On Appeal from the United States District Court for the Western District of Pennsylvania.
Gibbons and Hunter, Circuit Judges, and Stapleton, District Judge.*fn*
Sharon Steel Corporation appeals from the denial of its petition to compel arbitration in a contractual dispute with Jewell Coal & Coke Company. The district court ruled that Sharon's commercial impracticability claim did not constitute the sort of force majeure claim that the contract referred to arbitration. Because we hold that Sharon raised a prima facie claim of arbitrability we will reverse and remand.
On July 1, 1978, the parties signed an agreement under which Jewell would supply Sharon with one hundred and twenty thousand tons of coke per year for a period of five years. Various provisions in the agreement dealt with quality, shipping, and renegotiation terms. Paragraph 7 dealt with price, and provided that the basic price of eighty-five dollars per net ton would be adjusted quarterly in accordance with a set formula attached quarterly in accordance with a set formula attached quarterly in accordance with a set formula attached to the agreement. The formula divided the price of the coke into seven elements: labor, royalties, equipment, trucking, power, black lung expense and other. Each element was classified according to its contribution to the total base price. Then the formula specified an escalation index for each element. For example, the labor index consisted of the percentage increase in daily wage rates for workers covered by the National Bituminous Coal Wage Agreement.The equipment index was prepared from the "Mining Machinery and Equipment" tables in the Bureau of Labor Statistics compilation of Producer Prices and Price Indexes. As the appellees note, the formula seems designed to reflect changes in the production costs of coke, not changes in the market price.*fn1
The Agreement also contained a 'force majeure' provision. Paragraph 10(a) and (b) specified instances in which failures to comply with the Agreement would be excused. Paragraph 10(b) is labeled "Force Majeure Affecting Performance by Buyer," and it recites that performance will be excused upon the occurrence of various specified factors that "render performance commercially impracticable." The last of the factors listed is simply "any other cause beyond buyer's reasonable control."*fn2
Paragraph 10(c) provides for arbitration of commercial impracticability disputes.*fn3 It is echoed by Paragraph 10(c) which states:
11. Arbitration. All disputes as to quality pursuant to paragraph 4 hereinabove, determination of changes in price and renegotiation of price pursuant to paragraph 7 hereinabove and as to any claim of commercial impracticability pursuant to paragraph 10 hereinabove shall be submitted to, and settled by, arbitration. Such arbitration shall be effected by arbitrators selected as hereinafter provided and shall be conducted in accordance with the rules, existing at the date thereof, of the American Arbitration Association. The dispute shall be submitted to three arbitrators, one arbitrators being selected by Buyer, one by Seller, and the third by the two so selected by Buyer and Seller, or, if they cannot agree on a third, by the American Arbitration Association. . . .*fn3
Both parties observed their contractual obligations until January 11, 1983. On that day Sharon wrote to inform Jewell that "drastic changes in the circumstances which existed at the time the contract was entered into have relieved Sharon from further obligation to perform under the contract." The letter continues:
The coke shortage contemplated at the time of the contract never materialized, and this, we believe, has made performance of the contract both impossible and economically unfeasible. In consequence, the purpose of the contract has been frustrated and it would be unconsionable [ sic ] for Sharon to be required to continue to purchase coke under contractual terms and conditions which would severely penalize Sharon.
App. at 81a. Apparently, the depressed conditions in the steel industry had lowered the market price of coke to a point well below that set by the Agreement.
Jewell treated the letter as an anticipatory breach, and filed suit in the U.S. District Court for the Western District of Virginia to enforce the contract. That suit remains pending.*fn4 Sharon responded by filing a suit to compel arbitration in the Western District of Pennsylvania. Jurisdiction was based on diversity of the parties and on the Federal Arbitration Act, ...