Wisconsin Elec. Power Co. v. Union Pacific R. Co.

• Decision Date: 02 March 2009
• Docket Number: No. 08-2693.,08-2693.
• Citation: 557 F.3d 504
• Parties: WISCONSIN ELECTRIC POWER COMPANY, Plaintiff-Appellant, v. UNION PACIFIC RAILROAD COMPANY, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

557 F.3d 504

WISCONSIN ELECTRIC POWER COMPANY, Plaintiff-Appellant, v. UNION PACIFIC RAILROAD COMPANY, Defendant-Appellee.

No. 08-2693.

United States Court of Appeals, Seventh Circuit.

Argued January 7, 2009.

Decided March 2, 2009.

Matthew W. O'Neill, Attorney, Friebert, Finerty & St. John, Milwaukee, WI, Frank J. Pergolizzi, Attorney (argued), Slover & Loftus, Washington, DC, for Plaintiff-Appellant.

James M. Yeretsky (argued), Yeretsky & Maher LLC, Overland Park, KS, for Defendant-Appellee.

Before POSNER, RIPPLE, and ROVNER, Circuit Judges.

POSNER, Circuit Judge.

WEPCO, an electric utility that is the plaintiff in this diversity suit for breach of contract (governed by Wisconsin law), appeals from the grant of summary judgment to the defendant, the Union Pacific railroad. The contract was for the transportation of coal to WEPCO from coal mines in Colorado between the beginning of 1999 and the end of 2005. The appeal presents two issues: whether a force majeure clause in the contract authorized the railroad to increase its rate for shipping the coal, and whether the railroad breached its duty of good-faith performance of its contractual obligations by failing to ship the tonnage requested by WEPCO on railcars supplied by the railroad.

The doctrine of impossibility in the common law of contracts excuses performance when it would be unreasonably costly (and sometimes downright impossible) for a to carry out its contractual obligations. If the doctrine is successfully invoked, the contract is rescinded without liability. The standard explanation for the doctrine is that nonperformance is not a breach if it is caused by a circumstance "the non-occurrence of which was a `basic assumption on which the contract was made.'" Restatement (Second) of Contracts, introductory note to ch. 11, preceding § 261 (1981), quoting UCC § 2-615. But this explanation leaves unexplained why parties to a contract would have assumed that a condition would not occur that has occurred. Was it just a lack of foresight? Or is the idea behind the doctrine, rather, that the parties, had they negotiated with reference to the contingency that has come to pass and has made performance infeasible or fearfully burdensome, would have excused performance? The latter is the more promising line of inquiry, and is the line we took in Northern Indiana Public Service Co. v. Carbon County Coal Co., 799 F.2d 265, 276-78 (7th Cir.1986), where we said that "the proper question in an `impossibility' case is ... whether [the promisor's] nonperformance should be excused because the parties, if they had thought about the matter, would have wanted to assign the risk of the contingency that made performance impossible or uneconomical to the promisor or to the promisee; if to the latter, the promisor is excused." Id. at 276. "Impossibility" is thus a doctrine "for shifting risk to the 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." Id. at 277; see also Associated Gas Distributors v. FERC, 824 F.2d 981, 1016-17 (D.C.Cir. 1987).

Liability for breach of contract is strict, Globe Refining Co. v. Landa Cotton Oil Co., 190 U.S. 540, 543-44, 23 S.Ct. 754, 47 L.Ed. 1171 (1903) (Holmes, J.); Evra Corp. v. Swiss Bank Corp., 673 F.2d 951, 956-57 (7th Cir.1982); Restatement, supra, introductory note to ch. 11, preceding § 261, which makes the performing party an insurer against the consequences of his failing to perform, even if the failure is not his fault. But formal insurance contracts contain limits of coverage, and the impossibility doctrine in effect caps the "insurance" coverage that strict liability for breach of contract provides. Cf. Northern Indiana Public Service Co. v. Carbon County Coal Co., supra, 799 F.2d at 277. The analogy is to a provision in a fire insurance contract that excepts from coverage a fire caused by an act of war. So it is no surprise that in Allanwilde Transport Corp. v. Vacuum Oil Co., 248 U.S. 377, 385-86, 39 S.Ct. 147, 63 L.Ed. 312 (1919), the doctrine of impossibility was successfully invoked when a wartime embargo prevented the performance of a shipping contract because the ship could not complete its voyage. See also Israel v. Luckenbach S.S. Co., 6 F.2d 996 (2d Cir. 1925).

Parties can, however, contract around the doctrine, because it is just a gap filler, First National Bank v. Atlantic Tele-Network Co., 946 F.2d 516, 521 (7th Cir.1991); United States v. General Douglas MacArthur Senior Village, Inc., 508 F.2d 377, 381 (2d Cir.1974); 2 E. Allan Farnsworth, Farnsworth on Contracts § 9.6, p. 643 (3d ed.2004)—a guess at what the parties would have provided in their contract had they thought about the contingency that has arisen and has prevented performance or made it much more costly. As Holmes explained, "the consequences of a binding promise at common law are not affected by the degree of power which the promisor possesses over the promised event.... In the case of a binding promise that it shall rain to-morrow, the immediate legal effect of what the promisor does is, that he takes the risk of the event, within certain defined limits, as between himself and the promisee. He does no more when he promises to deliver a bale of cotton." O.W. Holmes, Jr., The Common Law 299-300 (1881); see Field Container Corp. v. ICC, 712 F.2d 250, 257 (7th Cir.1983). The key is binding promise. To defeat the application of the doctrine of impossibility the contract must state that the promisor must pay damages even if he commits a breach that could not have been prevented at a reasonable cost.

Modern contracting parties often do contract around the doctrine, though not by making the promisor liable for any and every failure to perform—rather by specifying the failures that will excuse performance. The clauses in which they do this are called force majeure ("superior force") clauses. The name suggests a purpose similar to that of the impossibility doctrine. But it is essential to an understanding of this case that a force majeure clause must always be interpreted in accordance with its language and context, like any other provision in a written contract, rather than with reference to its name. It is not enough to say that the parties must have meant that performance would be excused if it would be "impossible" within the meaning that the word has been given in cases interpreting the common law doctrine. Perlman v. Pioneer Ltd. Partnership, 918 F.2d 1244, 1248 n. 5 (5th Cir. 1990); PPG Industries, Inc. v. Shell Oil Co., 919 F.2d 17, 18-19 (5th Cir.1990); Williams Cary Wright, "Force Majeure Delays," 26 Construction Lawyer 33, 33 (2006); see also Gulf Oil Corp. v. FPC, 563 F.2d 588, 601-02 (3d Cir.1977).

The provision at issue in this case does not specify circumstances that would make performance impossible or infeasible in any sense, and does not excuse the performing party (the railroad) from performing the contract. The provision is part of Article XI of the contract, and some of the other provisions in the article do specify contingencies that would excuse performance, including certain "acts of God." But the provision at issue merely provides that if the railroad is prevented by "an event of Force Majeure" from reloading its empty cars (after it has delivered coal to WEPCO) with iron ore destined for Geneva, Utah, it can charge the higher rate that the contract makes applicable to shipments that do not involve backhauling. Cf. 2 Farnsworth, supra, § 9.1, p. 585; 14 Corbin on Contracts § 74.19, p. 113 (Joseph M. Perillo ed.2008). For example, the rate for coal shipped from one of the Colorado mines to WEPCO was specified as $13.20 per ton if there was a backhaul shipment but $15.63 if there was not. The reason for the higher rate, obviously, was that if the railroad's cars were empty on the trip back to Colorado, the railroad would obtain no revenue on that trip; it would be underutilizing the cars.

The iron ore that the railroad's freight train would have picked up in Minnesota on its way back was intended for a steel mill in Utah owned by the Geneva Steel company. (The mill had been built during World War II well inland because of fear that the Japanese might attack the West Coast.) The company was bankrupt when the parties signed the contract. It was still operating, but obviously might cease to do so; hence the provision. Why the parties used the term "force majeure," rather than simply providing that the railroad could charge the higher rate if the steel company stopped buying iron ore, has not been explained. More careful drafting might have averted this lawsuit.

In November 2001 the steel mill shut down, never to reopen. It was closed for good in February 2004. A couple of months after that final closing the railroad wrote WEPCO to declare "an event of Force Majeure" and that henceforth it would be charging WEPCO the higher rate applicable to shipments without a backhaul. It did not attempt to make the rate change retroactive. Had it invoked the force majeure clause when the steel mill first shut down, WEPCO would have incurred an extra $7 million in shipping charges between then and the belated declaration of force majeure.

Despite this windfall, WEPCO argues that the railroad broke the contract by invoking the force majeure clause when it did. The fact that the railroad didn't invoke the clause earlier shows that the shutting down of the steel mill did not prevent the railroad from charging the low, backhaul rate. Well of course not; it is never "impossible" to offer a discount. But what the contract says is that the railroad may charge the higher rate if it is prevented from reloading its cars, rather than if it is prevented from charging a lower rate.

WEPCO points out that Article XI requires prompt notification of an event of force majeure and also requires the...