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Hemlock Semiconductor Operations, LLC v. SolarWorld Indus. Sachsen GmbH - 867 F.3d 692 (6th Cir. 2017)

Rule:

Under Michigan law, liquidated-damages provisions are enforceable if the amount is reasonable with relation to the possible injury suffered and not unconscionable or excessive. Liquidated damages are especially appropriate where the damages which would result from a breach are uncertain and difficult to ascertain when the contract is executed. Courts are to determine the enforceability of liquidated-damages provisions based on the circumstances existing at the time that the contract was executed, not at the time of the breach. Generally, courts should give effect to the parties' intent and enforce liquidated-damages provisions unless it is obvious from the contract that the principle of compensation has been disregarded.

Facts:

Hemlock Semiconductor Operations, LLC (Hemlock) and SolarWorld Industries Sachsen GmbH (Sachsen) are both involved in manufacturing components of solar-power products. They entered into a series of long-term supply agreements (LTAs), by which Hemlock in Michigan would supply Sachsen in Germany with set quantities of polycrystalline silicon (polysilicon) at fixed prices between the years 2006 and 2019. The market price of polysilicon was initially well above the LTA price, but the market price plummeted several years later after the Chinese government began subsidizing its national production of polysilicon. The parties reached a temporary agreement to lower the LTA price in 2011. When that agreement expired in 2012, however, the price reverted to the original amount. Hemlock then demanded that Sachsen pay the original LTA price for the specified quantity of polysilicon for the year 2012. Sachsen refused.

This caused Hemlock to sue Sachsen for breach of contract in the United States District Court for the Eastern District of Michigan. Based on Hemlock's motion for summary judgment, which the district court granted, Hemlock was awarded nearly $800 million in damages and prejudgment interest.

Issue:

Was the liquidated-damages provision an unenforceable penalty?

Answer:

No.

Conclusion:

Finally, the district court enforced the liquidated-damages provision in part because the LTAs contemplated that Hemlock would invest substantial amounts of capital in expanding its manufacturing facilities, and Sachsen's breach "result[ed] in a loss of prior capital commitments toward expansion." Indeed, the liquidated-damages provision contains an introductory paragraph stating Sachsen's understanding that Hemlock "is making substantial capital investments to expand its manufacturing capabilities in order to satisfy [Sachsen's] demand." That paragraph goes on to explain that the parties'"express intent" was to ensure that Sachsen "is obligated to purchase the contracted volumes over the Initial Term" of the LTAs.

In light of this language, the liquidated-damages provision can be interpreted as taking into account Hemlock's expansion costs. This court has enforced a similar provision because it reflected the parties' understanding that the plaintiff would undertake "large expenditures" to expand its production facilities. See City of Memphis v. Ford Motor Co., 304 F.2d 845, 853 (6th Cir. 1962)(concluding that a contract provision requiring Ford to make minimum monthly payments for electricity for a five-year term even after shutting down its plant was reasonable because the consideration for the contract was partly that the City of Memphis would expand its electric-power plant to meet Ford's needs). We apply the same reasoning here and conclude that the liquidated-damages provision is not an unenforceable penalty.

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