Roth Steel Products, and Toledo Steel Tube Company, Cross-Appellants v. Sharon Steel Corporation, Cross-Appellee

This diversity action for breach of contract involves issues which require us to explore some relatively uncharted areas of Article Two of the Uniform Commercial Code, Ohio Rev.Code Sec. 1302.01 et seq. We vacate the district court's judgment, however, to the extent that it concludes that adequate notice of breach was given in 1974 and remand this question for more comprehensive findings of fact.

The plaintiffs-appellees (cross-appellants), Roth Steel Products Company and Toledo Steel Tube Company, are subsidiaries of Roth Industries, Inc. Roth Steel produces welded straight tubing for a variety of uses; Toledo Steel Tube produces fabricated steel tubing for use in automobile exhaust systems. Mr. Howard Guerin, vice-president for purchasing, Roth Industries, served as the purchasing agent for both corporations until April, 1973, when he was replaced by Mr. Richard Mecaskey.

Sharon Steel Corporation, defendant-appellant (cross-appellee), is a subsidiary of NVF Corporation. In 1973, Sharon was an integrated steel producer which accounted for approximately one percent of the steel produced in this country. It produced hot rolled and cold rolled sheet steel in carbon and alloy grades, as well as pickled and oiled sheet steel. The plaintiffs used sheet steel to produce tubing. Mr. Frank Metzger, Sharon's Northern Ohio Sales Manager, was responsible for all sales to the plaintiffs.

A. In 1972, the steel industry operated at approximately 70% of its capacity. Steel prices were highly competitive and discounts from published prices were given customers in an effort to increase the productive use of steel making capacity. On November 14, 1972, Metzger, Sharon's representative, met with Guerin1 and offered to sell the plaintiffs specific quantities of hot rolled, cold rolled and pickled steel at prices substantially lower than Sharon's "book price".2 Testimony indicated that these prices and quantities were to be effective from January 1 until December 31, 1973.

On November 17, 1972, Metzger forwarded a communication in the form of a letter to Guerin confirming the discussions of November 14.3 The letter indicated that Sharon would sell the plaintiffs 200 tons of hot rolled pickled steel each month for $148.00 per ton and that it would sell plaintiffs hot rolled black steel on a open schedule basis for $140.00 per ton. The letter also discussed "the probability" that Sharon could sell 500 tons of cold rolled to both Roth Steel and Toledo at varying prices depending on the type of cold rolled steel ordered. Metzger testified that a few days after the letter was sent, the plaintiffs agreed to purchase 1,000 tons of cold rolled steel (500 tons each) at the prices indicated in the letter.

On February 15, 1973, Metzger and Guerin met to discuss the tonnages of hot rolled steel mentioned in the November 17 letter. During the meeting, Metzger and Guerin agreed to increase the monthly tonnage of hot rolled pickled steel that Sharon would sell to the plaintiffs from 200 tons to 300 tons each month. Metzger also agreed, on behalf of Sharon, to sell the plaintiffs 300 tons of hot rolled black steel until May, 1973, when the monthly tonnage would be increased to 400 tons per month for the remainder of 1973. To confirm the agreement, Metzger noted these increased tonnages on Guerin's copy of the November 17 letter.

In early 1973, several factors influenced the market for steel. Federal price controls4 discouraged foreign producers from importing steel; conversely, domestic producers exported a substantial portion of the steel produced domestically, in an effort to avoid federal price controls. Thus, the domestic steel supply was sharply reduced. In addition, the industry experienced substantial increases in demand as well as increases in labor, raw material, and energy costs. These increased labor, raw material, and energy costs compelled steel producers to increase prices. The increased demand and the attractive export market caused the entire industry to operate at full capacity in 1973 and 1974. Consequently, nearly every domestic producer experienced substantial delays in delivery.

As a result of the changed market conditions, Sharon decided to withdraw all price concessions, including those it had given the plaintiffs. The plaintiffs were notified of this decision on March 23, 1973 and they immediately protested, asserting that the price increase was a breach of the November, 1972 agreement, as modified in February. As a result of this protest, discussions ensued and Sharon agreed to continue to sell steel to the plaintiffs at the discount prices of November, 1972 until June 30, 1973. For the remainder of 1973, Sharon proposed to sell rolled steel to plaintiffs at modified prices; these prices were higher than the prices set forth in the November 17 letter, but were lower than the published prices which Sharon charged its other customers. Sharon clearly indicated to plaintiffs that Sharon would sell no steel to plaintiffs after June 30, 1973 except at modified prices. Although plaintiffs initially were reluctant to accept Sharon's compromise, they finally agreed to Sharon's compromise proposal primarily because they were unable to purchase sufficient steel elsewhere to meet their production requirements.5

In the second half of 1973, Sharon also experienced difficulties in filling orders in a timely fashion. In most of 1973 and 1974, Sharon's mill was operating at full capacity; because it could not produce any more steel, Sharon implemented a "blanking" policy in an effort to reduce the backlog of orders. Pursuant to the blanking policy, Sharon would refuse to accept purchase orders that requested delivery for a particular "blanked" month and all the steel produced that month was used to fill overdue orders. Because of this policy Sharon refused several purchase orders issued by plaintiffs: it refused to book Roth's orders of 300 tons of hot rolled pickled steel and 400 tons of hot rolled black steel for delivery in October, 1973 and Toledo's order of 425 tons of cold rolled steel for delivery in December, 1973. Both October and December were "blanked" months.

B. Sharon and the plaintiffs conducted business differently in 1974. In 1974, contracts were formed separately on an order-by-order basis. Normally, the plaintiffs issued a purchase order which indicated the type and amount of steel sought, and the requested delivery date; the purchase orders were offers to purchase steel and were not effective until accepted by Sharon. Sharon accepted an offer by issuing an acknowledgment form; in this form, Sharon agreed to ship a quantity of steel by a specific date, usually the date requested by the purchaser. The acknowledgment form indicated that the price for the shipment would be the "[s]eller's prices prevailing at the time of shipment."

In 1974, the steel market became even less predictable than in 1973: overall demand increased, deliveries of steel became more erratic, and acknowledged delivery dates were rarely observed. Sharon's actual delivery dates were three to five months after the promised delivery dates. Throughout 1974, the price of steel steadily rose; as a consequence, Sharon's late deliveries had the effect of increasing the price of the goods.

Although Sharon's shipments to the plaintiffs were consistently delinquent throughout 1974, the plaintiffs continued to accept the late shipments and to place new orders with Sharon. The plaintiffs apparently acquiesced in this pattern of late shipments and higher prices for two reasons: they had no practical alternative source of steel and they believed Sharon's assurances that the late deliveries resulted from the general shortage of raw materials and the need to equitably allocate its limited production among all of its customers.

In May, 1974, the plaintiffs discovered facts that caused them to believe that the delays in shipment were not entirely the result of raw material shortages and Sharon's allocation system. Specifically, the plaintiffs learned on May 9, 1974, that Sharon was selling substantial amounts of rolled steel to its subsidiary Ohio Metal Processing Company. Ohio Metal Processing was operating as a warehouse6 and selling steel at premium prices. By selling through its warehouse-subsidiary, Sharon was able to obtain higher prices than federal price controls otherwise permitted. In 1974, approximately fifteen percent (20,000 tons per month) of Sharon's monthly steel production was sold to Ohio Metal Processing. Thus, the plaintiffs assert that they first learned that Sharon's late deliveries were not entirely the result of raw material shortages and an allocation system when they learned that steel was being sold to Ohio Metal Processing.

The plaintiffs did not immediately act upon this information. Instead, they allowed the remaining unfilled orders to pend during the summer. In September, 1974, Roth's orders were placed on "hold" due to the labor dispute. Most of plaintiffs' orders were cancelled October, 1974. One final delivery was made by Sharon on October 31, 1974; although this order had been inadvertently overlooked by the plaintiffs and thus not cancelled, the plaintiffs rejected this shipment because delivery had been made nearly one year after the agreed delivery date.7

C. The plaintiffs commenced this action in April, 1975, alleging breach of contract and seeking to recover their expenses in "covering". In March, 1976, the plaintiffs sought leave to file an amended complaint. The complaint, as amended, asserted 41 counts; plaintiffs sought damages based on the difference between the contract price and the market price for the goods at the time breach was discovered. The amended complaint sought total damages of $896,174.60. Sharon's answer denied the existence of a contract for the calendar year 1973 and raised several defenses: the statute of frauds, modification of the oral contract, commercial impracticability and failure to give notice of breach. It also counterclaimed for damages based upon the steel shipment which was rejected by Toledo Steel in October, 1974.

Following discovery, the district court granted plaintiffs' motion for partial summary judgment, concluding that the statute of frauds did not bar the enforcement of the November, 1972 oral agreement. Following a five day trial, the district court issued a lengthy and exhaustive memorandum of opinion. In the opinion, the district court concluded that an oral contract was formed in November, 1972; that Sharon's attempt, in June, 1972, to modify the contract was ineffective; and that Sharon had breached the contract by charging prices higher than agreed upon in the November, 1972 contract, by refusing to sell steel in October and December, 1973, and by failing to make timely delivery of some orders issued pursuant to the 1972 agreement. With regard to the 1974 transactions, the district court concluded that Sharon had breached several contracts for delivery of steel by failing to make a timely delivery or by failing to make delivery at all. It also concluded that the plaintiffs had given adequate notice of breach with regard to those late shipments which they accepted. It granted the plaintiffs damages of $555,968.46, but denied their motion for prejudgment interest. Finally, it dismissed Sharon's counterclaim, because it concluded that Toledo properly rejected the late shipment.8

Sharon has appealed from the district court's order granting the plaintiffs claim for damages and the order dismissing its counterclaim. The plaintiffs have cross-appealed from the district court's order denying prejudgment interest.9

A. The threshold question is whether an oral contract for the sale of goods in excess of five hundred dollars which cannot be performed within one year is subject to the requirements of both O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) and O.R.C. Sec. 1335.05.10 The district court, in response to cross-motions for partial summary judgment, concluded that O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) must be viewed as an exception to the requirements of O.R.C. Sec. 1335.05, the general statute of frauds provision, and that the November 17, 1972 confirmation letter, coupled with certain admissions on the part of Frank Metzger, satisfied O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201). Because we believe that O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) and O.R.C. Sec. 1335.05 present an irreconcilable conflict, we agree with the district court that only the uniform commercial code's statute of frauds is applicable.11 We also believe that the admissions made by Frank Metzger satisfy the special requirements of O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) and, thus, that the oral contract is enforceable.

The uniform commercial code is a comprehensive statutory scheme regulating commercial sales transactions. See O.R.C. Sec. 1301.04 (U.C.C. Sec. 1-104). As part of that scheme, O.R.C. Sec. 1302.04(C)(2) (U.C.C. Sec. 2-201(3)), provides that a contract for the sale of goods in excess of five hundred dollars need not be evidenced by a writing "if the party against whom enforcement is sought admits in his pleading, testimony, or otherwise in court that a contract was made." O.R.C. Sec. 1335.05, however, contains no exception to its requirement that contracts which cannot be performed within one year must be in writing. Consequently, an irreconcilable conflict exists when a contract falls within the scope of both O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) and O.R.C. Sec. 1335.05; not all contracts which are enforceable under O.R.C. Sec. 1302.04 satisfy the requirements of O.R.C. Sec. 1335.05.12 Either the writing requirements of O.R.C. Sec. 1335.05 must be viewed as an exception to O.R.C. Sec. 1302.04(C)(2) or O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) must be interpreted as an exception to mandates of O.R.C. Sec. 1335.05.

Generally, when an irreconcilable conflict exists between a special statute and a general statute, the special statute prevails as an exception unless the legislature has expressly manifested a contract intent.13 E.g., State ex rel. Myers v. Chiaramonte, 46 Ohio St.2d 230, 237, 348 N.E.2d 323, 328 (1976). O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201) is a special legislative attempt to tailor the statute of frauds to the unique characteristics of a commercial sales transaction.14 Conversely, O.R.C. Sec. 1335.05, is the "general" statute of frauds provision encompassing a wide variety of contractual obligations which must be evidenced by a writing. Because of Ohio's policy of interpreting special statutes as exceptions to more general provisions, and because the transactions between plaintiffs and Sharon are squarely within the scope of Article 2 of the uniform commercial code, we believe that the November oral contract need only satisfy the requirements of O.R.C. Sec. 1302.04 (U.C.C. Sec. 2-201).

The district court held that the deposition testimony of Frank Metzger satisfied the judicial admission exception to the statute of frauds established by O.R.C. Sec. 1302.04(C)(2) (U.C.C. Sec. 2-201(3)(b)).15 The primary dispute on appeal concerns the scope of a representative admission under O.R.C. Sec. 1302.04(C)(2) (U.C.C. Sec. 2-201(3)(b)).16 The question is whether agents with authority to contract on behalf of their principals17 can make an admission which satisfies O.R.C. Sec. 1302.04(C)(2) (U.C.C. Sec. 2-201(3)(b)).

The uniform commercial code should be liberally construed and ought to be applied to promote its underlying purposes, O.R.C. Sec. 1301.02 (U.C.C. Sec. 1-102). The primary purpose of the statute of frauds is to protect parties from unfounded parol assertions of contractual obligation. See e.g., Dehahn v. Innes, 356 A.2d 711, 717 (Me.1978). Before the judicial admission section was enacted, parties enjoyed the protection afforded by the statute of frauds even though they admitted the existence of a contract in their pleadings or in their testimony. The judicial admission exception to the statute of frauds represents a specific legislative response to this anomaly: no longer may a party admit the existence of a contract, or facts which may establish existence of a contract, and simultaneously claim the benefits of the statute of frauds. E.g., Dehahn v. Innes, 356 A.2d 711 (Me.1978) (the enactment of the judicial admission exception to the statute of frauds was designed to prevent unscrupulous litigants from using the statute of frauds in a manner inconsistent with its intended purpose); Packwood Elevator Company v. Heisdorffer, 260 N.W.2d 543 (Iowa 1977). The question whether a representative admission by an agent with authority to bind his principal satisfies the judicial admission exception to the uniform commercial code's statute of frauds provision, therefore, must be analyzed in light of these policy considerations.

The judicial admission exception to the statute of frauds is based on the maxim that principals rarely act in a manner inconsistent with their own interests. The statute, therefore, assumes that a principal's admission regarding the existence of a contract is certain to be well founded. We believe that an admission by an agent with authority to bind his principal to the disputed contract is equally reliable. Agents owe a duty to their principals to act in a manner consistent with the principal's interests. Moreover, the agent's interest in continued employment assures that the agent will act in the principal's best interest. In short, both the principal and his agent have an identity of interest in protecting the principal from unfounded oral assertions of obligation. Because the principal retains the ability to choose the individuals able to contract on his behalf, an interpretation which recognizes as admissions those statements made by agents with authority to contract does not unduly burden the principal's interest in being protected from unwarranted assertions of contractual obligation. For these reasons we hold that agents with authority to bind their principals to the disputed contract may admit the existence of an oral contract for the purposes of O.R.C. Sec. 1302.04(C)(2) (U.C.C. Sec. 2-201(3)(b)), see Alter & Sons, Inc. v. United Engineers & Constructors, Inc., 366 F.Supp. 959, 966 (S.D.Ill.1973), and that the admissions by Metzger of the existence of a contract satisfied the requirements of O.R.C. Sec. 1302.04(C)(2) (U.C.C. Sec. 2-201(3)(b)).18

B. The district court found that during the November, 1972 negotiations between plaintiffs and Sharon, plaintiffs promised to purchase and Sharon promised to sell specific quantities of steel throughout the calendar year 1973. The existence and scope of promises made by the plaintiffs and Sharon during the November negotiations present factual questions wholly separate from the legal consequences which attach to such subsidiary findings. Although this Court may freely review the district court's legal conclusion concerning the existence of an enforceable oral contract, its subsidiary factual determinations must be upheld unless they are clearly erroneous.19 Sufficient evidence supports the district court's findings regarding what the parties actually agreed upon. Moreover, we believe that the district court properly applied the controlling principles of law; thus, we hold that the November negotiations resulted in a contract, to be performed in 1973, for the sale of fixed quantities of steel.

The district court relied primarily upon the testimony of Frank Metzger, to support its finding that the November negotiations resulted in an agreement concerning the issuance and acceptance of monthly purchase orders for specific tonnage of steel: two hundred tons per month of hot rolled pickled and oiled and five hundred ton per month of cold rolled steel. Metzger testified that on November 14, 1972, an agreement concerning the quantity and price of hot rolled pickled and oiled steel was reached between Guerin, and Sharon representatives and that the confirmation letter dated November 17, 1972 reflects the terms of that agreement.20 Metzger's testimony and the terms of the November 17 letter indicate that the quantity of cold rolled steel was initially a tentative figure. Metzger admitted, however, that both parties agreed upon the proposed tonnage stated in the November 17 confirmation letter.21 Although credible evidence exists which might support a different conclusion, we cannot conclude, in light of Metzger's testimony, that the district court's subsidiary finding that plaintiffs promised to purchase and that Sharon promised to sell specific tonnages of steel is clearly erroneous.

Sharon argues that the November, 1972 agreement is unenforceable because the plaintiffs' promise to purchase specific quantities of steel from Sharon is illusory.22 Sharon argues that it was not obligated to ship steel unless a purchase order was first issued and that the decision to issue a purchase order was wholly within the control of the plaintiffs. This argument assumes that the plaintiffs were obligated to buy steel only if they chose to issue a purchase order and that the plaintiffs were not obligated to issue purchase orders for a specific quantity of steel each month. The district court, however, found that the plaintiff's promise to buy a specific amount of steel per month was unconditional and concluded that the promise provided adequate consideration to support Sharon's promise to sell steel. We believe that this finding is not clearly erroneous and, therefore, that the plaintiff's promise to purchase steel is not illusory. E.g., Davis Laundry & Cleaning Co. v. Whitmore, 92 Ohio St. 44, 110 N.E. 518 (1915) (exchange of promises to buy and sell represents sufficient consideration).

C. In March, 1973, Sharon notified its customers that it intended to charge the maximum permissible price for all of its products; accordingly, all price concessions, including those made to the plaintiffs, were to be rescinded effective April 1, 1973. On March 23, 1973, Guerin indicated to Metzger that the plaintiffs considered the proposed price increase to be a breach of the November, 1972 contract. In an effort to resolve the dispute, Guerin met with representatives of Sharon on March 28, 1973 and asked Sharon to postpone any price increases until June or July, 1973. Several days later, Richard Mecaskey, Guerin's replacement, sent a letter to Sharon which indicated that the plaintiffs believed that the November, 1972 agreement was enforceable and that the plaintiffs were willing to negotiate a price modification if Sharon's cost increases warranted such an action. As a result of this letter, another meeting was held between Sharon and the plaintiffs. At this meeting, Walter Gregg, Sharon's vice-president and chairman of the board, agreed to continue charging the November, 1972 prices until June 30, 1973 and offered, for the remainder of 1972, to charge prices that were lower than Sharon's published prices but higher than the 1972 prices.23 Although the plaintiffs initially rejected the terms offered by Sharon for the second half of 1973, Mecaskey reluctantly agreed to Sharon's terms on June 29, 1973.

Before the district court, Sharon asserted that it properly increased prices because the parties had modified the November, 1973 contract to reflect changed market conditions. The district court, however, made several findings which, it believed, indicated that Sharon did not seek a modification to avoid a loss on the contract. The district court also found that the plaintiffs' inventories of rolled steel were "alarmingly deficient" at the time modification was sought and that Sharon had threatened to cease selling steel to the plaintiffs in the second-half of 1973 unless the plaintiffs agreed to the modification. Because Sharon had used its position as the plaintiffs' chief supplier to extract the price modification, the district court concluded that Sharon had acted in bad faith by seeking to modify the contract. In the alternative, the court concluded that the modification agreement was voidable because it was extracted by means of economic duress; the tight steel market prevented the plaintiffs from obtaining steel elsewhere at an affordable price and, consequently, the plaintiffs were forced to agree to the modification in order to assure a continued supply of steel. See e.g. Oskey Gasoline & Oil Co. v. Continental Oil Co., 534 F.2d 1281 (8th Cir.1976). Sharon challenges these conclusions on appeal.

The ability of a party to modify a contract which is subject to Article Two of the Uniform Commercial Code is broader than common law, primarily because the modification needs no consideration to be binding. O.R.C. Sec. 1302.12 (U.C.C. Sec. 2-209(1)). A party's ability to modify an agreement is limited only by Article Two's general obligation of good faith. Ralston Purina Company v. McNabb, 381 F.Supp. 181, 183 (W.D.Tenn.1974); Official Comment 2, O.R.C. Sec. 1302.12 (U.C.C. Sec. 2-209). See O.R.C. Sec. 1302.01(A)(2) (U.C.C. Sec. 2-103). Erie County Water Authority v. Hen-Gar Construction Corp., 473 F.Supp. 1310, 1313 (W.D.N.Y.1979); Ralston Purina Co. v. McNabb, 381 F.Supp. at 182-83. In determining whether a particular modification was obtained in good faith, a court must make two distinct inquiries: whether the party's conduct is consistent with "reasonable commercial standards of fair dealing in the trade," U.S. for Use and Benefit of Crane Co. v. Progressive Enterprises, 418 F.Supp. 662, 664 n. 1 (E.D.Va.1976), and whether the parties were in fact motivated to seek modification by an honest desire to compensate for commercial exigencies. See Ralston Purina Co. v. McNabb, 381 F.Supp. at 183 (subjective purpose [to maximize damages] of extending time of performance under contract indicates bad faith and renders modification invalid); O.R.C. Sec. 1302.01(A)(2) (U.C.C. Sec. 2-103). The first inquiry is relatively straightforward; the party asserting the modification must demonstrate that his decision to seek modification was the result of a factor, such as increased costs, which would cause an ordinary merchant to seek a modification of the contract. See Official Comment 2, O.R.C. Sec. 1302.12 (U.C.C. Sec. 2-209) (reasonable commercial standards may require objective reason); J. White & R. Summers, Handbook of Law under the U.C.C. at 41. The second inquiry, regarding the subjective honesty of the parties, is less clearly defined. Essentially, this inquiry requires the party asserting the modification to demonstrate that he was, in fact, motivated by a legitimate commercial reason and that such a reason is not offered merely as a pretext. Ralston Purina Co. v. McNabb, 381 F.Supp. at 183-84. Moreover, the trier of fact must determine whether the means used to obtain the modification are an impermissible attempt to obtain a modification by extortion or overreaching.24 Erie County Water Authority v. Hen-Gar Construction, 473 F.Supp. at 1313; Official Comment 2, O.R.C. Sec. 1302.12 (U.C.C. Sec. 2-209). See J. White and R. Summers, Handbook of the Law under the Uniform Commercial Code, at 40-41 (1972).

Sharon argues that its decision to seek a modification was consistent with reasonable commercial standards of fair dealing because market exigencies made further performance entail a substantial loss. The district court, however, made three findings which caused it to conclude that economic circumstances were not the reason that Sharon sought a modification: it found that Sharon was partially insulated from raw material price increases, that Sharon bargained for a contract with a slim profit margin and thus implicitly assumed the risk that performance might come to involve a loss, and that Sharon's overall profit in 1973 and its profit on the contract in the first quarter of 1973 were inconsistent with Sharon's position that the modification was sought to avoid a loss. Although all of these findings are marginally related to the question whether Sharon's conduct was consistent with reasonable commercial standards of fair dealing, we do not believe that they are sufficient to support a finding that Sharon did not observe reasonable commercial standards by seeking a modification. In our view, these findings do not support a conclusion that a reasonable merchant, in light of the circumstances, would not have sought a modification in order to avoid a loss.25 For example, the district court's finding that Sharon's steel slab contract26 insulated it from industry wide cost increases is correct, so far as it goes. Although Sharon was able to purchase steel slabs at pre-1973 prices, the district court's findings also indicate that it was not able to purchase, at those prices, a sufficient tonnage of steel slabs to meet its production requirements.27 The district court also found that Sharon experienced substantial cost increases for other raw materials, ranging from 4% ton nearly 20%. In light of these facts, the finding regarding the fixed-price contract for slab steel, without more, cannot support an inference that Sharon was unaffected by the market shifts that occurred in 1973. Similarly, the district court's finding that Sharon entered a contract in November, 1972 which would yield only a slim profit does not support a conclusion that Sharon was willing to risk a loss on the contract. Absent a finding that the market shifts and the raw material price increases were foreseeable at the time the contract was formed--a finding which was not made--Sharon's willingness to absorb a loss cannot be inferred from the fact that it contracted for a smaller profit than usual. Finally, the findings regarding Sharon's profits are not sufficient, by themselves, to warrant a conclusion that Sharon was not justified in seeking a modification. Clearly, Sharon's initial profit on the contract28 is an important consideration; the district court's findings indicate, however, that at the time modification was sought substantial future losses were foreseeable.29 A party who has not actually suffered a loss on the contract may still seek a modification if a future loss on the agreement was reasonably foreseeable. Similarly, the overall profit earned by the party seeking modification is an important factor; this finding, however, does not support a conclusion that the decision to seek a modification was unwarranted. The more relevant inquiry is into the profit obtained through sales of the product line in question. This conclusion is reinforced by the fact that only a few product lines may be affected by market exigencies;30 the opportunity to seek modification of a contract for the sale of goods of a product line should not be limited solely because some other product line produced a substantial profit.

In the final analysis, the single most important consideration in determining whether the decision to seek a modification is justified in this context is whether, because of changes in the market or other unforeseeable conditions, performance of the contract has come to involve a loss. In this case, the district court found that Sharon suffered substantial losses by performing the contract as modified. See note 29, supra. We are convinced that unforeseen economic exigencies existed which would prompt an ordinary merchant to seek a modification to avoid a loss on the contract; thus, we believe that the district court's findings to the contrary are clearly erroneous. See, e.g., U.S. for Use and Benefit of Crane Co. v. Progressive Enterprises, 418 F.Supp. 662, 664 (E.D.Va.1976); Official Comment 2, O.R.C. Sec. 1302.12 (U.C.C. Sec. 2-209); White & Summers, supra, at 41.

The second part of the analysis, honesty in fact, is pivotal. The district court found that Sharon "threatened not to sell Roth and Toledo any steel if they refused to pay increased prices after July 1, 1973" and, consequently, that Sharon acted wrongfully. Sharon does not dispute the finding that it threatened to stop selling steel to the plaintiffs. Instead, it asserts that such a finding is merely evidence of bad faith and that it has rebutted any inference of bad faith based on that finding. We agree with this analysis; although coercive conduct is evidence that a modification of a contract is sought in bad faith, that prima facie showing may be effectively rebutted by the party seeking to enforce the modification. E.g., Business Incentives, Inc. v. Sony Corp. of America, 397 F.Supp. 63, 69 (S.D.N.Y.1975) (in context of economic duress, coercive conduct permissible in light of contractual right to terminate). See Jamestown Farmers Elevator, Inc. v. General Mills, 552 F.2d 1285, 1290 (8th Cir.1977) ("good faith insistence upon a legal right [with coercive effect] which one believes he has usually is not duress, even if it turns out that that party is mistaken and, in fact, has no such right"); White & Summers, supra, at 41 (good faith exists if a party believes that contract permits party seeking modification to refuse to perform if modification not effected). Although we agree with Sharon's statement of principles, we do not agree that Sharon has rebutted the inference of bad faith that rises from its coercive conduct. Sharon asserts that its decision to unilaterally raise prices was based on language in the November 17, 1972 letter which allowed it to raise prices to the extent of any general industry-wide price increase. Because prices in the steel industry had increased, Sharon concludes that it was justified in raising its prices. Because it was justified in raising the contract price, the plaintiffs were bound by the terms of the contract to pay the increased prices. Consequently, any refusal by the plaintiffs to pay the price increase sought by Sharon must be viewed as a material breach of the November, 1972 contract which would excuse Sharon from any further performance. Thus, Sharon reasons that its refusal to perform absent a price increase was justified under the contract and consistent with good faith.

This argument fails in two respects. First, the contractual language on which Sharon relies only permits, at most, a price increase for cold rolled steel; thus, even if Sharon's position were supported by the evidence, Sharon would not have been justified in refusing to sell the plaintiffs hot rolled steel because of the plaintiffs' refusal to pay higher prices for the product. More importantly, however, the evidence does not indicate that Sharon ever offered this theory as a justification until this matter was tried. Sharon's representatives, in their testimony, did not attempt to justify Sharon's refusal to ship steel at 1972 prices in this fashion. Furthermore, none of the contemporaneous communications contain this justification for Sharon's action. In short, we can find no evidence in the record which indicates that Sharon offered this theory as a justification at the time the modification was sought. Consequently, we believe that the district court's conclusion that Sharon acted in bad faith by using coercive conduct to extract the price modification is not clearly erroneous. Therefore, we hold that Sharon's attempt to modify the November, 1972 contract, in order to compensate for increased costs which made performance come to involve a loss, is ineffective because Sharon did not act in a manner consistent with Article Two's requirement of honesty in fact when it refused to perform its remaining obligations under the contract at 1972 prices.31III.

A. The district court concluded that Sharon's refusal to accept certain purchase orders requesting delivery during the months of October and December of 1973 resulted in a breach of the November 14, 1972 oral agreement.32 Sharon asserted the affirmative defense of commercial impracticability,33 arguing that demand far surpassed its decreasing production capabilities. Because the oral contract of November 14, 1972 was based upon the presupposed condition that raw materials sufficient to meet Sharon's contractual obligations would be available, and because sufficient raw materials were unavailable to meet demand, Sharon claims that strict performance of the contract is excused by O.R.C. Sec. 1302.73 (U.C.C. Sec. 2-615).34 The district court, however, found that Sharon's policy of accepting more purchase orders than it was capable of filling was the direct cause of Sharon's inability to perform pursuant to the terms of the November 14, 1972 oral agreement and rejected Sharon's commercial impracticability defense.

Generally, a party asserting the defense of commercial impracticability must prove that an unforeseeable event occurred, that the non-occurrence of the event was a basic assumption underlying the agreement, and that the event rendered performance impracticable O.R.C. Sec. 1302.73 (U.C.C. Sec. 2-615). See, e.g., Neal-Cooper Grain Company v. Texas Gulf Sulfur Company, 508 F.2d 283, 293 (7th Cir.1974). The evidence in this case supports Sharon's assertions that an unforeseeable raw material shortage occurred and that the non-occurrence of such a shortage was a basic assumption underlying the November 14, 1972 oral contract. The primary dispute involves the question whether the raw material shortage rendered Sharon's ability to perform the November, 1972 contract commercially impracticable. We believe that Sharon failed to affirmatively demonstrate that its alleged inability to perform was caused by the existing raw material shortage. Therefore, we affirm the district court's decision denying Sharon relief under O.R.C. Sec. 1302.73 (U.C.C. Sec. 2-615).

To successfully assert the affirmative defense of commercial impracticability, the party must show that the unforeseeable event upon which excuse is predicated is due to factors beyond the party's control. Chemetron Corp. v. McLouth Steel Corp., 381 F.Supp. 245 (N.D.Ill.), aff'd, 522 F.2d 469 (7th Cir.1974). This rule of law is simply a restatement of the causation requirement of O.R.C. Sec. 1302.73 (U.C.C. Sec. 2-615); if the factors which create the event are within the control of the party asserting commercial impracticability, then the inability to perform is the result of the party's conduct rather than the event itself. The record indicates that Sharon continued to accept an unprecedented amount of purchase orders during the first half of 1973 even though it knew that raw materials were in short supply.35 In light of these facts, we believe that sufficient evidence sup