate that International Harvester faced a dramatic recession in the farm equipment market and substantial losses, prompting its asset sale to Case/Tenneco.24 Yet the continuation of existing market conditions and the financial situation of the parties are ordinarily not basic assumptions of the contract under the Restatement commentary.25 The Dealer Sales and Service Agreement contained specific provisions for termination, and International Harvester elected to sell its assets rather than pursue mutual assent termination or share proceeds with dealers.26 Michigan precedents such as Chase, Milligan, and Sheldon confirm that even severe economic hardship does not excuse performance, and the proportional effect of International Harvester's losses does not alter the doctrine's scope.27
The district court erred in permitting the defense of impracticability to go to the jury, and Wendt was entitled to a directed verdict on this issue as a matter of law.28
Related opinions on this issue
Circuit Judge Ryan dissents from the majority's holding on impracticability.29 He maintains that the Michigan Supreme Court would likely adopt the impracticability doctrine as defined in Restatement (Second) of Contracts section 261, as signaled by the Court of Appeals decision in Bissell.30 Ryan argues that whether the economic circumstances were sufficiently extreme and unreasonable to excuse performance presents a question of fact for the jury.31
Viewing the evidence in the light most favorable to International Harvester, the sudden nationwide collapse of the farm implement industry that produced over $2 billion in losses over four years could support the defense.32 He stresses that the jury, not the appellate court, is empowered to decide whether those facts constituted an event the non-occurrence of which was a basic assumption on which the contract was made.33
Whether the district court properly granted a directed verdict rejecting the frustration of purpose defense?34
Under the Restatement (Second) of Contracts section 265, the defense of frustration of purpose requires that the principal purpose of the contract be substantially frustrated without the fault of the party seeking discharge.35 This must occur by an event the non-occurrence of which was a basic assumption on which the contract was made.36 The frustration must be severe enough that it is not fairly regarded as within the risks assumed.37 Market conditions or financial inability are not basic assumptions.38
Yes. The established facts show that the primary purpose of the Dealer Sales and Service Agreement, as stated in section 1, was to establish the dealer and govern relations in promoting sales and providing service.39 The dramatic downturn in the farm equipment market and International Harvester's subsequent asset sale did not destroy that primary purpose.40 Continuity of market conditions was not a basic assumption, and the frustrating event was International Harvester's own decision to exit the business without following the agreement's termination provisions.41
The district court properly granted a directed verdict rejecting the frustration of purpose defense.42
Whether Section 2 of the Dealer Agreement authorized International Harvester to discontinue all product lines and exit the market?43
Section 2 of the Dealer Agreement reserves the right to make additions to and eliminations from the agricultural equipment price list, including reductions from discontinued production of lines, without incurring responsibility to the dealer.44 This provision addresses shifts in product lines and does not function as an alternative termination mechanism when the agreement separately specifies conditions and procedures for termination.45
No. The established facts indicate that section 2 permits International Harvester to adjust its product offerings but the agreement contains a distinct section entitled Termination of the Agreement that sets forth specific conditions.46 Allowing complete withdrawal under section 2 would render the termination provisions meaningless and contradict the parties' evident intent to maintain the agreement's binding force despite line changes.47
The district court correctly granted a directed verdict for Wendt on the section 2 defense.48
Whether an implied covenant or term limited the duration of the dealership agreement when the manufacturer ceased operations?49
When a dealership agreement contains express provisions for termination for cause, courts will not imply a term allowing termination upon the manufacturer's cessation of business.50 Equitable implication of terms is appropriate only to apportion risk as the parties would have done had they considered the circumstance.51 Implying unilateral exit without following termination conditions places all risk on the dealer.52
No. The established facts establish that the Dealer Sales and Service Agreement included detailed termination provisions.53 Neither party anticipated International Harvester's complete exit from the farm equipment business.54 Implying a term permitting termination without compliance with those provisions would contradict Michigan authority such as Lichnovsky and unfairly burden the dealer.55
The district court properly granted a directed verdict rejecting the implied duration defense.56
Whether the Michigan Farm and Utility Equipment Franchise Act applied to the calculation of the deficiency judgment on the counterclaim?57
The Michigan Farm and Utility Equipment Franchise Act requires a supplier to repurchase a dealer's inventory upon termination of a franchise agreement and permits the dealer to offset repurchase proceeds against debts.58 A party must raise the Act's provisions at the appropriate stage of proceedings concerning deficiency calculations or the issue is waived on appeal.59
No. The established facts show that after the April 1, 1988 order and the subsequent contempt motion, Wendt never raised the Farm Act in its response to the motion for deficiency judgment.60 Instead, the parties stipulated the deficiency amount at $180,379.21, which the court entered on August 18, 1989.61 Raising the Act for the first time on appeal is untimely.62
The district court properly declined to apply the Farm Act to the deficiency judgment calculation.63