Kyocera Corp. v. Hemlock Semiconductor, LLC.

• Citation: 886 N.W.2d 445,313 Mich.App. 437
• Decision Date: 03 December 2015
• Docket Number: Docket No. 327974.
• Parties: KYOCERA CORPORATION v. HEMLOCK SEMICONDUCTOR, LLC.
• Court: Court of Appeal of Michigan (US)

313 Mich.App. 437

886 N.W.2d 445

KYOCERA CORPORATION

v.HEMLOCK SEMICONDUCTOR, LLC.

Docket No. 327974.

Court of Appeals of Michigan.

Submitted Oct. 6, 2015, at Lansing.

Decided Dec. 3, 2015, at 9:05 a.m.

Dykema Gossett PLLC, Ann Arbor (by Jill M. Wheaton and Krista L. Lenart ) and Morrison & Foerster LLP (by David C. Doyle, William V. O'Connor, Joseph R. Palmore, and Ellen N. Adler ) for plaintiff.

Braun Kendrick Finkbeiner PLC, Saginaw (by Jamie Hecht Nisidis and Craig W. Horn ) and Orrick, Herrington & Sutcliffe LLP (by John Ansbro, J. Peter Coll, Jr., and Thomas Kidera ) for defendant.

Before: BOONSTRA, P.J., and SAAD and HOEKSTRA, JJ.

BOONSTRA

, P.J.

Plaintiff appeals by right the trial court's order granting summary disposition in favor of defendant under MCR 2.116(C)(8)

(failure to state a claim) and dismissing plaintiff's declaratory-judgment action. We affirm.

I. NATURE OF THE CASE

This case involves the interpretation of a force-majeure clause in a contract. Generally, the purpose of a force-majeure clause is to relieve a party from penalties for breach of contract when circumstances beyond the party's control render performance untenable or impossible. See Erickson v. Dart Oil & Gas Corp., 189 Mich.App. 679, 689, 474 N.W.2d 150 (1991)

. The contract at issue is a take-or-pay contract. A take-or-pay contract obligates a buyer to purchase a specific quantity of product from the seller (usually also the manufacturer of the product) at a fixed price; if the buyer purchases less than that quantity, it is nonetheless obligated to pay the seller for the full specified quantity at the specified price. See, e.g., Mobil Oil Exploration & Producing Southeast Inc. v. United Distrib. Co., 498 U.S. 211, 229, 111 S.Ct. 615, 112 L.Ed.2d 636 (1991). The very essence of a take-or-pay contract is to allocate to the buyer the risk of falling market prices by virtue of fixed purchase obligations at a long-term fixed price and to thereby secure for the buyer a stable supply, while allocating to the seller the risk of increased market prices and, by virtue of the buyer's obligation to take or pay for a fixed quantity of product, removing from the seller the risk of producing product that may go unpurchased. See generally Medina, The Take–or–Pay Wars: A Cautionary Analysis for the Future, 27 Tulsa L J 283 (1991).

At stake in this case is plaintiff's liability under its take-or-pay contract for the purchase of polysilicon for use in solar panels. If plaintiff is liable under the contract for the full purchase price of all unordered polysilicon for the duration of the contract, plaintiff faces liability of up to $1.74 billion. Plaintiff asserts that such a liability would force it to leave the solar panel industry. Nonetheless, as developed later in this opinion, we conclude that plaintiff contracted for precisely that liability, that plaintiff contractually assumed the very market risks that give rise to that liability, and that the plain language of the force- majeure clause at issue does not permit relief to plaintiff on the ground that the market for polysilicon has shifted, regardless of the cause of that shift. We therefore affirm the trial court's dismissal of plaintiff's complaint for declaratory relief under MCR 2.116(C)(8)

.

II. PERTINENT FACTS AND PROCEDURAL HISTORY

Plaintiff is a Japanese company that produces high-quality solar panels. Defendant is a Michigan company and a large manufacturer of polycrystalline silicon (also called polysilicon), which is used in the manufacture of solar panels. Plaintiff alleges that in 2005 there was a worldwide shortage of polysilicon and defendant proposed partnering with plaintiff to provide it with a stable supply of polysilicon. According to plaintiff, defendant intended to significantly expand its manufacturing capacity to meet the increased demand for its product, funding this expansion with long-term contracts for the sale of polysilicon.

Between 2005 and 2008, the parties entered into four long-term contracts requiring plaintiff to purchase a certain quantity of polysilicon annually over a period of ten years, and allowing defendant to bill plaintiff for the difference between the quantities of polysilicon plaintiff ordered in a year and the expected order for that year. Plaintiff thus contracted to secure a long-term, stable supply of polysilicon, by virtue of which it protected itself from market disruptions that might threaten that supply. The trade-off was a contracted-for fixed price, and an obligation to pay for quantities of polysilicon for which plaintiff anticipated a need, even if that need ultimately proved to be nonexistent. The parties did not (although they could have) negotiate a contractual limitation (e.g., a price floor or ceiling), and therefore plaintiff assumed all downside price risk (if the market price fell) and defendant assumed all upside price risk (if the market price rose). According to plaintiff, the contracts provided for advance payments to be used by defendant in expanding its polysilicon manufacturing infrastructure. Plaintiff alleges that by 2010, it had made $685 million in advance payments on the contracts toward $2.6 billion in total purchases of polysilicon from defendant. Plaintiff asserts that the advance payments allowed defendant to open a new facility in Tennessee, costing approximately $1.2 billion. Each agreement also contained an acceleration clause that rendered plaintiff liable for the full purchase price of all unordered polysilicon for the entire length of the contract in the event of a default in payment.

At issue in this case is the November 13, 2008 long-term supply agreement between the parties (Agreement IV), which plaintiff alleges is the “last, and by far the largest” agreement between the parties. Pursuant to that agreement, plaintiff was to pay defendant more than $514,848,000 in advance payments for set amounts of polysilicon to be purchased through 2020. The deliveries were scheduled to begin in 2011 and end in 2020. Section 19 of Agreement IV is a force-majeure provision, which states as follows:

Neither Buyer nor Seller shall be liable for delays or failures in performance of its obligations under this Agreement that arise out of or result from causes beyond such party's control, including without limitation: acts of God; acts of the Government or the public enemy; natural disasters; fire; flood; epidemics; quarantine restrictions; strikes; freight embargoes; war; acts of terrorism; equipment breakage (which is beyond the affected Buyer's or Seller's reasonable control and the affected Buyer or Seller shall promptly use all commercially reasonable efforts to remedy) that prevents Seller's ability to manufacture Product or prevents Buyer's ability to use such Product in Buyer's manufacturing operations for solar applications; or, in the case of Seller only, a default of a Seller supplier beyond Seller's reasonable control (in each case, a “Force Majeure Event”). In the event of any such delay or failure of performance by Buyer or Seller, the other party shall remain responsible for any obligations that have accrued to it but have not been performed by it as of the date of the Force Majeure Event. When the party suffering from the Force Majeure Event is able to resume performance, the other party shall resume its obligations hereunder. The Term of this Agreement may be extended for a period not to exceed three (3) years so as to complete the purchase and delivery of Product affected by a Force Majeure Event. The party suffering a Force Majeure Event shall provide the other party with prompt written notice of (i) the occurrence of the Force Majeure Event, (ii) the date such party reasonably anticipates resuming performance under this Agreement and, if applicable, (iii) such party's request to extend the Term of this Agreement.

In addition, if due to a Force Majeure Event or any other cause, Seller is unable to supply sufficient goods to meet all demands from customers and internal uses, Seller shall have the right to allocate supply among its customers in any manner in which Seller, in its sole discretion, may determine.

Plaintiff alleges that after Agreement IV was executed, the Chinese government embarked on a plan to become the world leader in the solar industry. To that end, the Chinese government provided illegal subsidies to Chinese companies, some of which are state owned. Plaintiff further alleges that the Chinese companies engaged in “large-scale dumping,” i.e., “when a foreign producer, aided by state support, sells a product at a price that is lower than its cost of production to intentionally manipulate an industry and capture market share.” As a result, plaintiff contends that China gained 75% of the global solar-panel market, causing over 20 United States and European manufacturers to go out of business and solar-panel prices to “decline [ ] precipitously.” In 2012, plaintiff asserts, the United States imposed anti subsidy and antidumping import tariffs on Chinese-manufactured components of solar panels.

According to plaintiff, the President and CEO of defendant's majority shareholder, Dow Corning Corporation, issued a response to the tariffs, hoping that the United States and Chinese governments would reach an acceptable compromise to stabilize the industry. However, defendant announced layoffs in January 2013 and reduced production because of the trade problems with China.

Plaintiff alleges that as a result of China's market interference, the price of polysilicon to which the parties agreed in 2008 is significantly higher than the market price as of 2015. Consequently, plaintiff maintains, defendant has reduced its participation in the solar market and focused on enforcing its long-term contract, in many cases accepting cash settlements without having to provide polysilicon, which has caused defendant to remain profitable despite the United States and China's lack of progress toward resolution of the dispute.

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