Market Change Risks

AuthorRobert J. Spjut
Pages327-368
12
Market Change Risks
MARKET CHANGE HAZARDS
A market is a location where “goods or services are bought and sold.1 It
is also a “geographic area or demographic segment considered as a place
of demand for particular goods or services” and “the demand there is
for any particular article.”2 In this latter sense, a market is an activity
of individuals, demanding goods, services, and other items of value and
supplying such items to satisfy that demand.
A change in supply or demand is a change in the market for the good,
service, or other item of value so demanded and supplied. Such a change
may be comparable to the uncontrollable events described in chapter
11 when no party to the transaction controls its occurrence, and it may
or may not be foreseeable. Market changes are the cumulative eects
or aggregation of the results of individuals’ buying and selling goods,
services, and other items of value; usually no specific individual controls
such eects or aggregation. The exception is a “thin” market, which is
defined as a market “in which the number of oerings is relatively low.
Such a market may be controlled or influenced by a few individuals in
a way uncontrollable events are not. Still, the market changes even in a
1 B’ Law D 970 (10th ed. 2014).
2 Id.
327
thin market may be beyond the control of both parties to a transaction.
The reference to “market forces” enhances the comparison to other
uncontrollable events: like earthquakes, lightning, and the like, changes
in supply and demand seemingly deny a party aected thereby the ability
to perform or realize a benefit or compel or pressure it to make a choice
between two adverse outcomes. The analogy is far from perfect, however,
as explained as follows.
Adverse Outcomes of Market Changes
Each market change whose occurrence or nonoccurrence is beyond the
parties’ control and aects their transaction can be described using the
three variables used for other uncontrollable events:
whether such change was (1) the occurrence of an event that was
not expected to or was hoped would not occur or (2) the failure to
occur of an event that was expected to occur or was hoped would
occur;
whether the change aected (a) benefit realization or (b) task
completion; and
whether benefit realization or task completion was as a result of
such change partly or wholly (i) reduced, (ii) delayed, or (iii) made
more expensive.
The market changes discussed in this chapter are assumed to
be beyond the control of the parties. The previous variables can be
combined to describe each market change. For example, an increase
in a contractor’s labor and material costs purchased in the open market
would be a (1)(b)(iii) scenario: a market change that increases costs at
the time of performance. If additional delay is also the result, because
labor and materials take longer than anticipated to procure, the scenario
would be (1)(b)(ii), as well.
The impact of uncontrollable events on task completion may also
be repeated for market changes. The impact on task completion may
be that (A) task completion is impossible, impractical, or dicult or
(B) a choice is created between completing the task and suering
adverse consequences, on one hand, and breaching and avoiding
the adverse consequences, on the other. When task completion is
impaired, partly or wholly, or delayed by a market change, it can be further
Third-Party and Uncontrollable Event Risks
328
described by whether, if task completion is aected, the task is intended
to be completed for (I) the benefit of the party completing it or (II) the
other party. These previous variables can be combined with the first three
groups to describe each uncontrollable incident. If the contractor was
unable to procure an item needed for construction, it would be unable
to perform its obligation to the owner. Such scenario is (1)(b)(i)(A)(II).
Contingencies and Nonoccurrences
A nonoccurrence of a market change is comparable to the nonoccurrence
of an uncontrollable event and can adversely aect a transaction. In
both instances, a transaction is structured such that benefit realization or
task completion can be achieved only if an anticipated event or market
change occurs. The passage of time without its occurrence results in such
benefit not being realized or task not being completed. The hazard is
proceeding with a transaction assuming or hoping such event or change
will occur.
Columbian National Title Insurance Co.,3 summarized in chapter 10,4
may illustrate such a structure. Either the demand for title insurance in
the county title insurance market had changed after contract formation,
precluding the entry of new insurers in that market, or the demand
for the new insurer’s insurance policies did not develop after contract
formation, as hoped. Viewed as the latter, which seems a more accurate
description of events, the agent’s realization of the benefits of the contract
depended upon the occurrence of a market change. Accordingly, the
agent’s claim implied that he had not assumed responsibility for the
risk of such nonoccurrence. Rather, both parties had jointly assumed
responsibility for the risk of such nonoccurrence, and he could terminate
the contract. Each party would have had to bear its losses. The title
insurer’s successful claim that the agent could not terminate the contract
implied that the agent had assumed responsibility for the risk the market
would not develop as anticipated.5 So viewed, the case illustrates a (2)
(a)(i) scenario (nonoccurrence of event precludes benefit realization).
3 659 F. Supp. 796 (D. Kan. 1987).
4 See text accompanying ch. 10, note 27.
5 The agent claimed termination was permissible because performance was commercially
impracticable and frustration of purpose. The court agreed that the purpose of the exclusive
agency contract had been frustrated: “When the insurance policies became unmarketable,
defendant [the agent] was totally deprived of the benefits of the contract. Although the
Market Change Risks 329

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