Contracts Class Notes 2/25/04

American Trading & Prod. Corp. v. Shell Int’l Marine, Ltd.

A ship is contracted to take some oil from Beaumont, Texas to Bombay, India. This deal is negotiated between two sophisticated parties. The tanker goes all the way to the gateway to the Suez Canal, but then the canal is closed. The ship turns around and goes out through the Straits of Gibraltar, around the Cape of Good Hope, and finally to Bombay where the oil is delivered. The ship owners want extra money, because it cost more to go the long route! The court says no way! Why in the world did the owner of the ship think they should get more than they were promised?

The initial contract is discharged on one of two bases: (1) It was a Suez Canal contract which became impossible to perform when the canal was closed. (2) Assuming it wasn’t a Suez Canal contract, there was, nonetheless, a supervening event that makes it impracticable to perform the contract, and thus the contract is avoided. Nonetheless, it is claimed that this carrier is not giving away its service in transporting the oil. The shipper wants to be paid on a quantum meruit basis just what their services rendered were worth. It’s like when you go to the barber and sit down in the chair: you implicitly agree to pay a reasonable price for the services you’re about to get.

Judge Mulligan doesn’t buy this theory. How come? First off, the court struggles with whether this was a Suez Canal contract or whether it was a general Texas to India contract using either of the standard routes. The court decides that this is the latter: it’s simply a Texas to India contract. The court finds that the Suez route was the planned route, but it wasn’t a route that was required by the contract. The contract says, according to the court, we’ll get this stuff from Texas to India one way or another. In that case, performance was not rendered impossible by the closing of the Suez Canal because the ship could have taken the Cape route instead. There were two alternatives, even though one was quicker and cheaper.

So once you have a Texas to India contract, its performance is not rendered impossible by the closing of the Suez Canal. However, its performance is made much more difficult and expensive. So will we avoid the contract on the basis of impracticability? The court says no. The court says that this situation doesn’t reach the level of difficulty required to call something “impracticable”. It costs a little less than a third more to go around the Cape than through the Suez under these circumstances. The court finds that it’s not big enough of a difference to kill the contract. The court tells us that there is no bright line. They say that it’s a tough question! These are some of the world difficult cases in the world on which to predict results.

If you have very similar facts to this, you may have an okay time predicting the result.

Why is there no excuse for the carrier? Well, it wasn’t the first time that the Suez Canal had been closed. That part of the world was subject to war and disturbance. You could see this one coming; the closer you got to it, the more likely it was. There were plenty of warning signs before the ship entered the Straits of Gibraltar. That’s one basis on which we’ll sometimes say that the ship owner is bought by its promise.

Consider UCC § 2-615 and its comments. If you can see that a difficulty may increase the cost and expense of performing a contract, what should you do? You ought to qualify your promise so that you have an out if the difficulty materializes.

Part of how we decide whether to let the promisor off the hook is whether or not the supervening circumstance is really surprising.

Mishara Contr. Co. v. Transit-Mixed Concrete Corp.

In industries where there are frequent strikes, contracts for the sale of goods can be reasonably read to include the intention to perform whether or not there is a strike. However, if you’re in a line of trade where there has never been a strike or there hasn’t been one for many years, then the occurrence of a strike might grant you an excuse even absent an express “out” in your contract.

When you’re representing somebody, think about whether it is wise to qualify your promises. If you qualify your promises too much, you’ll turn off the other party and you might fail to come to an agreement. Your ability to qualify your promises is limited by the bargaining situation.

Maple Farms, Inc. v. City School Dist.

These are serious and important problems! These are commercial contracts for the sale of a lot of goods over a significant period of time at fixed prices. When that kind of a contract is made, what’s the purpose? The purpose is to shift the risk of the market. The buyer wants to assure that it will get the named goods at the price specified in the contract, and the seller wants to assure that it will get the named price for the goods. This is understood as a risk-shifting agreement.

If the parties don’t want to shift risk, they can enter into things like open-price agreements. If they choose not to do that, we should be slow to grant an excuse because we figure the parties knew what they were doing.

So in this case, the court concludes that the school’s expectation of getting milk at a fixed price should be protected even though there was an escalation of milk prices on the part of the Department of Agriculture. The supplier who signed onto the agreement should have been able to foresee the possibility of rising prices!

The “yellow-cake” cases

These are an extreme example. Westinghouse promised to supply fuel uranium at fixed prices over a very long period of time in order to encourage the building of nuclear power plants. Westinghouse had to buy the yellow-cake at prices that became very high. But we don’t grant an excuse. This is catastrophic for Westinghouse. What do the buyers do? They settle. They don’t want Westinghouse to go bankrupt because they needed the uranium.

Price escalation and inflation is rarely going to grant a fixed-price seller an excuse. In order for it to do so, it must be catastrophic and caused by a catastrophic event that tends to surprise you.

Krell v. Henry

What were the promises? Krell, the lessor (or licensor) promised to make his rooms available on two days. Henry promised to pay £75 (probably $8,000-$10,000 today!) for the availability of the rooms on those two days. When somebody is paying that kind of money for two rooms on two days, there must be something special going on. What was going on was that the rooms were on the procession route for the coronation of Edward VII. Victoria had ruled for 64 years. So there hadn’t been a new monarch and a coronation in a heck of a long time. It’s a big deal! A really big deal!

There was a large market for being able to see the procession. Henry was in the business of setting up stands and chairs for people to sit in and watch the procession. He would also set up concession stands. He would invite lots of people to watch from the rooms and make them pay.

This is all great, but then the King develops acute appendicitis. They had to cancel the procession. That’s the background of the case.

Against that background, the Court of Appeal excuses Henry from his performance, in other words, his promise to pay £50. Why excuse Henry from his promise to pay?

This is the landmark case on frustration. Why is this a “frustration of purpose” case rather than an impossibility or impracticability case? The promise of the defendant is to pay £50. This promise is not impossible to perform. It’s not impracticable either. When you have a promise to pay a fixed sum, the sum doesn’t go up because of the supervening event. Paying £50 isn’t impossible.

Another thing in the background of the case is that Krell and Henry did not know the King was having health problems. The possibility of operating on the King hadn’t been foreshadowed. They had no reason to anticipate that. It was a surprising event.

Check out Restatement Second §265 on underlying basic assumptions. The key question is whether the occurrence of the procession was the basis on which the contract was made. The thing that tells us this is so is that the price was so inflated. When the procession is cancelled, it seems to be sensible to let the parties walk away.

What does it take to get relief here? Relief is relatively unusual. § 265 says you need not only the occurrence of a very surprising event, but also a party’s principal purpose must be substantially frustrated. There are lots of things that could happen to Henry that wouldn’t give him any relief. For example, if there is bad weather on procession day, Henry can’t get relief. That’s the kind of risk Henry would have assumed. He won’t get any relief if that contingency occurs. That’s not a contingency the non-occurrence of which was a basic assumption on which the contract was made.

Or what if there’s an assassination attempt on the King? There’s no relief for Henry there either. In any case, that one isn’t going to be the occurrence of a contingency for which there was a basic assumption that it wouldn’t occur. You need something that makes the value of the performance that Henry bargained for, and promised to pay for, essentially worthless. It’s not a failure of consideration as if Krell wasn’t delivering on his promise, but it turns out that what Krell offers is worthless to Henry.

Some of what the case says is somewhat off target. This was a path-breaking case much more for what it does than for what it says. It doesn’t make sense to make it a test whether the performance of the contract was prevented, because this is definitely not a case of impossibility.

When you look at § 265, don’t neglect the stuff at the very end.

How does the court distinguish the “cab to Derby Day” hypothetical? They struggle with this; Clovis thinks they don’t succeed. There are plenty of rooms from which to see the procession and plenty of cabs that you can use to get to the Derby.

What happens to the £25 that Henry had paid before the decision to operate on the King and thus cancel the procession? In this case, we don’t know because the parties abandon the suit over this. In Chandler v. Webster, a year later, the facts are similar. The court held that money paid down before the announcement of the King’s illness could not be recovered. In addition, money that was due to be paid before the King was announced as ill, but not paid, was still due. That’s absurd! We have a transaction that has been disturbed in such a way as to frustrate pretty much everybody’s purpose.

Later, in Fibrosa, the British changed their minds. Can the party who has made a down payment but has gotten no performance get their money back? Fibrosa says yes. This was a contract by a British manufacturer to manufacture some tailor-made machinery for a Polish buyer. After the machinery was made, Germany invaded Poland, and then you couldn’t deliver anything to Poland. The Polish company wanted their down payment of £1000 back. The seller was greatly disturbed! The seller has a great loss. They would argue that they should be able to keep the down payment to the extent of their reliance. However, this, in turn, was fixed by an act of Parliament. As it turned out in the United States, we did better on this issue and we did it without statutes. Under the facts of Krell v. Henry in our country, Henry would get his £25 back.

It was Henry’s business to tell tickets to the coronation procession in Krell’s rooms to see the parade. When the parade was cancelled, people who promised to pay Henry will be able to avoid their promises. The courts, in making decisions of this sort, need to think about that.

A hotel and a sports club, unrelated businesses, make a five-year deal where the hotel pays the sports club $3,000 per month for making the club’s exercise facilities available to the hotel’s guests. A year into the contract, the hotel is destroyed by fire. It doesn’t make any sense to rebuild the hotel. The hotel refuses to make any more payments. The club sues. Does the hotel have a defense? Sure, because that is a frustration of purpose case. The hotel gets nothing of any use for continuing to pay for use of the club’s facilities, because there are no guests. This is illustration 3 to Restatement Second § 265.

But what if the club was destroyed by fire? Consult § 263: this is an impossibility case like Taylor v. Caldwell. The club can’t provide services anymore because it has burned to the ground. The club will not be liable to the hotel.

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