Lake River Corp. v. Carborundum Co.

Facts

Carborundum made Ferro Carbo, an abrasive powder used in making steel. It contracted with Lake River to receive the powder in bulk at Lake River's Illinois warehouse, bag it, and ship it to Carborundum's customers. The powder stayed Carborundum's property until delivered. Carborundum insisted that Lake River install a new bagging system, which cost $89,000. Lake River demanded a minimum-quantity guarantee in return. Carborundum had to ship 22,500 tons in three years. If it fell short, Lake River would invoice it at the then prevailing rates for the difference. Full shipment would have paid Lake River roughly $533,000. After the contract was signed in 1979, demand for domestic steel and for Ferro Carbo plummeted. When the contract expired late in 1982, Carborundum had shipped only 12,000 tons and had paid for bagging them. By the formula, it still owed $241,000. Carborundum refused to pay, saying the formula imposed a penalty. Lake River held 500 tons of bagged Ferro Carbo worth $269,000 and would not release it unless it was paid. Lake River offered to sell the product and hold the proceeds in escrow. Carborundum refused and trucked in product from the East, at an added cost of $31,000.

Issues

1. Did Lake River have a valid lien on the bagged Ferro Carbo in its warehouse, when Carborundum had already paid for all bagging and storage Lake River had actually performed?
2. Under Illinois law, is the minimum-guarantee formula a valid liquidation of damages, or an unenforceable penalty?
3. If the formula is a penalty, what damages may Lake River recover, and how must the counterclaim damages be figured?

Holding

Lake River had no valid lien, because Carborundum had paid all charges for services performed before the lien was asserted. The formula was a penalty, because it was designed always to assure Lake River more than its actual damages. Lake River is limited to common law damages, to be fixed on remand.