Contracts II, Pages 1002–1007

Transatlantic Financing Corp. v. United States

United States Court of Appeals District of Columbia Circuit, 1996

Facts:

Libellant agreed to carry a cargo of wheat from a US port to an Iranian port, without specifying the route. During the trip, Egypt obstructed the Suez Canal and closed it to traffic. Libellant contacted Potosky, an employee of the Department of Agriculture who was unauthorized to bind defendant, seeking an agreement for additional compensation for a voyage around the Cape of Good Hope, which was 30%. Potosky expected libellant to perform according to the terms of the contract, without additional compensation, but said that libellant was free to file a claim for more compensation. Libellant sailed around the Cape of Good Hope and fulfilled his performance.

Procedural History:

District court dismissed libellant's suit.

Libellant's Argument:

The charter had an implied term that it be performed by the usual route of sailing through the Suez Canal. When the canal was closed, it became impossible to perform. Libellant's delivery of the cargo around the Good Hope conferred a benefit on defendant, for which libellant should be paid in quantum meruit.

Issue:

Was the performance of the contract discharged due to its impracticability?

Rule:

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When the issue [of impossibility] of performance is raised, the court is asked to construct a condition of performance based on the changed circumstances, a process that involves at least three reasonably definable 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.

Reasoning:

  • There is no proof that the risk was allocated in the agreement or surrounding circumstances. Going around the Cape of Good Hope is generally regarded an alternative route. The implied expectation that the route would be via the Suez Canal is not adequate proof of an allocation to the defendant of the risk of closure. The parties were even aware of the unrest in the area and that the Canal could be closed.

  • Libellant could have purchased insurance, and it is more reasonable to expect them to do so than the defendant. Libellant incurred $43,972 in costs beyond the contract price of $305,842.92, but for impracticability only on the added expense when libellant presumably accepted some degree of abnormal risk, there must be more variation from the expected cost.

Holding:

Performance was not rendered legally impossible. Affirmed.


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