United States District Court, Southern District of Illinois
December 28, 1987
UNITED STATES OF AMERICA, NATIONAL RURAL UTILITIES COOPERATIVE FINANCE CORPORATION AND SOYLAND POWER COOPERATIVE, INC., PLAINTIFFS,
SOUTHWESTERN ELECTRIC COOPERATIVE, INC., DEFENDANT/COUNTER-PLAINTIFF, V. SOYLAND POWER COOPERATIVE, COUNTER-DEFENDANT.
The opinion of the court was delivered by: Stiehl, District Judge:
MEMORANDUM AND ORDER
Before the Court are the parties cross-motions for summary
This cause was filed by the United States of America on
behalf of the Rural Electrification Administration (REA), The
National Rural Utilities Cooperative Finance Corporation
(CFC), and Soyland Power Cooperative, Inc. (Soyland), seeking
a declaratory judgment that the Wholesale Power Contract
between Soyland and Southwestern Electric Cooperative, Inc.
(Southwestern) is binding and enforceable. Count II of the
complaint for declaratory judgment was previously dismissed by
Plaintiffs seek summary judgment on Count I of the
complaint. Southwestern has filed a cross-motion for partial
summary judgment on paragraphs 35 and 37 of plaintiffs'
Southwestern has filed a counterclaim seeking a declaratory
judgment that the wholesale Power Contract is void, because of
mutual mistake of fact in Count I, and frustration of purpose
in Count II.
Fed.R.Civ.P. 56(c) provides that a district court shall
grant summary judgment "if the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to
any material fact and that the moving party is entitled to
judgment as a matter of law." In determining whether a
district court properly granted summary judgment, "[a]ll
factual inferences are to be taken against the moving party
and in favor of the opposing party." International
Administrators, Inc. v. Life Insurance Co. of North America,
753 F.2d 1373, 1378 (7th Cir. 1985). In instances in which
"inferences contrary to those drawn by the trial court might be
permissible," a district court's grant of summary judgment must
be reversed. Munson v. Friske, 754 F.2d 683,
690 (7th Cir. 1985). Once a motion for summary judgment has
been made and properly supported, however, the nonmovant does
have the burden of setting forth specific facts showing the
existence of a genuine issue of a material fact for trial.
See Rule 56(e); Posey v. Skyline Corp., 702 F.2d 102, 105 (7th
Cir.), cert. denied, 464 U.S. 960, 104 S.Ct. 392, 78 L.Ed.2d
336 (1983), (noting that "a bare contention that an issue of
fact exists is insufficient to raise a factual issue").
Although a requisite, the existence of a factual dispute,
nonetheless, is not, standing alone, sufficient to bar summary
judgment. It is well settled that a "factual dispute does not
preclude summary judgment unless . . . the disputed fact is
outcome determinative under the governing law." Egger v.
Phillips, 710 F.2d 292, 296 (7th Cir.), cert. denied,
464 U.S. 918, 104 S.Ct. 284, 78 L.Ed.2d 262 (1983), as cited in Shlay v.
Montgomery, 802 F.2d 918, 920 (7th Cir. 1986).
Plaintiffs have asserted that there is no genuine issue of
material fact as to the validity and enforceability of the
all-requirements contract, and that, therefore, they are
entitled to summary judgment. Southwestern asserts that
material issues of fact exist by claiming the contract is
"void" on the bases of mutual mistake of fact and/or
frustration of purpose, and that a jury should determine
whether these defenses do, in fact, exist.
The matter is before this Court on diversity jurisdiction,
therefore this Court will apply the choice-of-law rules of the
State of Illinois. Baltimore Orioles v. Major League Baseball
Players, 805 F.2d 663, 681 (7th Cir. 1986) cert. denied, ___
U.S. ___, 107 S.Ct. 1593, 94 L.Ed.2d 782 (1987). The parties
are in agreement that the contract in question was entered
into, and is currently being performed, in Illinois, therefore,
Illinois contract law principles control this issue. The basic
issue underlying these motions is whether the contract between
Soyland and Southwestern is binding and enforceable, or whether
it is subject to rescission under either the doctrine of mutual
mistake of fact, or frustration of purpose.
MISTAKE OF FACT
It should initially be noted that defendants seek to have
this Court render the Soyland/Southwestern contract void on
the basis of mutual mistake of fact. It is clear from both the
Restatement of Contracts and Illinois case law that a contract
may be voidable or subject to rescission on this basis, but it
is not void on its face.
The Restatement of Contracts 2d at § 151 defines "mistake" as
a "belief that is not in accord with the facts." Further, § 152
details when a mistake of both parties makes a contract
(1) Where a mistake of both parties at the time
of contract was made as to a basic assumption on
which the contract was made has a material effect
on the agreed exchange of performances, the
contract is voidable by the adversely affected
party unless he bears the risk of the mistake
under the rule stated in § 154.
(2) In determining whether the mistake has a
material effect on the agreed exchange of
performances, account is taken of any relief by
way of reformation, restitution or otherwise.
§ 154 provides:
A party bears the risk of a mistake when
(a) the risk is allocated to him by agreement of
the parties, or
(b) he is aware, at the time the contract is
made, that he has only limited knowledge with
respect to the facts to which the mistake relates
but treats his limited knowledge as sufficient,
(c) the risk is allocated to him by the court on
the ground that it is reasonable in the
circumstances to do so.
In Illinois, the four conditions generally required for a
court to rescind a contract are: "that the mistake relate to
a material feature of the contract; that it occurred
notwithstanding the exercise of reasonable care; that it is of
such grave consequence that enforcement of the contract would
be unconscionable; and that the other party can be placed in
statu quo." Wil-Fred's Inc. v. Metropolitan Sanitary, 57 Ill. App.3d 16,
14 Ill.Dec. 667, 672, 372 N.E.2d 946, 951 (1978), leave to
Moreover, the party seeking "rescission on the basis of
mutual mistake must prove, as part of [its] prima facie case,
that both parties were mistaken as to a material matter . . .
the mutual mistake must be shown by clear and positive
evidence." Casanas v. Nelson, 140 Ill. App.3d 341, 95 Ill.Dec.
137, 140, 489 N.E.2d 358, 361 (1986); Wil-Fred, 372 N.E.2d at
Defendant asserts that both parties had a basic assumption
that "the Clinton cost projections, the electrical use
projections and the ultimate electrical cost projections
provided by IPC (Illinois Power Company), IAEC (Illinois
Atomic Energy Commission), REA and others were correct and
would allow Soyland to achieve its concept of obtaining a
secure source of power at reasonable rates;" and "Southwestern
and Soyland were both subjectively and objectively mistaken as
to this basic assumption of the contract."
Southwestern's arguments center around the issue of the high
price of energy as supplied by IPC to Soyland and then
distributed to Southwestern and other rural facilities. In
order to succeed, Southwestern must be able to show that price
would be a "material term." In support of its assertion that
price is a material fact, Southwestern relies on the ruling of
the Seventh Circuit in S.T.S. Transport Service v. Volvo White
Truck Corp., 766 F.2d 1089 (7th Cir. 1985). However, the
reliance is unfounded, as S.T.S. is both easily distinguishable
on its facts, and contains dicta which would preclude
Southwestern's argument as to materiality.
In S.T.S., the Seventh Circuit recognized that mutual mistake
of fact cases traditionally involve a contract in which "the
parties understand a key term differently." 766 F.2d at 1092.
The court drew a specific distinction between mathematical or
clerical error and an error of judgment. Although the court
stated that the mistake in S.T.S. "relates to the price, which
must be conceded to be material," 766 F.2d at 1093, the court
found the error in the "price" was best qualified as a
mathematical or clerical error.
In simple terms, the mistake in S.T.S. concerned two
subtractions which were made from the offered base price, when
only one should have been made. Approximately $179,000 in the
base price difference resulted. The Seventh Circuit found that
the offer was as follows: "Volvo White offered to take over the
remaining debt on the trade-ins, so that there was nothing in
the way of trade-in value to be subtracted from the purchase
price. The assessed value was completely offset by the
outstanding debt." 766 F.2d at 1093. The court found this error
to be "merely" mathematical or clerical, rather than a
miscalculation of economic climate.
Although it would be wrong to suppose that
"merely" mathematical or clerical errors are
easily distinguished from other errors such as
those of judgment — a miscalculation about the
economic climate, say — the distinction is clear
enough for ordinary purposes. A merely mathematical
or clerical error occurs when some term is either
one-tenth or ten times as large as it should be;
when a term is added in the wrong column; when it
is added rather than subtracted; when it is
The error involved here is of that sort, but if
anything more difficult to detect.
Id. Therefore, the Seventh Circuit, in concluding that the
error in the price term of the S.T.S. contract was clerical in
nature, allowed for rescission of the contract.
However, this is not the case in the Soyland/Southwestern
contract. Here, Southwestern seeks relief because the price of
energy is much higher than originally projected. The Seventh
Circuit rejected the proposition that contracts could be
rescinded based on errors in judgment, particularly judgment
as to the economic climate. "For example, if the mistake
resulted from a miscalculation as to the economic climate, to
undo the contract would fly in the face of the very reason for
having contracts in the first place . . . But that problem is
solved by excluding miscalculations of
judgment. E. Farnsworth, Contracts 666 (1982)." Id. Although
Southwestern attempts to use S.T.S. to support its position
that the issue of price is a material issue, this is clearly
inapposite to the ruling in S.T.S. Poor judgment as to future
economic climate cannot be a basis for rescinding a contract.
It should be noted that Southwestern argues at length that
this Court should consider the unrelated case of Soyland Power
and Western Illinois Power v. Illinois Power, 86-L-373, filed
in state court in Sangamon County, Illinois,*fn1 as support
for the theory that a mutual mistake was made by Soyland and
Southwestern. In that complaint, Soyland alleges that, due to
IPC's deficient performance as a project manager, the costs of
the Clinton Power Station are in excess of ten times greater
than the original estimates. Southwestern argues in the case
before this Court that Soyland cannot sue Illinois Power on
these grounds in the state court case, and at the same time
deny that a mutual mistake of fact as to the estimates of cost
existed in this case. However, this argument is without merit,
and Southwestern offers no authority for its position.
The pleadings in the state court case only serve to point up
the fact that while all the parties may have thought and
believed that the construction costs of the Clinton power
plant, and ultimately the costs of power, would be much less
than what they have, in fact, become, this is, again, only an
error in economic judgment. It fails to establish that a
mutual mistake of material fact by Southwestern and Soyland
existed at the time they entered into the all-requirements
contract sufficient to allow this Court to rescind that
contract under Illinois law.
Furthermore, the Ownership Participation Agreement among
Illinois Power, Soyland and Western Illinois Power Cooperative
at para. 8.9 provides the following:
Cost Changes. The Participants are aware that the
estimated costs of the Clinton station (including
cost of fuel) are subject to change by reason,
among other matters, of inflation, compliance with
additional governmental requirements, design and
equipment changes, and delays in construction and
commencement of the operation.
As fully discussed in the prior Order of this Court,
Southwestern is one of the fifteen distribution cooperatives
that joined together to form Soyland, a generation and
transmission cooperative. Southwestern is a member of Soyland
and has members who serve on the Soyland board. Therefore,
Southwestern was aware of this provision in the participation
Paragraph 4 of the contract at issue in this case includes
a formula for determining the rate of power purchased by
(a) The Member shall pay the Seller for all
electric power and energy furnished hereunder at
the rates and on the terms and conditions set
forth in the then applicable rate schedules.
Applicable rate schedules shall be those approved
from time to time and adopted by the Board of
Directors of the Seller; provided, such rate
schedules shall be formulated and adopted in
accordance with the procedures and subject to the
limitations and requirements set forth in
subparagraph 4(b) hereof.
(b) The Board of Directors of the Seller, at such
intervals as it shall deem appropriate, shall
review the rate for electric power and energy
furnished hereunder and under similar agreements
with other members and, if in the judgment of the
Board, it is necessary, shall revise such rate so
that it shall produce revenues which shall be
sufficient, but only sufficient, with the
revenues of the Seller from all other sources, to
meet the cost of the operation and maintenance,
(including, without limitation, replacements,
insurance, taxes and administrative and general
overhead expenses) of the generating plant or
plants, transmission systems, and related
facilities of the Seller, the cost of any power
and energy purchased for resale hereunder by the
Seller, the cost of transmission service, to make
payments on account of principal
of, and interest on, all indebtedness of the
Seller, and to provide for the establishment and
maintenance of reasonable reserves. . . .
The term of the all-requirements contract runs through the
year 2015. Power is to be provided to Southwestern, and
Southwestern's obligation to pay commences upon completion of
the nuclear power facility.
The deposition of Jack Compton, General Manager of
Southwestern from 1952 to 1980, revealed that both he and the
Southwestern board understood that the all-requirements
contract served as an assurance to the REA that monies would
be available to repay the loans made to Soyland.
In its prior ruling this Court stated the following:
This court is persuaded that the long term
all-requirements contract which the REA and CFC
required Southwestern and Soyland to enter into
served as the primary security to ensure the
repayment of the massive loans which the REA and
CFC made to Soyland as well as to Southwestern.
United States v. Southwestern Elec. Coop., Inc., 663 F. Supp. 538
(S.D.Ill. 1987). Clearly, the understanding of the General
Manager is in accordance with the Court's ruling. Southwestern
has attempted to raise an issue of fact by offering excerpts
from the deposition of Walter Smith, President of Soyland. Mr.
Smith testified that if the 1975 and 1976 estimates had shown
that the costs of the plant would not be economical, Soyland
would not have entered into the Clinton project. However, this
again is an economic climate judgment mistake, and does not
meet the requirements of mutual mistake in Illinois.
Southwestern has failed to meet the first of four requirements
of mutual mistake, and its claim must fail.
Nor has Southwestern shown that it meets all of the
remaining requirements to establish mutual mistake. Although
the second prong, reasonable care, seems to have been met,
Southwestern has not satisfied the third or fourth
requirements. Southwestern has not offered any evidence to
show that the enforcement of the contract would result in such
grave consequences that it would be unconscionable, the third
Nor have they been able to show that Soyland could be placed
in status quo if the contract were rescinded, the final
requirement. Southwestern argues that Soyland can merely
charge higher rates to the other fourteen members to cover
debts and costs that would have been assessed to Southwestern.
This clearly is not the meaning of status quo. Southwestern
has not shown that Soyland could be placed in the same
position it was in at the time the all-requirements contract
was signed. Moreover, Southwestern has completely ignored the
relationship of the REA and CFC to the contract. This Court
has previously ruled that the REA and CFC are integral to the
contract between Soyland and Southwestern. Therefore, any
consideration of rescission should be made with regard to the
status quo as to REA and CFC as well. Southwestern has failed
to even address this aspect of the requested rescission, and
the Court is of the opinion that none of the plaintiffs could
be placed in status quo were the contract to be rescinded.
FRUSTRATION OF PURPOSE
Defendant also asserts that the contract is voidable under
the doctrine of frustration of purpose. No. Illinois Gas Co. v.
Energy Coop., Inc., 122 Ill. App.3d 940, 78 Ill.Dec. 215,
461 N.E.2d 1049 (1984), leave to appeal denied, discusses the
standards of the doctrine of frustration of purpose in
Illinois. In No. Illinois Gas, the Gas Co. sought declaratory
judgment that it had properly ceased performance under a
long-term naphtha supply contract. One of the bases plaintiff
used to support its termination was that of frustration of
purpose. The court stated, "[f]rustration of purpose or
commercial frustration as the doctrine has been called in
Illinois, is a viable defense but is not to be applied
liberally." 78 Ill.Dec. at 225, 461 N.E.2d at 1059. The court
recognized that the case of Smith v. Roberts, 54 Ill. App.3d 910,
12 Ill.Dec. 648,
370 N.E.2d 271 (1977) set 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
counterperformance has been totally or nearly totally
destroyed by the frustrating event." 78 Ill.Dec. at 225, 461
N.E.2d at 1059. In rejecting No. Illinois Gas' arguments, the
[T]he only certainty of the market is that prices
will change. Changing and shifting markets and
prices from multitudinous causes is endemic to
the economy in which we live. Market forecasts by
supposed experts are sometimes right, often
wrong, and usually mixed. If changed prices,
standing alone, constituted a frustrating event
sufficient to excuse performance of a contract,
then the law binding contractual parties to their
agreements is no more.
Id., (emphasis added).
Initially, Southwestern has failed to show how the rise in
costs of energy was unforeseeable. The history of the Clinton
project shows an actual pattern of rising costs from the time
of its inception. The Soyland and Southwestern board minutes
alike show that the estimates were constantly being updated as
well as upscaled. The mere fact that the contract provides
that the rates could be reviewed and adjusted from time to
time shows that the rising costs were foreseeable.
Nor has Southwestern shown that the value of
counter-performance has been totally or nearly totally
destroyed. As a matter of fact, Southwestern has asserted that
it is current with its payments, and has not been guilty of
anticipatory repudiation of the contract. Again, the mere fact
that the costs are greater than anticipated is not a
sufficient basis under Illinois law for rescinding the
contract pursuant to the doctrine of frustration of purpose.
This Court finds, therefore, that no genuine issue of
material fact remains. Plaintiffs have shown that a valid and
enforceable contract between Soyland and Southwestern exists.
Defendant has failed to show that it is entitled to rescission
of this contract or that the contract is voidable under either
of the doctrines of mutual mistake of fact or frustration of
Accordingly, plaintiffs' Motion for Summary Judgment is
GRANTED. The Court finds that as a matter of law it is proper
to enter judgment in favor of the plaintiffs on Count I of the
complaint for declaratory judgment. Defendant's cross-motion
for partial summary judgment is DENIED and defendant's
counter-claim is DISMISSED. The Clerk of the Court is ordered
to enter judgment accordingly.
IT IS SO ORDERED.