In March 2021, the Suez Canal was blocked by the container ship Ever Given. Nearly as long as the Empire State Building is tall, the Ever Given was one of the largest container ships ever built.1Vivian Yee & James Glanz, How One of the World’s Biggest Ships Jammed the Suez Canal, The New York Times (Jul. 17, 2021), https://www.nytimes.com/2021/07/17/world/middleeast/suez-canal-stuck-ship-ever-given.html. Its keel floated only a few yards from the canal’s bottom.2Id. The Suez Canal blockage triggered the fears that a prolonged shutdown could disrupt supply chains worldwide. This is because the Suez Canal is one of the most important trade arteries in the world, connecting Asia to Europe and the U.S. East Coast.3Matt Leonard, Container ships steer toward longer route around Cape of Good Hope to avoid Suez Canal, Supply Chain Dive (Mar. 26, 2021), https://www.supplychaindive.com/news/suez-cape-good-hope-ever-given-evergreen-blocked-stuck/597402/. It handles at least 10% of global seaborne trade and a similar amount of oil shipments.4David Sheppard, et al., Suez Canal blocked after huge container ship runs aground, Financial Times (Mar. 24, 2021), https://www.ft.com/content/eec9f3a6-2817-45f5-b007-a290f3e530c6. Every day, about 50 vessels sail through the 120-mile long Suez Canal.5Id. After the Ever Given ran aground, over 200 vessels joined the queues at either end of the canal awaiting transit.6Richard Meade, Suez blockage extends as salvors fail to free Ever Given, Lloyd’s List (Mar. 25, 2021), https://lloydslist.com/LL1136246/Suez-blockage-extends-as-salvors-fail-to-free-Ever-Given.
As the Suez Canal blockage stretched into its third day, carriers started to weigh up their options: sit and wait for the canal to open for traffic, or reroute ships around the southern tip of Africa. Sitting at the entrance of the canal and waiting for the traffic jam to dissipate would likely result in significant delays in delivery and demurrage charges that ranged from $15,000 to $30,000 per day.7Peter S. Goodman & Stanley Reed, With Suez Canal Blocked, Shippers Begin End Run Around a Trade Artery, The New York Times (Mar. 26, 2021), https://www.nytimes.com/2021/03/26/business/suez-canal-blocked-ship.html. Rather than risk further delay—with an estimated $400 million per hour in trade—some container ships began to take the long route around South Africa.8Lori Ann LaRocco, Suez Canal blockage is delaying an estimated $400 million an hour in trade, CNBC (Mar. 25, 2021), https://www.cnbc.com/2021/03/25/suez-canal-blockage-is-delaying-an-estimated-400-million-an-hour-in-goods.html; Leonard, supra note 3.
The journey around South Africa adds at least 10 days and thousands of miles depending on the destination.9Daniel Stone, The Suez Canal blockage detoured ships through an area notorious for shipwrecks, National Geographic (Mar. 29, 2021), https://www.nationalgeographic.com/history/article/suez-blockage-detoured-ships-through-cape-good-hope-notorious-shipwrecks. For example, the journey from the Suez Canal in Egypt to Rotterdam in the Netherlands typically takes about 11 days, but venturing south around Africa’s Cape of Good Hope adds at least 26 more days.10Goodman & Reed, supra note 7. The additional fuel charges for the journey generally run more than $30,000 per day, depending on the vessel, or more than $800,000 total for the longer trip.11Id. Can the carrier recover the increased shipping costs caused by sailing around the Cape of Good Hope? This question will be analyzed in this article.
I. The 1956 Suez Crisis and Transatlantic Financing Corporation v. United States.
The Suez Canal blockage by the Ever Given in 2021 was not the first incident when the closure of a key trade artery disrupted global supply chains. The Suez Canal was closed to traffic for 5 months during the 1956 Suez Crisis:
On July 26, 1956, the Government of Egypt announced the nationalization of the Suez Canal Company, the joint British-French enterprise which had owned and operated the Suez Canal since its construction in 1869.
Great Britain and France viewed this situation as a threat to their national interests because the Suez Canal was a valuable waterway that controlled two-thirds of the oil used by Europe. Accordingly, they sought a military solution to recover control of the Suez Canal. They secretly contacted the Israeli Government and proposed a joint military operation.
On October 29, 1956, Israel invaded Egypt.
On October 31, 1956, Great Britain and France invaded the Suez Canal
On November 2, 1956, the Egyptian Government obstructed the Suez Canal with sunken vessels and closed it to traffic.
On November 6, 1956, the United States pressured Great Britain and France to accept a United Nations ceasefire.
By December 22, 1956, the last British and French troops had withdrawn from Egyptian territory, but Israel kept its troops in Gaza until March 19, 1957, when the United States finally compelled the Israeli Government to withdraw its troops.
The 1956 Suez Crisis affected the parties to a lawsuit that reached the District of Columbia Circuit.12See Transatlantic Fin. Corp. v. United States, 363 F.2d 312 (D.C. Cir. 1966). On October 2, 1956, Transatlantic Financing Corporation (hereinafter the “Carrier”) entered into a voyage charter with the United States (hereinafter the “Charterer”) in which the Carrier agreed to transport a full cargo of wheat on the SS CHRISTOS from the United States to Iran. The charter indicated the termini of the voyage but not the route. On October 27, 1956, the SS CHRISTOS sailed from Galveston, Texas, for Bandar Shapur, Iran, on a course which would have taken her through Gibraltar and the Suez Canal. On October 29, 1956, Israel invaded Egypt. On November 2, the Suez Canal was closed to traffic. As a result, the vessel was forced to move through the longer and more expensive Cape of Good Hope route.
The Carrier sought payment for the excessive costs of the longer Cape of Good Hope route. The Carrier’s claim was based on the following chain of arguments: (1) The contract implied the term that the voyage was to be performed by the usual and customary route via the Suez Canal; (2) When the Suez Canal was closed, this contract became impossible to perform; (3) When the Carrier delivered the cargo by going around the Cape of Good Hope, it conferred a benefit upon the Charterer for which it should be paid in quantum meriut.
The plea of impossibility was dismissed. The District of Columbia Circuit explained that “[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.”13363 F.2d at 315 (citation omitted). The District of Columbia Circuit developed a three-prong test to determine whether a party’s performance was made impossible (or, in the modern terminology, impracticable): (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) The occurrence of the contingency must have rendered performance commercially impracticable.14Id. (footnote omitted). Unless the court finds these three requirements satisfied, the plea of inadmissibility must fail.
1. A contingency—something unexpected—must have occurred.
In Transatlantic Financing, the court found this requirement being met. At the time of contract, the usual and customary route from Texas to Iran was through the Suez Canal. Accordingly, it is reasonable to assume that the parties expected performance by the usual and customary route, i.e., through the Suez Canal, at the time of contract. The Suez Canal closure made the expected method of performance impossible. However, this is not the end of the impossibility inquiry.
2. The risk of the unexpected occurrence must not have been allocated either by agreement or by custom.
This requirement may be rephrased as follows: (1) “the non-occurrence of the event was a basic assumption on which the contract was made”15Restatement (Second) of Contracts § 261. or (2) “the occurrence of the event was not a risk that the parties were tacitly assigning to the promisor by their failure to provide for it explicitly.”16This element requires consideration of the following: “[G]iven the commercial circumstances in which the parties dealt: Was the contingency which developed one which the parties could reasonably be thought to have foreseen as a real possibility which could affect performance? Was it one of that variety of risks which the parties were tacitly assigning to the promisor by their failure to provide for it explicitly? If it was, performance will be required. If it could not be so considered, performance is excused. The contract cannot be reasonably thought to govern in these circumstances, and the parties are both thrown upon the resources of the open market without the benefit of their contract.” Le Fort Enterprises, Inc. v. Lantern 18, LLC, 491 Mass. 144, 144–45, 199 N.E.3d 1257, 1260 (2023) (citation omitted).
Proof that the risk of a contingency’s occurrence has been allocated may be expressed in or implied from the contract. Such proof may also be found in the surrounding circumstances, including custom and usages of the trade. Thus, the following evidence must be analyzed: (1) the provisions of the contract and (2) the surrounding circumstances, including custom and usages of the trade.
In Transatlantic Financing, the parties did not expressly condition performance upon availability of the Suez route. The contract did not specify any route. The court also did not find any provision in the contract that would properly imply that the continued availability of the Suez route was a condition of performance. The charter party provided that the vessel was “in every way fitted for the voyage.”17363 F.2d at 317-18 (holding that while it is true that the parties expected the usual and customary route would be used, it is “hardly adequate proof of an allocation to the promisee of the risk of closure”). In addition, the court could not construct a condition of performance based on custom or trade usage, or the surrounding circumstances generally. This is because that the Cape route was and continues to be generally regarded as an alternative means of performance. For these reasons, the court did not find that the risk of the Suez Canal closure has been allocated to the Charterer from whom the Carrier sought to recover additional expenses.
The court found that the risk of the Suez Canal closure “may be deemed to have been allocated to Transatlantic [i.e., the Carrier].”18363 F.2d at 318. This inference was made on the basis of the surrounding circumstances. Before the parties entered into their contract, the Suez Canal was nationalized by the Government of Egypt, and the mass media widely covered the issues related to the political tensions between Egypt, Great Britain, and France. By entering into the contract of carriage in those unstable times, the Carrier demonstrated its willingness to assume abnormal risks. As a merchant with interests affected by the Suez situation, the Carrier must have been aware that the Suez Canal could become a dangerous area. For this reason, the court applied more stringent standards when assessing the impracticability of performance by an alternative route, compared to the situations where the contingency was totally unforeseen.
3. Occurrence of the contingency must have rendered performance commercially impracticable.
In Transatlantic Financing, the court did not find the impracticability of performance by an alternative route for the following reasons: (1) The goods shipped were not subject to harm from the longer, less temperate Southern route; (2) The vessel and crew were fit to proceed around the Cape; and (3) The Carrier was no less able than the Charterer to purchase insurance to cover the contingency’s occurrence.19“If anything, it is more reasonable to expect owner-operators of vessels to insure against the hazards of war. They are in the best position to calculate the cost of performance by alternative routes (and therefore to estimate the amount of insurance required), and are undoubtedly sensitive to international troubles which uniquely affect the demand for and cost of their services.” 363 F.2d at 319.
The only factor operating in the Carrier’s favor was the added expense, allegedly $43,972.00 above and beyond the contract price of $305,842.92, of extending a 10,000 mile voyage by approximately 3,000 miles. The court did not find these expenses sufficient to invoke the doctrine of impossibility of performance (or, in the modern terminology, the doctrine of commercial impracticability). “While 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,” the court held.20363 F.2d at 319 (footnotes omitted).
Based on the foregoing, the court concluded that performance of the contract was not rendered legally impossible in this case. The court also declined the Carrier’s theory of relief. When performance of the contract is deemed impossible, it is a nullity.21363 F.2d at 320. If the contract is a nullity, the Carrier’s theory of relief should have been quantum meriut for the entire trip, rather than only for the extra expense.22Id. “But here [the Carrier] has collected its contract price, and now seeks quantum meriut relief for the additional expense of the trip around the Cape. … [The Carrier] attempts to take its profit on the contract, and then force [the Charterer] 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,” the court held.23Id.
II. The Six-Day War and American Trading & Production Corporation v. Shell International Marine Ltd.
During the 1956 Suez Crisis, the Suez Canal was closed for 5 months. In June 1967, the Suez Canal was closed by Egypt again. It was not reopened until June 1975, thus being closed to traffic for 8 years. This catastrophic situation was related to the long-lasting political tensions between Israel and the Arab states of Egypt, Jordan, and Syria:
Between 1965 and April 1967, terrorist attacks were conducted against Israel by Palestinian guerilla groups based in Syria, the Gaza Strip, Lebanon, and Jordan.
On April 7, 1967, Israeli planes shot down 6 Syrian fighter planes during the retaliatory attack between Israel and Syria.
On May 13, 1967, the Soviets—who had been providing military and economic assistance to both Syria and Egypt—informed the Syrian and Egyptian Governments that Israel had massed troops on Syria’s border. Though the report was false, the Egyptian President sent large numbers of Egyptian soldiers into the Sinai anyway.
On May 18, 1967, Egypt demanded that the United Nations Emergency Force (UNEF), which had been deployed in the Sinai Peninsula and the Gaza Strip since 1957, withdraw from Israel’s border. The Secretary-General of the United Nations tried to redeploy the UNEF to the areas on the Israeli side of the border, in order to maintain a buffer, but this was rejected by Israel.
On May 22, 1967, the Egyptian President banned Israeli shipping from the Straits of Tiran, the sea passage connecting the Red Sea with the Gulf of Aqaba, thus instituting an effective blockade of the port city of Elat in southern Israel.
On June 5, 1967, Israel bombed most of Egypt’s airfields and then entered and occupied the Sinai Peninsula, all the way to the Suez Canal. Israel then expanded the range of its attack and decimated the air forces of Jordan, Syria, and Iraq. By the end of the day on June 5, Israeli pilots had won full control of the skies over the Middle East.
On June 5, 1967, Egypt blocked both ends of the Suez Canal to prevent its use by Israel. Ships, dredgers, other floating craft, and even a bridge were sunk to block the canal. In addition to the vessels that were sunk, there were a number of sea mines that prevented navigation. The canal remained closed for exactly 8 years, reopening on June 5, 1975.
Between June 5, 1967, and June 10, 1967, Israel had captured the Sinai Peninsula and the Gaza Strip from Egypt, the West Bank and East Jerusalem from Jordan, and the Golan Heights from Syria.
On June 10, 1967, a United Nations-brokered ceasefire took effect, and the Six-Day War came to an abrupt end. It was later estimated that some 20,000 Arabs and 800 Israelis had died in just 132 hours of fighting.
The Six-Day War and the related closure of the Suez Canal inevitably affected the international trade. Fourteen ships—nicknamed the Yellow Fleet after the desert sand that coated them—were trapped in the Suez Canal for 8 years before the Suez Canal was reopened in 1975.24Shari Kulha, A week stuck in the Suez Canal? Once, 14 ships and crew were trapped there for eight years, National Post (Mar. 29, 2021), https://nationalpost.com/news/world/a-week-stuck-in-the-suez-canal-once-14-ships-and-crew-were-trapped-there-for-eight-years. More fortunate ships were able to change their route before the start of the Six-Day War, just like it happened in American Trading & Production Corporation v. Shell International Marine Ltd.25Am. Trading & Prod. Corp. v. Shell Int’l Marine Ltd., 453 F.2d 939 (2d Cir. 1972).
On March 23, 1967, American Trading & Production Corporation (hereinafter the “Carrier”) entered into a voyage charter with Shell International Marine Ltd. (hereinafter the “Charterer”) in which the Carrier agreed to transport a full cargo of lube oil from the United States to India. The invoice specifically indicated a charge for passage through the Suez Canal.
On May 15, 1967, the vessel departed from the United States.
On May 29, 1967, the Carrier advised the master of the vessel by radio to take additional bunkers at Ceuta due to possible diversion because of the Suez Canal crisis.
On May 30, 1967, the vessel arrived at Ceuta and bunkered.
On May 31, 1967, the vessel embarked on her journey to India via the Suez Canal.
On June 5, 1967, Israel invaded Egypt, and the Suez Canal was closed to traffic.
By that time, the vessel had almost reached the entrance of the Suez Canal. Due to the Suez Canal closure, the vessel was forced to change her route and move through the longer and more expensive Cape of Good Hope route. The Carrier billed the added expense, allegedly $131,978.44 above and beyond the contract price of $417,327.36, which the Charterer refused to pay.
The Carrier’s claim was based on the following chain of arguments: (1) Transit of the Suez Canal was the agreed specific means of performance of the contract; (2) The Suez Canal closure rendered the contract legally impossible to perform and therefore discharged the Carrier’s unperformed obligation; (3) When the Carrier delivered the cargo by going around the Cape of Good Hope, it conferred a benefit upon the Charterer for which it should be paid in quantum meriut.
The plea of impossibility was dismissed. Although the invoice contained a specific Suez Canal toll charge, the Second Circuit did not find that the Suez passage was the exclusive method of performance. “The charter party does not so provide and it seems to have been well understood in the shipping industry that the Cape route is an acceptable alternative in voyages of this character. … [T]he parties obviously expected a Suez passage but there is no indication at all in the instrument or dehors that it was a condition of performance,” the court held.26453 F.2d at 941-42.
The court concluded that the Suez Canal closure did not render performance commercially impracticable in this case. “There is no extreme or unreasonable difficulty apparent here. The alternate route taken was well recognized, and there is no claim that the vessel or the crew or the nature of the cargo made the route actually taken unreasonably difficult, dangerous or onerous. The [Carrier’s] case here essentially rests upon the element of the additional expense involved—$131,978.44. This represents an increase of less than one third over the agreed upon $417,327.36. We find that this increase in expense is not sufficient to constitute commercial impracticability under either American or English authority,” the court held.27453 F.2d at 942.
Notably, in American Trading, the court did not analyze whether the first prong of the Transatlantic Financing test—a contingency (i.e., something unexpected) must have occurred—was satisfied.28453 F.2d at 943 (“While we may not speculate about the foreseeability of a Suez crisis at the time the contract was entered, there does not seem to be any question but that the master here had been actually put on notice before traversing the Mediterranean that diversion was possible. Had the [vessel] then changed course, the time and cost of the Mediterranean trip could reasonably have been avoided, thereby reducing the amount now claimed.”). The court dismissed the plea of inadmissibility because it did not find that the risk of the Suez Canal closure was allocated to the Charterer and that the route around the Cape of Good Hope was commercially impracticable.
III. Conclusion.
In Transatlantic Financing and American Trading, the District of Columbia Circuit and the Second Circuit held that under the specific circumstances of each case, the carriers were not entitled to additional compensation for transportation of cargo via the Cape of Good Hope as a result of the Suez Canal closure. The following findings interpret the doctrine of impossibility of performance (or, in the modern terminology, the doctrine of commercial impracticability):
“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.”29363 F.2d at 315 (citation omitted).
The District of Columbia Circuit introduced a three-prong test to determine whether a party’s performance was made impossible (or, in the modern terminology, impracticable): (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) The occurrence of the contingency must have rendered performance commercially impracticable.30Id. (citation omitted).
The increase in costs in Transatlantic Financing was nearly 14% and in American Trading less than 32%. The courts denied recovery, finding that these extra costs did not rise to the level authorizing the invoking of the doctrine of commercial impracticability. “While 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.”31363 F.2d at 315 (citation omitted).
Based on the foregoing, it would be quite challenging to invoke the doctrine of commercial impracticability in case of the Suez Canal closure or blockage. This, however, does not imply that this doctrine is inapplicable to all cases related to the Suez Canal closure or blockage. The circumstances of each case must be analyzed, including the extent of cost increases and the reasonableness of rerouting in light of factors such as the nature of the cargo, the type of vessel, and the crew’s preparedness.
Absent special circumstances, the force majeure clause in the contract will likely not help the party invoke the doctrine of commercial impracticability in case of the Suez Canal closure or blockage because “the language of the contract itself is irrelevant in the application of the doctrine.” See Fla. Power & Light Co. v. Westinghouse Elec. Corp., 826 F.2d 239, 240 (4th Cir. 1987) (holding that the language of the contract itself is irrelevant in the application of the doctrine of commercial impracticability because this doctrine is “essentially an equitable defense,” without any basis in the specific language of the contract or “any expression of intention by the parties,” but resting firmly “on the unfairness [and] unreasonableness of giving [the contract] the absolute force which its words clearly state”); see also Glidden Co. v. Hellenic Lines, Ltd., 275 F.2d 253 (2d Cir. 1960) (“[The force majeure clause and the provisions of the Carriage of Goods by Sea Act related to the carrier’s immunities, 46 U.S.C. App. § 1304] could only come into operation to exculpate [the carrier] in the event it was prevented from performing by one of the causes therein described. Since we have already described that [the carrier] was under a duty to perform by an alternative route these provisions have no applicability.”).
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.
