Ocean carriers may need to divert from the planned route due to circumstances such as military conflict in a particular region. For example, on February 28, 2026, CMA CGM announced the suspension of its vessels’ passage through the Suez Canal due to the deteriorating security situation in the Middle East and rerouted its vessels via the Cape of Good Hope.1Middle East – Strait of Hormuz and Bab El Mandeb Security Transits, CMA CGM, Feb. 28, 2026, https://www.cma-cgm.com/news/5344/middle-east-situation-updates#Advisory. On March 1, 2026, Maersk and Hapag-Lloyd adopted the same measures.2Rerouting of ME11 and MECL Service around the Cape of Good Hope, Maersk, Mar. 1, 2026, https://www.maersk.com/stay-ahead; IMX Service Rerouted via the Cape of Good Hope, Hapag-Lloyd, Mar. 1, 2026, https://www.hapag-lloyd.com/en/services-information/news/2026/02/imx-service-rerouted-via-cape-of-good-hope.html.
Diversion around the Cape of Good Hope results in additional expenses for the carrier. Can these expenses be recovered from cargo interests, or must they be borne by the carrier? There is no bright-line rule. Courts have long dealt with such situations, with some cases dating back to the Suez Crisis of 1956. One such example is Transatlantic Financing Corporation v. United States, 363 F.2d 312 (D.C. Cir. 1966).
I. Background
The Transatlantic case arises out of a voyage charter concluded in 1956, during the international crisis that followed Egypt’s nationalization of the Suez Canal Company and its takeover of the Suez Canal. The nationalization was announced by Egypt on July 26, 1956.
On October 2, 1956—nearly two months after the nationalization—Transatlantic Financing Corporation (the vessel operator) and the United States, acting through the United States Department of Agriculture (the charterer), entered into a voyage charter for the carriage of bagged wheat from Texas to Iran. The contract did not specify the route.
The vessel sailed from Texas on October 27, 1956, planning to take the usual and shortest route through the Strait of Gibraltar and the Suez Canal. However, on October 29, Israeli forces invaded Egypt, followed shortly by French and British forces. Egypt responded by sinking ships in the Suez Canal, blocking it to traffic.
While the vessel was in the mid-Atlantic, the Suez Canal became impassable. On November 7, 1956, Transatlantic contacted the charterer to request instructions regarding the disposition of the cargo and to seek an agreement for payment of additional compensation for completing the voyage around the Cape of Good Hope. The charterer’s representative—who had no authority to bind the charterer to a contract or to modify its terms—stated that the charterer expected Transatlantic to comply with the charter and deliver the cargo to the designated port in Iran, regardless of the route taken. He added that he did not believe Transatlantic was entitled to additional compensation, but that it was free to submit a claim.
Following this discussion, the vessel altered course, proceeded around the Cape of Good Hope, and arrived in Iran on December 30, 1956.
The voyage around the Cape of Good Hope added an estimated 18 days to the transit time and approximately 3,100 nautical miles to the distance compared to the route via the Suez Canal.
On December 26, 1958, Transatlantic submitted a claim to the charterer for $41,175.83, representing the estimated additional costs of the longer voyage. The charterer rejected the claim, arguing that its obligation under the charter was to pay the freight as agreed, that it had not authorized or directed the deviation, and that it assumed no liability for it.
Transatlantic subsequently sued the charterer for $43,972 in additional costs arising from the vessel’s diversion from the normal route due to the blockage of the Suez Canal. The district court dismissed Transatlantic’s claim, concluding that “the prevailing law is that if a supervening event, not attributable to a party, does in fact make it impossible to go forward, the contract may be abandoned without liability; but that if the supervening event only renders attainment of the ultimate objective more oppressive or more expensive, the contractor has the duty to go forward without extra compensation.” Transatlantic Fin. Corp. v. United States, 259 F. Supp. 725, 728 (D.D.C 1965).3The district court noted that “the general rule might not apply in the face of evidence of custom throwing the risk one way or the other or in the face of a mutual contemplation or understanding as to the impact of risk.” Transatlantic Fin. Corp. v. United States, 259 F. Supp. 725, 728 (D.D.C 1965). However, the court found that such factors were not present in this case.
II. The D.C. Circuit’s Opinion: Performance of the Contract Was Not Rendered Legally Impossible
Transatlantic argued that the doctrine of deviation required the court to imply into the contract a term that the voyage would be performed by the usual and customary route. At the time of contracting, the usual and customary route from Texas to Iran was via the Suez Canal. Therefore, the contract should be understood as one for carriage via Suez. Once the Suez Canal was closed, performance became impossible. According to Transatlantic, by delivering the cargo around the Cape of Good Hope, it provided a benefit to the charterer for which it should be compensated in quantum meruit.
The D.C. Circuit held that the doctrine of impossibility of performance did not apply in this case. The Court adopted the following 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.” Transatlantic Fin. Corp. v. United States, 363 F.2d 312, 315 (D.C. Cir. 1966) (internal quotation marks omitted).
To succeed on a plea of impossibility of performance, a party must establish three elements: (1) “a contingency—something unexpected—must have occurred”; (2) “the risk of the unexpected occurrence must not have been allocated either by agreement or by custom”; and (3) “occurrence of the contingency must have rendered performance commercially impracticable.” Id. at 315.
1. “[A] contingency—something unexpected—must have occurred.”
The Court concluded that the first element was met. The contract did not specify a route, and the Court found it was reasonable to assume that the parties expected performance by the usual and customary route at the time of contracting. The usual and customary route from Texas to Iran at the time of contracting was through the Suez Canal. The closure of the Suez Canal therefore made the expected method of performance impossible.
2. “[T]he risk of the unexpected occurrence must not have been allocated either by agreement or by custom.”
In analyzing the second element—the allocation of the risk of the contingency—the Court stated that such risk may be allocated by the parties either expressly or impliedly in the contract. It may also be inferred from the surrounding circumstances, including trade custom and usage.
Applying this framework, the Court found no evidence that the risk had been allocated. Neither the contract nor the surrounding circumstances indicated that the parties had agreed on who would bear the risk of the closure of the Suez Canal. The Court emphasized that foreseeability, or even awareness of a risk, does not by itself establish that the risk was allocated. Even when parties are aware of potential risks, they may fail to allocate them in the contract, either because negotiations break down or because they are too busy.
The Court found no evidence that, at the time of contracting, either Transatlantic or the charterer foresaw or allocated the risk of the closure of the Suez Canal. However, the Court found that Transatlantic had shown a willingness to assume the risk that the Suez Canal might become a dangerous area. Therefore, it scrutinized Transatlantic’s claim of impossibility more strictly than it would have in a case involving an unforeseen contingency, making it less likely to interpret the circumstances in Transatlantic’s favor.
3. “[O]ccurrence of the contingency must have rendered performance commercially impracticable.”
The Court found that this requirement was not satisfied. First, the cargo was not vulnerable to damage from the longer route around the Cape of Good Hope. The vessel and crew were also capable of completing the voyage along that route. Second, Transatlantic was aware of geopolitical issues and could have obtained insurance to protect against them. As the vessel operator, Transatlantic was in a better position than the charterer to calculate the cost of performing via an alternative route and, consequently, to estimate the insurance required.
The only factor in Transatlantic’s favor was the additional cost of $43,972, which amounted to approximately 14% of the freight. However, the Court did not consider this increase sufficient to apply the doctrine of impossibility of performance. As the Court stated, “[w]hile it may be an overstatement to say that increased cost and difficulty of performance never constitute impracticability, 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, where the promisor can legitimately be presumed to have accepted some degree of abnormal risk, and where impracticability is urged on the basis of added expense alone.” Transatlantic, 363 F.2d at 319.
The Court concluded that performance of the contract was not rendered legally impossible in this case. It also stated that even if the doctrine of impossibility of performance applied, Transatlantic’s theory of recovery would still fail. Recovery in quantum meruit is only allowed for the entire trip if the injured party has taken steps to mitigate its damages. In this case, Transatlantic had already collected the full freight under the contract and sought additional compensation under quantum meruit for part of the voyage. This is not permitted, so the Court concluded that Transatlantic’s claim would not succeed.
III. Takeaways
Transatlantic remains good law, even though it was decided in 1966. The case sets out the definition and test for the doctrine of impossibility of performance, which is now referred to as impracticability of performance. The case also shows that added expense alone does not render performance of the contract legally impossible unless there is “more of a variation between expected cost and the cost of performing by an available alternative than is present in this case.” Transatlantic, 363 F.2d at 319. The comment to the Restatement (Second) of Contracts § 261 describes this variation as one that is “extreme and unreasonable.”4“Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved.” Restatement (Second) of Contracts § 261 comment.
It should be noted that the ruling in Transatlantic was based on the specific facts of that case. The decision does not mean that ocean carriers will always remain uncompensated for additional costs resulting from a diversion. For example, the parties may expressly allocate the risk of such costs in their contract, in which case the contractual terms will govern. Each case must be evaluated based on its own facts and circumstances.
The information provided in this article is intended for informational purposes only and does not constitute legal advice. It should not be relied upon or applied without consulting an attorney to address your specific circumstances. Please note that this article was published on the date indicated and may not reflect subsequent changes in the law.
