Karl Wendt Farm Equipment Co. v. International Harvester Co.

United States Court of Appeals for the Sixth Circuit · 1991 · Contracts

Contractsfrustrationimpracticabilitydealer agreementeconomic hardshipimpracticabilityfrustration of purposeeconomic hardship

Facts

Wendt and IH entered a dealer sales and service agreement making Wendt an IH farm equipment dealer in Marlette, Michigan, and the agreement contained detailed termination provisions. After a severe downturn in the farm equipment market, IH sold its farm equipment division's assets to Case/Tenneco and did not transfer its existing dealer network; Wendt, located in a conflicted area, was not offered a Case franchise. IH defended Wendt's breach claim by arguing impracticability and other contract-based defenses, while also pursuing a counterclaim for debts owed by Wendt. The district court let impracticability go to the jury, rejected IH's other defenses by directed verdict, and later entered a stipulated deficiency judgment against Wendt.

Issue

Whether, under Michigan law, IH could avoid liability for breaching the dealer agreement on the ground that performance became impracticable or frustrated because of a severe market downturn and IH's decision to sell its farm equipment business. The court also considered whether Section 2 of the agreement or an implied term allowed IH unilaterally to terminate by going out of business, and whether Wendt could invoke the Michigan Farm and Utility Equipment Franchise Act on appeal to challenge the deficiency judgment.

Rule

Under Michigan law, even assuming impracticability is recognized beyond strict impossibility, mere market shifts, financial inability, or severe economic hardship do not discharge contractual duties where those conditions do not alter a basic assumption of the contract. Frustration of purpose likewise does not apply when the contract's principal purpose is not destroyed and the alleged frustration is merely reduced profitability or the promisor's own decision to exit the business. Where a contract contains specific termination provisions, courts will not read other clauses or implied terms to create an alternative unilateral right to terminate by going out of business. Issues not properly raised in the district court cannot be raised for the first time on appeal.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Summit Orchard Systems, a farm-drone manufacturer based in Des Moines, signed a five-year dealer agreement with Riley Boone in Cedar Rapids. The agreement includes detailed termination procedures requiring notice and specified buyback steps. Two years later, a sharp collapse in agricultural spending caused Summit's division to lose money, and Summit sold the division's assets and immediately told Riley the dealer agreement was over.

If Riley sues for breach, which is the strongest argument against Summit's impracticability defense under the governing rule?

Explanation. Economic hardship, reduced profitability, and market shifts ordinarily do not excuse performance under impracticability because continuation of market conditions and a party's financial condition are not usually basic assumptions of the contract. The majority also stressed that where the contract contains specific termination provisions and the promisor chose to sell assets rather than follow them, impracticability does not discharge performance.