Mistakes Re Future Little Defense to Breach of Contract

No one can predict the future. Instead, when entering into business agreements, the contracting parties assume that the current state of events will remain unchanged many years down the line. But the future is uncertain and a change in circumstances can often lead one party to forgo the entire value of the contract. A recent case from the California Court of Appeal for the Second Appellate District shows how making critical assumptions can render performance financially untenable if those assumptions do not hold up. In these situations, the law provides little recourse for the aggrieved party.

Paramount Petroleum Corporation v. Superior Court (Case Number B253290, Opinion Filed June 20, 2014)

In this breach of contract case, Building Materials of America dba GAF Materials Corporation (GAF) entered into a renewable five-year contract with Paramount Petroleum Corporation (Paramount), where Paramount agreed to supply GAF with its requirements for asphalt coating, which GAF needed in order to manufacture its roofing shingles. GAF is the largest manufacturer of residential roofing systems in the United States.

The asphalt coating was to be made using Oriente crude oil from Ecuador. Instead of agreeing to a fixed price for the asphalt coating, GAF and Paramount agreed to link the contract price for the asphalt coating to the price of West Texas Intermediate (WTI) oil using a formula detailed in the contract. Historically, the prices of Oriente and WTI were directly correlated and moved up and down together. The price of WTI was quoted at Cushing, Oklahoma.

Problems arose in 2011, when hydraulic fracturing or “fracking,” allowed more WTI oil to be extracted in Cushing, leading to a decrease in its market price. Consequently, it became economically unfeasible for Paramount to supply GAF with asphalt coating using the market price of WTI. Paramount tried to renegotiate the contract price of its asphalt coating but the negotiations proved fruitless.

On March 16, 2012, Paramount wrote a letter to GAF informing GAF that it would terminate performance under the contract. GAF filed suit a month later. GAF’s complaint alleged a single action for breach of contract. Paramount filed a general denial along with numerous affirmative defenses. Notably, Paramount raised the affirmative defense of mistake of fact.

On August 14, 2013, GAF moved for summary adjudication on the issue of Paramount’s liability for breach of contract as well as Paramount’s affirmative defenses. After initially denying GAF’s motion, the trial court later vacated its initial decision and issued a new ruling granting GAF’s motion. Paramount then filed a writ of mandate seeking review of the trial court’s order.

The Court of Appeal held that the trial court did not err in granting GAF’s motion for summary adjudication of Paramount’s mistake of fact defense. The Court of Appeal concluded that Paramount’s lack of knowledge of the development of fracking technology was an error in judgment, not a mistake of fact. Notably, the Court of Appeal held that contracts cannot be rescinded based on mistakes regarding future events, in this case the development of fracking technology that led to a decrease in the price of WTI oil.

Takeaway

Perhaps Paramount’s biggest mistake was to assume that the price of Oriente and WTI would always rise and fall together. When this assumption failed to hold up, Paramount was left in the unenviable position of having to supply asphalt coating at a price that made no economic sense. Paramount may have chosen to limit its risk by putting in place a provision imposing a floor on the price of WTI under the contract so that its performance would still be financially viable even if the market price of WTI changed in the future.

Paramount Petroleum also illustrates how trying to get out of performing under a contract by arguing that one was mistaken about the occurrence of a future event will not get you far in the California courts.