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United States District Court for the Western District of Pennsylvania - 499 F. Supp. 53
Tags: Contracts, Mutual mistake, Reformation
tl;dr:
A price index stipulated in a contract turned out to be an inaccurate measure of one party’s actual production costs. The court allowed the parties to modify the contract based on the doctrine of mutual mistake.Video Summary
Case Summary
In Aluminum Co. of America v. Essex Group, Inc. (1980), a contract dispute arose between ALCOA and Essex over aluminum pricing. ALCOA agreed to supply Essex with aluminum, basing the price on a formula incorporating the Wholesale Price Index (WPI) and a maximum price cap. However, unforeseen inflation and other factors increased ALCOA's production costs beyond the contract price. ALCOA sued for contract reformation or adjustment, arguing impracticability or frustration due to unforeseen circumstances.
The court ruled in favor of ALCOA, removing the WPI reference in the price formula. They applied a four-factor test: (1) whether the parties anticipated the problem and allocated risk; (2) efforts to limit or hedge the risk; (3) potential severe out-of-pocket losses; and (4) industry customs and practices. The court found that ALCOA couldn't predict or assume the risk of increased costs, attempted to mitigate risks with negotiation, would suffer heavy losses if enforcing the original contract, and no industry practice existed for such situations.
This case demonstrates how courts can use the impracticability doctrine to reform contracts when performance becomes overly burdensome or costly due to unforeseen events. It also highlights how courts can balance both parties' interests and consider various factors when determining contract reformation appropriateness.
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The court granted ALCOA's request for reformation of the Molten Metal Agreement based on mutual mistake, but denied relief in counts two and three. ALCOA's request for an equitable modification of the contract price was granted based on mutual mistake of fact, unilateral mistake of fact, unconscionability, frustration of purpose, and commercial impracticability. The court distinguished between normal and gross errors and emphasized the principle of conscious uncertainty. ALCOA was granted relief based on impracticability, frustration of purpose, and mutual mistake of fact. The court adopted a remedial scheme for ALCOA's claim of frustration of purpose. The court found that the Molten Metal Agreement is a toll conversion contract, and ALCOA is not excused from the MMA due to a mutual mistake in the selection of the WPI. The court rejected ALCOA's argument that events beyond their control in 1977 and 1978 excuse part of their performance under Section 24 of the Molten Metal Agreement.
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