Facts
- A corporation formed to acquire and resell federally regulated “hop base” allotments entered court-supervised liquidation in 1985, creating a liquidation trust managed by a trustee.
- For about two decades, federal rules required hop growers to hold hop base allotments to market hops; base was transferable and scarce, supporting a substantial secondary market.
- On May 31, 1985, the trust invited hop growers to bid on two pools of hop base: one usable in 1985 and another usable in 1986.
- Growers submitted bids in June 1985, and on June 21, 1985, the trust sent notices awarding allotments to successful bidders at per-pound prices generally between $0.50 and $0.76.
- On June 27, 1985, the USDA issued a final rule ending the federal hop marketing order effective December 31, 1985, so that hop base would not be required to market hops beginning with the 1986 crop year.
- The trust demanded payment under the awarded contracts; the growers refused, asserting that termination of the marketing order defeated the reason for purchasing hop base.
- Litigation followed, with the growers seeking rescission and restitution and the trust seeking contract enforcement; the trial court granted summary judgment for the growers.
Issues
- Whether the growers’ payment obligations were discharged under the doctrine of supervening frustration (Restatement (Second) of Contracts § 265) despite arguments that the regulatory change was foreseeable and that hop base retained some value.
- Whether, if rescission and restitution were proper, the growers were entitled to prejudgment interest on amounts awarded.
Decision
- The Washington Supreme Court adopted Restatement (Second) of Contracts § 265 as Washington law governing discharge by supervening frustration.
- The Court held that termination of the federal marketing order substantially frustrated the growers’ principal purpose in purchasing hop base, discharging their remaining duty to pay.
- The Court affirmed summary judgment granting rescission and restitution in favor of the growers.
- The Court held that prejudgment interest could be awarded in rescission/restition for sums that were liquidated or determinable by computation, subject to appropriate offsets.
Legal Principles
- A party’s remaining duties are discharged when (1) the party’s principal purpose is substantially frustrated, (2) without the party’s fault, (3) by an event whose nonoccurrence was a basic assumption of the contract, unless the contract or circumstances allocate the risk otherwise. (Restatement (Second) of Contracts § 265.)
- “Principal purpose” means an objective so central to the bargain that, as understood by both parties, the transaction would make little sense without it.
- Substantial frustration turns on whether the promised performance becomes virtually worthless to the party in light of the frustrated principal purpose; residual or speculative value in the subject matter does not bar the defense.
- Foreseeability in the abstract does not defeat frustration where the specific supervening event was not a risk allocated by the parties and its nonoccurrence was a basic assumption of the exchange.
- In rescission and restitution, prejudgment interest is available on liquidated amounts (fixed or calculable by reference to a definite standard), even though the remedy is equitable.
Conclusion
The court held that the USDA’s termination of the hop marketing order destroyed the regulatory premise that made hop base purchases valuable for future market access, thereby substantially frustrating the growers’ principal purpose and discharging their duty to pay; rescission and restitution were affirmed, with prejudgment interest permitted on ascertainable restitution amounts.