xtitsx: (Default)
( 2 Mar 2017 05:14 pm)
this is what i've been doing in Law School lately.
Legal Writing II had us write an office memo, which is the bulk of what lawyers do all day long, apparently, for a make-pretend client who manufactures batteries for cellphones.
the make-pretend client wanted to see if he could get out of his contract after some natural disasters affected his supply and production chains but also, because he got a better offer to sell batteries to somebody else.
the memo was an open-universe problem, which meant that, as opposed to last semester, this time we had to do our own research and find our own precedents.
after several hundreds of hours, as follows is what i came up with.
read it or don't.
it's totally cool to skip ahead

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MEMORANDUM
To: Majorica Wynne
From: TITS
Date: February 12, 2017
Re: OBI (Z-Mobile v.): Excuse from contract under Commercial Impracticability doctrine.

-Question Presented-
OBI has a contract with Z-Mobile. A pair of natural disasters have affected OBI's supply and production chains, altering their ability to deliver on the deal as originally conceived without undertaking a significant increase in costs. OBI is now facing breach of contract. Under the laws of New York state, can OBI be completely excused from performance under the doctrine of commercial impracticable?

-Brief Answer-
Yes, OBI can likely be completely excused from performance of their contract. OBI can likely find relief in the New York UCC § 2-615 which allows for excuse by failure of presupposed conditions under certain circumstances; (1) a contingency must occur, (2) performance must thereby be made ‘impracticable’ and (3) the non-occurrence of the contingency must have been a basic assumption on which the contract was made. Because an unforeseeable pair of natural disasters significantly increased their costs, OBI can likely meet each element of the test.

-Facts-
Ovac Batteries, Inc. (OBI) manufactures an innovative rechargeable battery technology Dynamic Dilithium (D-Lith). Other companies are pursuing D-Lith technology but OBI is the first to bring the product to market.

On October 29, 2016, OBI signed a $3.5 million contract with Z-Mobile Manufacturing Inc. (Z-Mobile), a cellphone producer, to provide 100,000 units of D-Lith batteries for a new line of phones. This contract established four dates for delivery, April, June, August and October, 2017. Z-Mobile has staked their 2017 product line on phones featuring D-Lith batteries. Both OBI and Z-Mobile are headquartered in New York state and the contract is governed by New York law.

OBI produces D-Lith batteries using a somewhat rare compound, Dilithium, sourced from only two known mines, in South Africa and Malaysia. On December 21, 2016, an earthquake collapsed the Malaysian mine, causing the price of Dilithium from the remaining South African mine to skyrocket by 300 percent. After initial uncertainty from Malaysian authorities, OBI has learned that estimates to reopen the mine are eighteen months. OBI manufactures D-Lith batteries in two factories, one in Rochester and another on Long Island. On December 15, 2016, a category EF-5 tornado -the most severe- completely destroyed the Long Island facility, reducing manufacturing capacity by half. Estimates to reopen or retool another OBI manufacturing facility are two years.

OBI currently has enough Dilithium to manufacture 25,000 units for Z-Mobile, a quarter of the contract. OBI can purchase more Dilithium from the South African mine at the increased rate, but that would obliterate the profit margin of the contract, converting a $1 million profit into a $3 million loss and ultimately result in OBI's bankruptcy. Additionally, on January 10, OBI began negotiations to produce D-Lith batteries for Delshiba Computers. This would be a profitable endeavor, but would cause OBI to use their remaining Dilithium stockpile and factory for Delshiba's needs. On January 10, 2017, OBI informed Z-Mobile that they will be in breach of contract.

-Discussion-
OBI can likely be excused from their contract with Z-Mobile. The New York UCC § 2-615 provides an excuse for non-performance if some external contingency unforeseeable at the time of contract significantly alters the presupposed conditions upon which the contract was based. Because two natural disasters effected OBI's production ability, because these natural disasters were unforeseeable at the time of contract, because the absence of these natural disasters was a presupposed condition upon which OBI based its contract and because this ultimately led to a significant cost of materials affecting production, OBI can likely be excused from breach.

The New York UCC § 2-615 states that it is “not a breach of [] duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” N.Y. U.C.C. Law § 2-615 (McKinney, Westlaw through L.2017, chapters 1 to 6. Applying New York law, the US District Court for the Eastern District of Louisiana articulated a three-part test for breach to be excusable, “(1) a contingency must occur, (2) performance must thereby be made ‘impracticable’ and (3) the non-occurrence of the contingency must have been a basic assumption on which the contract was made.” Louisiana Power & Light Co. v. Allegheny Ludlum Indus., Inc., 517 F. Supp. 1319, 1323 (E.D. La. 1981). The court also said “(t)he burden of proof on a claim of commercial impracticability rests with the party making the claim.” Id. at 1324.

(1) The Long Island tornado and Malaysian earthquake are contingencies that affect the contract between OBI and Z-Mobile.

Quoting the official comments to the New York UCC § 2-615, the Supreme Court of Chemung County articulated in Maple Farms “a severe shortage of raw materials . . . due to a contingency such as . . . unforeseen shutdown of major sources of supply or the like, which [] causes a marked increase in cost . . . is within the contemplation of this section.” Maple Farms, Inc. v. City Sch. Dist. of City of Elmira, 76 Misc. 2d 1080, 1084, 352 N.Y.S.2d 784, 789 (Sup. Ct. 1974) quoting N.Y. U.C.C. Law § 2-615 (McKinney, Westlaw through L.2017, chapters 1 to 6. In 407 E. 61st Garage, the Court of Appeals did not find a hotel's financial difficulties sufficient as contingencies holding, “the excuse of impossibility of performance is [generally] limited to the destruction of the means of performance by an act of God.” 407 E. 61st Garage, Inc. v. Savoy Fifth Ave. Corp., 23 N.Y.2d 275, 282, 244 N.E.2d 37, 42 (1968). In Goddard, the state appellate court found that the destruction by fire of defendant's factory was sufficient to excuse performance because “it became impossible . . . to perform its obligation under the agreement . . . within the time contemplated by the parties.” Goddard v. Ishikawajima-Harima Heavy Indus. Co., 29 A.D.2d 754, 287 N.Y.S.2d 901 (1968).

Like fire, tornadoes and earthquakes are within God's purview. The earthquake that shut down the Malaysian mine resulted in a 300 percent increase in the cost of Dilithium. This shutdown of a major source of supply causes a marked increase in cost for OBI. The tornado that hit Long Island devastated one of OBI's two facilities, reducing their production capacity by half. Z-Mobile's product delivery dates, spaced two months apart, are now too narrow of a time frame for OBI to perform its obligation within the time contemplated by the parties.

Z-Mobile may say that even with the increased cost of Dilithium and fifty-percent capacity, OBI can still perform the terms of the contract. However, even if OBI were to retool their current production facilities and dedicated production full-time to Z-Mobile's needs, they would not be at full capacity for two years.

Because OBI suffered two separate acts of God that destroyed their means of performance and rendered performance within the time contemplated by the parties impossible, OBI can be considered to have suffered a contingency worthy of contemplation under NY UCC § 2-615.

(2) The occurrence of these contingencies made OBI's contractual performance impracticable.

For N.Y. UCC § 2-615 to apply, the impracticability of performance must not be exclusively financial. The Maple Farms court quoted Official Comment (4) of the New York UCC § 2-615 when it held “[i]ncreased 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.” Maple Farms 76 Misc. 2d at 1084, 352 N.Y.S.2d at 788. Courts require some justification for excuse beyond mere economic damage. “[T]here is a clear distinction between a defendant who seeks to excuse . . . performance by showing . . . conditions which would make the performance . . . more expensive, or which would result in economic loss, and a defendant who establishes that the increase in cost is so great as to render performance impossible.” Gay v. Seafarer Fiberglass Yachts, Inc., 1974 WL 21674 (N.Y. Sup. Ct. July 22, 1974).

In 407 East 61st Garage, the Court of Appeals declined to excuse the Savoy hotel from their contract with a parking garage solely because the hotel was facing financial difficulties. “[P]erformance by [the hotel] was at all times possible, although unprofitable, since the hotel could simply have remained in business, and the legal excuse of impossibility of performance would not be available to it.” 407 E. 61st Garage, 23 N.Y.2d at 282, 244 N.E.2d at 42. The court asserted that “the applicable rules do not permit a party to abrogate a contract, unilaterally, merely upon a showing that it would be financially disadvantageous to perform it.” Id.. However, in Gay, the Suffolk County Supreme Court found that because a severe oil shortage “cause[d] a marked increase in cost” the party should be excused from their obligation. Gay, 1974 WL 21674 quoting N.Y. U.C.C. Law § 2-615 (McKinney, Westlaw through L.2017, chapters 1 to 6.) The court made a specific point to note that “were it not for defendant's assertions concerning the [] shortage” it would have granted summary judgment against the defendant. Gay,1974 WL 21674.

If held to the terms of its contract, OBI faces more then mere financial difficulties. Unlike the Savoy Hotel in 407 E. 61st Garage which the court found could have continued operations just not profitably so, OBI would find itself brought to bankruptcy court if held to their contract. Like in Gay, a sudden shortage of raw materials has drastically affected OBI's costs. The collapse of the Malaysian mine has caused the price of Dilithium to increased 300 percent. Whereas under the terms of their contract OBI stood to make a $1 million profit, they are now facing the prospect of a $3 million loss. This is an increase in cost is so great as to render performance impossible.

Z-Mobile will likely argue that OBI's desire to be excused from their contract is a business decision like the Savoy's in 407 E. 61st Garage. They will likely say that OBI is seeking to be excused from a deal that is financial inconvenient, not impossible. Z-Mobile will likely point to the timeline of events that occurred and when OBI chose to notify Z-Mobile that they will be in breach as evidence that this is not a truly impossible performance. The tornado that destroyed OBI's Long Island facility happened on December 15 and the earthquake that closed the Malaysian mine happened on December 21, yet OBI did not notify Z-Mobile that they would be in breach until January 10. January 10 is also the same day OBI began negotiations with Delshiba about a deal that would be much more beneficial for OBI. Z-Mobile will likely argue that had OBI legitimately needed to breach contract because of the two acts of God, notice would have come much sooner then twenty days.

Citing New York law, the US District Court in Cliffstar held “The seller must notify the buyer seasonably that there will be delay or non-delivery”(emphasis in quotation). Cliffstar Corp. v. Riverbend Prod., Inc., 750 F. Supp. 81, 84 (W.D.N.Y. 1990) quoting N.Y. U.C.C. Law § 2-615 (McKinney, Westlaw through L.2017, chapters 1 to 6. In Cliffstar the defendant Riverbend, a tomato grower, initially notified Cliffstar, a tomato processor, that there might be some difficulty with the tomato crop in September 27, 1988. Riverbend did not officially notify Cliffstar that they would be in breach of contract until November 21, 1988, nearly eight weeks later. The court, applying New York Law, held that the delay was not unseasonable because “as a practical matter, a seller may not be able to provide this notice instantaneously.” Cliffstar 750 F. Supp. at 87.

OBI's notification of breach to Z-Mobile falls well within the “seasonable” time-frame laid out by Cliffstar. Furthermore, Between the mine's collapse on December 21 and January 5, OBI was operating on guidance from Malaysian authorities that the mine would reopen promptly. It was only after January 5 that OBI became truly aware of the depth of the situation and notified Z-Mobile five days later.

While the optics of OBI notifying Z-Mobile that they would be in breach on the same day as their conversation with Delshiba may suggest otherwise, it is likely that OBI can demonstrate that the twin acts of God caused a shortage of raw materials and a price increase so great as to render performance impossible and that the delay in notification was due to the uncertainty of mine authorities.

(3) The non-occurrence of these contingencies was a basic assumption upon which OBI based its contract.

Whether a contract is predicated upon the non-occurrence of contingencies “hinges on whether [the contingencies were] foreseeable at the time the contract was made.” Cliffstar 750 F. Supp. at 84. “If a contingency is foreseeable, it and its consequences are taken outside the scope of U.C.C. § 2–615.” Id. The Cliffstar court continues to say that non-foreseeability “is not an absolute requirement” because “practically any occurrence can be foreseen but [what matters is] whether the foreseeability is sufficient to render unacceptable the defense of impossibility.” Id.

In Maple Farms, plaintiff Maple Farms sought to be excused from a contract with the local school district for milk because of an increase in cost. The Supreme Court Chemung County ruled against excusing the plaintiff because the nature of the milk market normally fluctuated at the time of contract and these fluctuation were “not totally unexpected.” Maple Farms, 76 Misc. 2d 10 at 1085, 352 N.Y.S.2d at 789. In Cliffstar, the US District Court applying New York law found that a tomato grower was not precluded from a defense of commercial impracticability on foreseeable grounds when hot temperatures reduced their crop prospects, even though the grower had knowledge of the uncertainty of the incoming crop. The court seemed to hold that even knowledge of an uncertain situation was not enough to immediately preclude an unforseeability defense. Cliffstar, 750 F. Supp. at 84.

Here, OBI signed a contract with Z-Mobile that was predicated upon being able to have access to the raw materials and means of production necessary to deliver. This was an integral assumption made by OBI in order to yield the $1 million profit the contract originally promised and is not an unreasonable assumption. The tornado that destroyed OBI's Long Island factory was an EF-5, the most severe type on the Enhanced Fujita scale. While New York does experience several tornadoes in any given year, the overwhelming majority of them are EF-0 or EF-1 in intensity. This amounts to damage in the “light” to “moderate” categories, unable to destroy or threaten a factory. In the sixty-four years that the Rochester Democrat and Chronicle has kept track of tornadoes in New York State, there has never been an EF-5 tornado which yields “incredible” damage and only one EF-4, “devastating” damage, back in 1989. List of Tornadoes in New York State, NYDatabases.com, (last visited Feb. 12, 2017), http://rochester.nydatabases.com/database/list-tornadoes-new-york-state. Because an EF-5 tornado is so anomalous, it cannot be considered a “foreseeable” eventuality and therefore, the lack of tornadoes was a basic assumption upon which OBI made their contract with Z-Mobile.

Z-Mobile may argue that OBI should have been put on notice of the threat of a storm potentially affecting their facilities at the time of contract. They may point to OBI's property and casualty insurance provider Snake Farm raising rates by thirty percent in 2012 on account of “weather risks.” They may be able to demonstrate that Ray Ovac had conversations with Lloyd London, his Snake Farm agent, who referred him to a publication from the New York City Office of Emergency Management about tornadoes in New York. However, because of the demonstrable statistical rarity of an EF-5 tornado in New York, this kind of contingency is foreseeable only so much as practically any occurrence can be foreseen, but the Cliffstar court tells us that merely being within the realm of possibility is not the standard. The question is whether foreseeability is sufficient to render unacceptable the defense of impossibility and in this case, it likely is not.

Because of the rarity of the kind of tornado capable of destroying or even threatening OBI's production facility -a once-in-sixty-four year event- it is not unacceptable for OBI to not have foreseen damage to their factory. And because it is not unacceptable for OBI to not foresee the contingency, the lack of the contingency happening was a basic assumption upon which OBI was operating.

-Conclusion-
OBI is likely able to meet its burden of proof for all three elements of the test to excuse a contract by a failure of presupposed conditions. (1) The Malaysian earthquake and the New York tornado were acts of God that made performance in the time contemplated by the parties impossible. (2) The contingencies altered the essential nature of the performance by driving up the cost of raw materials 300 percent, an amount so great as to render performance impossible because of bankruptcy. (3) The unforeseeable nature of the destruction of the Long Island factory by an unprecedented EF-5 tornado was a contingency OBI could not have anticipated and was thus, not contemplated at the time they entered into contract. Because OBI meets all three elements of the test for excuse by a failure of presupposed conditions under New York UCC § 2-615, OBI can likely be excused.
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//[ab irato ad astra]
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September 2017

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