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Impossibility of Performance -- Contract

The general rule is that a person who has entered into a contract but is unable to fulfill their contractual obligation is liable to the other contracting person. An exception, however, is if conditions beyond the control of the contracting parties led to the inability to fulfill the obligation. This court case addresses whether a person is relieved of their contractual obligation due to circumstances beyond their control, such as drought.

Note that the quote from the Comments to the UCC mentions "designated land." This implies that an agricultural producer may not be relieved of the obligation to deliver a crop if the contract simply specified a type and quantity of crop, rather than specifying "the production from a specific or designated tract of land."

Also note the court's explicit reference to assumption of risk. This case illustrates that business contracts are a risk management tool. Accordingly, contracting parties should carefully consider the risk implications of entering into a contract and review whether their document clearly explains the parties' relative risks.

The second part of this case addresses the issue of providing notice when conditions are evolving that will prevent a person from fulfilling their contractual obligation.

Excerpts from Red River Commodities, Inc. v. Eidsness, 459 N.W.2d 805 (ND 1990)

... In early 1988, Kelby signed "Confection Sunflower Production" contract No. 242 with [Red River Commodities, Inc.] RRC. RRC agreed to purchase 250,000 pounds from Kelby at a floor price of 11.25 cents per pound, and Kelby agreed, as "The Grower," to "plant a minimum of 250 acres to cover contracted lbs." Because of drought, Kelby grew and delivered only 75,084 pounds. In December 1988, RRC sued Kelby for his failure to deliver the contracted balance of 174,916 pounds.

At the trial without a jury, the main dispute was whether the drought excused Kelby's failure to deliver the remaining pounds.[emphasis added] The contract contained an excuse clause for "acts of God." RRC's position was that it had not received "Certified Mail" notice from Kelby about his shortfall as the excuse clause stipulated. Kelby's position was that RRC had actual knowledge because he had orally notified RRC's agent, Richard Frith, about his poor crop in September before harvest. RRC insisted that Frith "was not a contracting agent. He [had] no authority to bind this organization in any way, shape, manner or form. He [had] no apparent authority."

The trial court ruled that Frith was "not an agent of [RRC] insofar as production, acts of God, waivers, and the like are concerned." The trial court found that Kelby was "not justified in assuming that [he was] not obligated to advise [RRC] of any shortfall caused by an act of God. The trial court determined that Kelby breached his contract "by failing to give the proper notice of low production or the inability to satisfy the contract..." Finding that RRC purchased replacements, the trial court held that Kelby was liable to RRC for the difference between the cost of cover at 26 cents per pound and the contract price of 11.25 cents per pound. Based on 14.75 cents for each of the 174,916 pounds undelivered, the trial court awarded damages of $25,800.11 to RRC. Kelby appealed.

On appeal, Kelby argues that the trial court erroneously determined that Frith was not RRC's agent, that Frith's knowledge of Kelby's poor production from drought was sufficient notice to RRC, and that, therefore, the trial court should have excused Kelby from the remainder of his contract. RRC responds that Frith was not its agent "for notice under the contract" and that Frith's knowledge was irrelevant because Kelby did not properly notify RRC by certified mail.

The Uniform Commercial Code chapter on Sales is the primary law on transactions in goods, including growing crops... Forward crop contracts, like this sunflower contract, are commercially important to both farmers and grain dealers ... In this case, we are largely guided by the Uniform Commercial Code but, as NDCC 41-01-03 (UCC 1-103) allows, principles of the law of agency and of contract supplement the UCC.

Impossibility caused by casualty or commercial impracticability caused by failure of presupposed conditions excuses performance of contracts for sale of goods ... Under NDCC 41-02-78, unless a seller has assumed a greater obligation, nondelivery "in whole or in part" is excused "if ... made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic [contract] assumption," and if the seller "seasonably" notifies the buyer. Uniform Commercial Code § 2-615, 1B U.L.A. 196-97, Official Comment 9 (1989) says:

The case of a farmer who has contracted to sell crops to be grown on designated land [emphasis added] may be regarded as falling either within the section on casualty to identified goods or this section, and he may be excused, when there is a failure of the specific crop, either on the basis of the destruction of identified goods or because of the failure of a basic assumption of the contract.

... A crop failure excuses performance of a farmer's forward crop contract unless the farmer has assumed a greater obligation.

Kelby's contract with RRC excused performance for "acts of God ... or other causes beyond the control of the parties":

8. Fire, strikes, accidents, acts of God and public enemy, or other causes beyond the control of the parties hereto, shall excuse them from the performance of this contract. Should said events occur, either party is to notify the other within 10 days of the event by Certified Mail. Grower shall be obligated to notify RRC and the contracting representative identified below. Excuse from performance of this contract is dependent upon delivery of this notice.

Thus, non-occurrence of the loss of Kelby's crop was a basic assumption of this contract. Kelby did not assume the risk of performing if his crop was affected by causes beyond his control [emphasis added], but he did agree to give RRC notice of the occurrence of adverse events in a certain way, in writing by certified mail.

[The remainder of the opinion addresses whether the agricultural producer provided the buyer with appropriate notice.] The UCC directs only that "[t]he seller must notify the buyer seasonably" of nondelivery if impracticable. NDCC 41-02-78(3). RRC stresses that this contract conditioned excuse from performance upon delivery of notice of the event by certified mail. Kelby argues that he did not need to strictly comply with the contracted form of notice by certified mail because he gave RRC actual notice about the effect of his poor crop by telling Frith, its agent, before harvest.

The trial court ruled that Frith was not RRC's agent for purposes of notice for excuse and that written notice to RRC by certified mail was made indispensable by the contract. The trial court determined that "Paragraph Eight ... calls for notification in the event of the occurrence of an act of God or other untoward happenstance beyond the control of the parties," and ruled that Kelby "gave no proper notification...." We believe that the trial court incorrectly applied the law in making its findings.

By delivering all of the sunflowers that he did produce, Kelby fulfilled his contract to the extent that the supervening contingency of the drought permitted. If, by Kelby's notice to its agent, RRC actually and seasonably knew that Kelby's sunflower harvest and deliveries would be reduced because of the drought, it is doubtful that RRC was harmed or prejudiced by the lack of a particular form of notice ... Through misapprehension of the law of contracts and of agency, the trial court did not weigh the evidence of actual knowledge communicated through RRC's agent.

Under the UCC, actual knowledge is notice of a fact.

A person has "notice" of a fact when:
a. He has actual knowledge of it;
b. He has received a notice or notification of it; or
c. From all the facts and circumstances known to him at the time in question he has reason to know that it exists.

Generally, "actual knowledge supersedes the requirement of notice." ... If the purpose of certified mail notice was fulfilled by Kelby's actual notice to the agent and by actual knowledge of RRC (other than through generalized knowledge of drought conditions), the departure from the form of notice was insignificant and trifling ... If Kelby seasonably notified RRC's agent, who reported that fact to his principal, any breach from failure to notify in a particular way was insubstantial and not a material breach ... Therefore, the evidence about agency, actual notice to the agent, and actual knowledge by RRC were more important in this case than the trial court realized.

There was considerable evidence that Frith was RRC's agent for this transaction, but the trial court treated it as irrelevant. Frith solicited the crop contract from Kelby for RRC. The written contract expressly limited Frith's power to bind RRC to the initial contract that he solicited:

The signature of the contracting representative does not bind Red River Commodities, Inc. upon signing of this document.... The contracting representative identified below does not have the authority to alter or vary the terms of this agreement. He is not an agent of RRC.

Nevertheless, after the contract was made, Frith frequently contacted growers for RRC to help with their production problems. Frith testified that he followed his contracts and did whatever was necessary to help insure delivery by the grower.

Frith talked to growers, inspected fields, and reported to RRC. RRC's manager testified that Frith's duties included observing the growers' crops and reporting back to him, and that Frith was his "go between" with growers such as Kelby. RRC's manager testified that he received letter reports from Frith. Whether he was specifically called an agent or not, Frith acted as an agent. However, the trial court did not consider this evidence, ruling that Frith was an independent sales representative" and "not an agent ... insofar as production, acts of God, waivers, and the like are concerned."

RRC's characterization of Frith as "independent" of RRC is not controlling. How a principal and agent describe their relationship between themselves does not regulate their relationship to others...

An agency "is ostensible when the principal intentionally or by want of ordinary care causes a third person to believe another to be his agent, who really is not employed by him." NDCC 3-01-03. An ostensible agency exists where the conduct of the supposed agent is consistent with an agency, and where, in a particular transaction, someone is justified in dealing with the supposed agent ... An apparent or ostensible agency "must rest upon conduct or communications of the principal which, reasonably interpreted, causes a third person to believe that the agent has authority to act for and on behalf of the principal." ... When an agency is denied, the one asserting it must establish it by clear and convincing evidence. We will not disturb a trial court's finding of agency unless it is clearly erroneous ... Frith's agency for RRC is a question of fact to be decided by the trial court under a correct view of the law of agency.

There was evidence that Frith knew about Kelby's poor production, other than through generalized knowledge of drought conditions. Kelby testified that Frith contacted him during the fall before harvest, and that he told Frith that he expected his crop production to be less than 500 pounds per acre, perhaps as little as 200 pounds per acre, or between 20% and 50% of the contracted quantity per acre. Richard Frith also testified that he contacted all growers later in the fall:

I contacted all of the growers that I worked with in October of 1988. And at that time, I determined from each one of them ... as to how much he had in the bin when he was done harvesting. How much he felt he had in the bin and those figures were submitted to Red River.

Notice to an agent is ordinarily notice to the principal ... Evidence of Kelby's actual notice to Frith should be reconsidered by the trial court with a correct understanding of the law of agency.

RRC insists that, even if Frith was its agent, he did not have power to amend or modify the written contract. But notice and knowledge do not amend the contract; they implement the contract. Indeed, the excuse clause in the contract called for notice to the "contracting representative" of RRC. On appeal, RRC concedes that Frith was the "contracting representative" designated in the excuse clause. It is clear that Frith was an agent for notice.

Nevertheless, RRC insists that notice of excuse was not given to both Frith and RRC in the precise form agreed upon. "Notice, knowledge or a notice or notification received by an organization is effective for a particular transaction from the time when it is brought to the attention of the individual conducting that transaction...." NDCC 41-01-11(27). Organization includes a corporation. NDCC 41-01-11(28). If Frith, as RRC's designated agent, seasonably knew from Kelby about the effect of his poor crop and reported that knowledge to his principal, RRC knew. If so, RRC could not in good faith claim a lack of notice. NDCC 41-01-13 (UCC 1-203) says, "Every contract or duty within this title imposes an obligation of good faith in its performance or enforcement."

The trial court also refused to allow testimony and evidence on what Frith reported to RRC about Kelby's growing crop and harvest. In a trial without a jury, a court should not exclude evidence unless it is so hopelessly irrelevant or so clearly cumulative that it is a waste of time. In Schuh v. Allery, 210 N.W.2d 96, 99-100 (N.D. 1973) this court warned trial courts that, in bench trials, exclusion of potentially relevant evidence was not good procedure. In a nonjury trial, entry of incompetent evidence will rarely be reversible error while exclusion of competent evidence will cause reversal whenever justice requires. In many cases since Schuh, this court has declined to reverse for admitting incompetent evidence ... When necessary, however, this court has reversed for excluding competent evidence ... This case requires reversal because RRC's knowledge of Kelby's actual notice to its agent, Frith, was relevant and important. Evidence of that knowledge was improperly excluded.

It is not this court's function to make findings of fact ... Because the trial court made findings of fact under a misapprehension of applicable law about Frith's agency and about the contractual importance of RRC's actual knowledge of Kelby's excuse, and because the trial court erroneously excluded relevant evidence bearing on RRC's actual knowledge, we reverse and remand for a new trial consistent with this opinion.

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