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Frustration of purpose, commercial frustration as the doctrine has been called in Illinois, is a viable defense but is not to be applied liberally. There is a rigorous two-part test which requires a party to show that: (1) the frustrating event was not reasonably foreseeable; and (2) the value of counter-performance has been totally or nearly totally destroyed by the frustrating event.
Energy Cooperative, Inc. (ECI), the supplier, provided naptha to Northern Illinois Gas Company (NI-Gas) for conversion to natural gas. When demand for natural gas started decreasing and the price of naphtha started increasing, the gas company terminated contract and sought declaratory judgment that the supplier was limited to the liquidated damages provided in the contract. The lower court held that the liquidated damages clause of the contract gave the nonbreaching party the choice of recovering either actual or liquidated damages and that the supplier elected actual damages.
Did the trial court err in granting ECI's motion for summary judgment on NI-Gas' frustration of purpose defense?
The court found that the trial court erred in finding that the supplier was not limited to the liquidated damages in the contract. The parties' agreement to a liquidated sum in the event of default was binding. Thus, the court reversed the lower court's order striking the liquidated damages defense. The court affirmed the lower court's summary judgments for the supplier on the gas company's unsupported affirmative defenses of force majeure, frustration of purpose, impracticability, fraud, and lack of good faith. Frustration of purpose, commercial frustration as the doctrine has been called in Illinois, is a viable defense but is not to be applied liberally. Smith v. Roberts, 54 Ill. App. 3d 910 (1977). The Smith decision sets out a rigorous two-part test which requires a party to show that: (1) the frustrating event was not reasonably foreseeable; and (2) the value of counter-performance has been totally or nearly totally destroyed by the frustrating event. The facts which constituted the frustrating events complained of by NI-Gas were not in dispute and the record clearly demonstrated that these events were, to a large degree, foreseeable to NI-Gas and in some cases predicted by NI-Gas. Applying these facts to the test set out in the Smith decision, there was no room for a difference of opinion. As a matter of law, NI-Gas was unable to show that the supposed frustrating events were not reasonably foreseeable. Therefore, the defense of commercial frustration was not available to NI-Gas, and summary judgment was properly entered in favor of ECI. The court affirmed the evidentiary rulings that excluded all references to the gas company's obligations as a public utility as not prejudicial.