A Frustrating Exercise: Federal District Court in Iowa Declines to Grant Summary Judgment on Frustration of Purpose Doctrine in a Breach of Contract Case

Rembrandt Enters., Inc. v. Dahmes Stainless, Inc., No. C15-4248-LTS, 2017 U.S. Dist. LEXIS 144636 (N.D. Iowa Sept. 7, 2017)

On September 7, 2017, the Federal District Court for the Northern District of Iowa denied a motion for summary judgment by Rembrandt Enterprises, Inc. (“Rembrandt”).  In the motion, Rembrandt asked the court to grant declaratory relief and excuse the company from its breach of a contract with Dahmes Stainless, Inc. (“Dahmes”) under the doctrine of frustration of purpose.

Beginning in approximately 2014, Rembrandt, a large-scale producer of eggs and egg products, sought to expand its business.  As part of these expansion efforts, Rembrandt planned to construct an entirely new egg processing plant in Thompson, Iowa.  After reaching agreements with multiple contractors to build the new facility, on November 20, 2014, Rembrandt entered into an agreement with Dahmes for the manufacture and installation of an $8.5 million egg dryer at the new processing facility.  During the course of the new facility’s construction, however, the Midwestern United States was impacted by the Avian Flu virus which caused Rembrandt to eliminate over a million of its birds in an effort to limit the spread of the virus, cutting Rembrandt’s production capacity by approximately 50 percent.  As a result of the loss in production capacity, Rembrandt decided to scuttle the construction of the new processing facility and subsequently breached its agreement with Dahmes.

In its summary judgment motion, Rembrandt argued, inter alia, that its decision to breach its contract with Dahmes was excused by the doctrine of frustration of purpose as recognized by Minnesota law.  Notably, despite alleging in its complaint that the doctrine of commercial impracticability also excused its performance under its agreement with Dahmes, Rembrandt did not pursue this line of argument further at summary judgment.

According to the doctrine of frustration of purpose, a breaching party is excused from performance if it can show:  (1) the party’s principal purpose in making the contract is frustrated; (2) without that party’s fault; and (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.  Accordingly, Rembrandt argued that the doctrine of frustration of purpose must apply to its case because:

(1) The principal purpose of the contract was to procure and install a yellow egg dryer at the new processing facility; however, the Avian flu outbreak frustrated the purpose of the agreement by rendering the construction of the new facility, and therefore the procurement of the egg dryer, commercially unjustified;

(2) Rembrandt could not have been responsible for the Avian flu outbreak; and

(3) The Contract was founded on the assumption that the new processing facility, where the egg dryer would be installed, would be constructed.

While the court did not necessarily disagree with Rembrandt’s application of the law, it concluded that summary judgment was not appropriate for two principal reasons.

First, in defining the “principal purpose,” the court concluded that, as a matter of law, the party claiming discharge (Rembrandt) must be the party whose purpose for entering the contract is frustrated; however, to dispose of the case at summary judgment that purpose “must be so basic and obvious that both parties understand it.”  The court went on to explain that while Rembrandt was correct that the agreement stated the dryer would be installed at the new processing facility, such that the construction of the facility could be understood as fundamental to the agreement, Dahmes was also correct to point out that Rembrandt was a large egg producer with multiple facilities and that the contract did not make clear that the purpose of the contract would be frustrated if the new facility was not built.  According to the court, “[t]he language of the agreement does not, by itself, resolve these competing positions.”  As a result, because the parties offered competing evidence of what the contract’s purpose was, the court declined to make such a factual determination and thus, dispose of the case at summary judgment.

Second, the court held that even if it could determine the purpose of the agreement at the summary judgment stage, there were a series of additional contested factual issues concerning whether Rembrandt satisfied the test to apply the doctrine of frustration of purpose including:  (i) how the purpose of the contract was frustrated; (ii) if Rembrandt’s own actions contributed to the collapse of the agreement; and (iii) whether the successful completion of the new processing facility was an event both parties assumed would occur.  As a result, the court held that Rembrandt’s motion for summary judgment must also be denied because the facts surrounding the three issues above remained unclear.

To view the full text of the court’s decision, courtesy of Lexis®, click here.

R. Zachary Torres-Fowler

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