Court Opinion

ID: 9664576
Source: CourtListenerOpinion
Date Created: 2023-08-24 00:21:38.295031+00
Date Added: 2024-06-11T18:15:07.297599
License: Public Domain

LAMBERT, Justice,
dissenting.
The decision of the majority should chill the hearts of business persons throughout Kentucky for it stands for the proposition that detailed contracts may be rewritten by judges on a “judgment call” to accommodate their views of equity. As virtually every contract contains some escape clause which excuses performance upon the occurrence of “material unforeseen events,” or some such descriptive phrase, parties may no longer rely upon the strict enforcement *405of their contracts if subsequent events do not transpire as had been expected.
While the trial court wrote more than a hundred pages and the Court of Appeals wrote forty more, the principal issue here is not that complicated. The issue is whether, as a matter of law, the failure of an economic forecast to accurately predict future market behavior amounts to a material unforeseen event which excuses performance of a contract. The majority has held that it does.
South East Coal Company (SECO) entered into a long-term contract with Kentucky Utilities (KU) for the supply of compliance coal. KU needed to have a dependable supply of such coal to avoid expensive capital expenditures in the form of scrubbers upon its generating units at Ghent. To meet the requirements of the KU contract, SECO expanded its holdings of compliance coal and invested heavily in plant and equipment. The original contract price was $43 per ton, a price in excess of the existing market price, but the lowest delivered price from a single, domestic-origin supplier. The parties’ contract called for upward and downward adjustment of the price per ton based on SECO’s production cost and published indices. About five years into the contract and in accordance with its adjustment provisions, the price had risen to nearly $57 per ton, but during the same period, the market or “spot” price of such coal had declined. KU sued seeking a $19 per ton reduction in the contract price.
KU based its claim on a provision of the contract which permitted review prior to the end of every third year to determine whether price adjustment was required “... because of the occurrence ... of material unforeseen events and changed conditions.” While recognizing that KU expected to pay in excess of the market price due to the underground production and its need for a dependable supply, and while recognizing that SECO had and would incur vastly greater costs due to its commitment to KU, the trial court nevertheless held that the difference between the contract price and the market price satisfied the contract requirement and granted KU a substantial price reduction.
As grounds for its ruling, the trial court found that the parties expected the price of coal to rise during the term of the contract and that failure of the market to behave as they had expected authorized relief. Its view is curious, however, due to a statement in the same opinion that “historically the price of coal fluctuates up and down. There have always been highs and lows in the production, in the use, and in the price of coal which is mined in Eastern Kentucky. This is not unforeseen nor unexpected.”
The contract of the parties was an enormous undertaking for SECO and for KU as well. To justify such, long-term and dependable performance was necessary. In disregard of the foregoing, the construction placed on the contract by the trial court essentially converted it from twelve and a half years to three years. By construing price fluctuations as material and unforeseen events, the trial court effectively held that the contract should be renegotiated every three years, contrary to the manifest intention of the parties.
In final analysis, this case boils down to KU’s seizure of an opportunity to make a greater profit by breach of its contract, and at the expense of its fuel supplier. At the time the contract was entered, KU expected fuel costs to increase. If the market had performed as it expected, KU would have demanded performance of the contract as written. When the price of fuel declined, however, KU did not suffer any rate reduction or any other economic detriment, but it seized the opportunity to enhance profit without regard to the disaster it wrought on SECO. As recent as 1991, we wrote in Ranier v. Mt. Sterling National Bank, Ky., 812 S.W.2d 154, 156 (1991), that
“In every contract, there is an implied covenant of good faith and fair dealing. (Citation omitted.) Indeed, it may be said that contracts impose on the parties thereto a duty to do everything necessary to carry them out.”
Our decision in this case is a retreat from the high principles we embraced just last year.
*406For a comprehensive and scholarly treatment of the issue presented here, the decision of the United States Court of Appeals for the Seventh Circuit, Northern Indiana Public Service Company v. Carbon County Coal Company, 799 F.2d 265 (7th Cir.1986), should be consulted. This decision, by Judge Richard A. Posner, is factually similar to the case at bar and legally indistinguishable. The public utility sought to be excused from performance of its fixed price coal supply agreement after escalation provisions in the contract had nearly doubled the price and the rate commission had denied an increase. Denying relief, the Court perceptively analyzed the parties’ circumstances and required them to lie in the beds they had made. Of particular significance was the willingness of the utility to agree to a fixed price and fixed quantity to assure supply of low sulphur coal. As such, risk of price fluctuations was held to be inherent and a central term of the contract. The Court said:
“It [the utility] committed itself to paying a price at or above a fixed minimum and to taking a fixed quantity at that price. It was willing to make this commitment to secure an assured supply of low-sulphur coal, but the risk it took was that the market price of coal or substitute fuels would fall. A force majeure clause is not intended to buffer a party against the normal risks of a contract. The normal risk of a fixed-price contract is that the market price will change. If it rises, the buyer gains at the expense of the seller (except insofar as escalator provisions give the seller some protection); if it falls, as here, the seller gains at the expense of the buyer. The whole purpose of a fixed-price contract is to allocate risk in this way. A force maj-eure clause interpreted to excuse the buyer from the consequences of the risk he expressly assumed would nullify a central term of the contract.” Id. at 275.
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“If, as is also the case here, the buyer forecasts the market incorrectly and therefore finds himself locked into a disadvantageous contract, he has only himself to blame and so cannot shift the risk back to the seller by invoking impossibility or related doctrines.” Id. at 278.
The majority opinion of the Court of Appeals, with the concurrence of three of the four judges participating,1 precisely analyzed this case and I adopt the view expressed therein:
“We do not agree that the factors cited by the court are material unforeseen events, nor do we believe that KU met the commercial impracticability threshold. The fact that the price of compliance coal on the spot market did not increase as had been predicted by some economists so as to make the contract price advantageous to KU, cannot be the basis of a claim of commercial impracticability. As earlier noted, the court found that the contract price accurately reflected SECO’s cost and inflation. If the price of coal had gone up to $85/ton as had been predicted, KU would have considered that it had a bargain in the contract; although, presumably, SECO’s contract prices would have risen somewhat, since they were tied partially to pass-through costs and partially to certain designated indices. The stated reason for KU to enter into the contract was the need for a long-term contract for the supply of low-sulphur coal and as a hedge against expected increases in costs of procuring this compliance coal. The chance that the market would go the other way is a risk that the parties took in entering into such a contract.” Court of Appeals Opinion at p. 17.
For the reasons stated, I dissent.
REYNOLDS, J., joins in this dissenting opinion.

. After rendition of the opinion of the Court of Appeals, but before any ruling on KU’s petition for rehearing, Judge Judy M. West died. Judge John D. Miller was thereafter designated as presiding judge of the panel for purposes of ruling on the petition for rehearing. Judge Miller concurred in the majority opinion by Judge Hower-ton.