Impossibility and impracticability: when performance becomes too hard

The second of October nineteen fifty six. Egypt has nationalised the Suez Canal. A shipowner charters its vessel, the Christos, to the United States to carry a full cargo of wheat from a Gulf port to a safe port in Iran. The charter names the ends of the voyage but not the route. On the twenty seventh of October the ship sails from Galveston on a course for Gibraltar and Suez. Two days later Israel invades Egypt. Two days after that, Britain and France do.
On the second of November Egypt sinks ships in the canal and closes it.
The shipowner asks the government for instructions and for extra pay to go around the Cape of Good Hope. It is told to perform the charter, that no extra pay is thought due, and that it is free to file a claim. The Christos turns south, rounds Africa, and delivers the wheat at Bandar Shapur on the thirtieth of December.
The owner collects the charter price, three hundred and five thousand dollars, and sues for the extra cost of the long way round, forty four thousand dollars. It says the contract was to go via Suez, Suez became impossible, and the government must pay for the substitute.
So here is the question. Something nobody expected happened after the contract was made. Performance was still physically possible, but it cost more. Who pays? Think about it before I go on, because the answer is a three step test, and the shipowner fails at the third step in a way that tells you almost everything about this doctrine.
And now the question I keep asking. What exactly did these people promise each other? Carriage of wheat from Texas to Iran for a price. Last lecture the parties were wrong about the world when they contracted. Today the world changes after they contract. The doctrines are impossibility, its modern form impracticability, and in the next lecture frustration. All three are ways of asking one question. Who took the risk of this?
Here is the first line for the board. The old rule was that a party who promised without qualification was bound even if performance became impossible. The modern rule is that where performance depends on the continued existence of a thing or state of affairs that both parties assumed as the basis of the agreement, performance is excused to the extent that the thing ceases to exist. And impossibility does not mean literally impossible.
A thing is impossible in legal contemplation when it is not practicable, and a thing is impracticable when it can only be done at an excessive and unreasonable cost.
Second line, the Code, and the test in three steps. Section two six fifteen. Delay or non-delivery by a seller is not a breach if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made, or by compliance in good faith with any applicable governmental regulation. The court asks, first, did something unexpected occur. Second, was the risk of it allocated by agreement or custom.
Third, did it make performance commercially impracticable.
Third line, the limit. Increased cost alone does not excuse. A fixed price contract is itself an allocation of the risk that costs will change, and the party whose gamble fails cannot shift it back by calling it impossibility. And a force majeure clause is read narrowly. It excuses only the events it names, and events of the same kind.
Now the case. Transatlantic Financing against United States, Court of Appeals for the District of Columbia Circuit, nineteen sixty six, Judge Skelly Wright. The doctrine of impossibility of performance has gradually been freed from the earlier fictional and unrealistic strictures of such tests as the implied term and the parties' contemplation.
The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully responsive to commercial practices and mores, at which the community's interest in having contracts enforced according to their terms is outweighed by the commercial senselessness of requiring performance.
Then the three steps. First, a contingency, something unexpected, must have occurred. Second, the risk of the unexpected occurrence must not have been allocated either by agreement or by custom. Finally, occurrence of the contingency must have rendered performance commercially impracticable. Unless the court finds these three requirements satisfied, the plea of impossibility must fail.
Step one was met. The parties expected the usual route, and the usual route from Texas to Iran was through Suez. Closure of the Canal made impossible the expected method of performance. Step two was harder. The contract did not say via Suez. Custom treated the Cape as an alternative route. And the circumstances pointed the other way. The parties were aware, as were most commercial men with interests affected by the Suez situation, that the Canal might become a dangerous area.
The court was careful here, and the sentence is important. Foreseeability or even recognition of a risk does not necessarily prove its allocation. Parties to a contract are not always able to provide for all the possibilities of which they are aware, sometimes because they cannot agree, often simply because they are too busy. But a party who signs with a known risk in the air will be judged in stricter terms when he asks to be excused for it.
Step three decided the case. The goods shipped were not subject to harm from the longer, less temperate Southern route. The vessel and crew were fit to proceed around the Cape. The shipowner could have insured, and was the party best placed to price the risk. The only factor operating here in appellant's favor is the added expense, of extending a ten thousand mile voyage by approximately three thousand miles.
To justify relief there must be more of a variation between expected cost and the cost of performing by an available alternative than is present in this case.
And the court noticed what the shipowner was really asking. If the contract was a nullity, the shipowner's theory of relief should have been quantum meruit for the entire trip, rather than only for the extra expense. Transatlantic attempts to take its profit on the contract, and then force the Government to absorb the cost of the additional voyage. There is no interest in casting the entire burden of commercial disaster on one party in order to preserve the other's profit. Claim dismissed.
Now the case Judge Wright took his definition from. South Pasadena, California, nineteen eleven. Bridge builders contract to take from a landowner all the earth and gravel needed for a concrete bridge over the Arroyo Seco, about one hundred and fourteen thousand cubic yards, at five cents a yard. They take fifty thousand yards and buy the rest elsewhere. The land has plenty more gravel.
But it is below the water level, and could be taken only with a steam dredger, dried at great expense, at ten or twelve times the usual cost per yard.
The Supreme Court of California, in Mineral Park Land Company against Howard, nineteen sixteen, excused them. When they stipulated that all of the earth and gravel needed for this purpose should be taken from plaintiff's land, they contemplated and assumed that the land contained the requisite quantity, available for use. The defendants were not binding themselves to take what was not there. Then the definition.
A thing is impossible in legal contemplation when it is not practicable, and a thing is impracticable when it can only be done at an excessive and unreasonable cost.
And the limit, in the same breath. We do not mean to intimate that the defendants could excuse themselves by showing the existence of conditions which would make the performance of their obligation more expensive than they had anticipated, or which would entail a loss upon them. But where the difference in cost is so great as here, and has the effect, as found, of making performance impracticable, the situation is not different from that of a total absence of earth and gravel.
Ten to twelve times. Not fifteen per cent.
Now the fixed price gamble, from Judge Posner. In nineteen seventy eight an Indiana electric utility signs a twenty year contract to buy about one and a half million tons of coal a year from a Wyoming mine at twenty four dollars a ton, with escalators that take it to forty four by nineteen eighty five. The price can only go up. Then electricity gets cheap.
The state regulator orders the utility to buy power from neighbours where that is cheaper than burning its own coal, and refuses to let it pass the coal contract's cost to ratepayers. The utility stops taking coal and asks to be excused, by the contract's force majeure clause, or by impracticability, or by frustration.
The Seventh Circuit, in Northern Indiana Public Service Company against Carbon County Coal, nineteen eighty six, refused on every ground, and the reasoning is the module's spine. By signing the kind of contract it did, the utility gambled that fuel costs would rise rather than fall over the life of the contract. If such a gamble fails, the result is not force majeure. The normal risk of a fixed-price contract is that the market price will change.
The whole purpose of a fixed-price contract is to allocate risk in this way.
On impracticability and frustration, Posner explained what the doctrines are for. All are doctrines for shifting risk to the party better able to bear it, either because he is in a better position to prevent the risk from materializing or because he can better reduce the disutility of the risk, as by insuring, if the risk does occur. So they have no place when the contract explicitly assigns a particular risk to one party or the other.
A buyer who forecasts the market incorrectly and therefore finds himself locked into a disadvantageous contract has only himself to blame. The jury's verdict of one hundred and eighty one million dollars stood.
And the government order made no difference. It does not matter that it is an act of government that may have made the contract less advantageous to one party. Government these days is a pervasive factor in the economy and among the risks that a fixed-price contract allocates between the parties is that of a price change induced by one of government's manifold interventions in the economy.
Last, the force majeure clause, and how narrowly courts read it. Clifton Park, New York. A tenant leases a vacant supermarket for ten years to run a roller skating rink, and promises to keep public liability insurance of five hundred thousand dollars a person and a million in aggregate. Six years in, the liability insurance crisis of the nineteen eighties hits, and no insurer will write the policy. The landlord serves a default notice.
The tenant says the obligation is impossible, or excused by the lease's force majeure clause, which lists labour disputes, inability to procure materials, failure of utility service, government regulations, riots, war, adverse weather, acts of God, or other similar causes beyond the control of such party.
The New York Court of Appeals, in Kel Kim Corporation against Central Markets, nineteen eighty seven, held the tenant to its promise. Impossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. Moreover, the impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract. The tenant had specifically undertaken the obligation, so it could have guarded against it.
And the clause? Ordinarily, only if the force majeure clause specifically includes the event that actually prevents a party's performance will that party be excused. The catch-all, other similar causes, is read by the company it keeps. The general words are not to be given expansive meaning. They are confined to things of the same kind or nature as the particular matters mentioned. Strikes and blackouts interrupt day-to-day operations. An insurance requirement protects the landlord's unrelated economic interests. Not the same kind.
The lease was forfeited.
Put the four cases side by side. Suez closed, the ship went round, cost up fifteen per cent. Not impracticable. Gravel under water at ten to twelve times the cost. Impracticable, because the parties assumed usable gravel was there. Coal at a fixed price when power got cheap. Not excused, because that is exactly the risk a fixed price allocates. Insurance nobody would sell. Not excused, because the tenant promised it and the clause did not name it.
The doctrine is real, and it is narrow.
Now let's change one fact. The wheat in the Christos had been a perishable cargo that would rot on the extra month at sea, and the charter had said, via Suez Canal. Choose an answer before I go on.
Now the shipowner has a real case. Step two changes. Via Suez in the contract is an express expectation, and the Transatlantic court said the difference between a contract specifying no route and a contract specifying Suez matters to allocation. Step three changes more. The court listed, as reasons the Cape route was practicable, that the goods were not subject to harm from the longer route. Take that away, and the alternative route is not an alternative at all.
The carrier may unload at a safe port, and recover in quantum meruit for what it has done.
Change one fact again. The coal contract had been a requirements contract, the utility to buy whatever coal it needed at the market price each year. Choose.
Then there is no gamble to lose and no contract to escape. A requirements contract puts the quantity risk on the seller and the price risk on nobody, because the price floats. When the utility needs less coal, in good faith, it buys less, and the regulator's order simply reduces its requirements. Posner's whole reasoning was that the utility had bought a fixed quantity at a floor price. It had chosen certainty and was held to its cost.
Change one fact a third time. The roller rink's force majeure clause had said, including any inability, despite diligent efforts, to procure insurance required by this lease. Choose.
Now the tenant is excused for the period of the delay. The New York court's rule was that the clause excuses what it specifically includes. Name the event, and the clause does its work. That is the practical lesson of Kel Kim. A force majeure clause is only as good as its list, and the catch-all at the end will be read to cover only the list's cousins. If your client fears a specific event, write it in.
Here is what people get wrong here, and why it is tempting. The first mistake is thinking a big cost increase is impracticability. Fifteen per cent is not. Double is usually not. Ten times, with the very thing assumed turning out not to exist, is. The second mistake is thinking foreseeability alone decides it. It is evidence about allocation, the Transatlantic court said, and no more. Parties are too busy to write everything down.
The third mistake is trusting a force majeure clause's catch-all. Other similar causes means similar. Name the risk or lose it.
Here is the rule, in one breath. Performance is excused where an unexpected contingency, the non-occurrence of which was a basic assumption of the contract, makes performance impracticable, meaning possible only at an excessive and unreasonable cost, and the risk of that contingency was not allocated to the promisor by agreement, custom or the nature of the bargain.
A fixed price allocates the risk of price change, increased cost alone is not enough, and a force majeure clause excuses only the events it names and their like. Now, five questions.