Eastern Air Lines, Inc. v. Gulf Oil Corp.

United States District Court, S. D. Fla.
415 F. Supp. 429 (1975)

ELI5:

Rule of Law:

A seller's performance of a contract is not excused under the doctrine of commercial impracticability (UCC § 2-615) due to a rise in the cost of raw materials if the contingency causing the price increase was foreseeable at the time of contracting and the seller cannot prove extreme and unreasonable financial hardship.

Facts:

Eastern Air Lines, Inc. (Eastern) and Gulf Oil Corporation (Gulf) had a decades-long business relationship for the sale of aviation fuel.
On June 27, 1972, the parties signed a requirements contract, effective until January 31, 1977, for Gulf to supply Eastern's jet fuel needs at certain airports.
The contract's price escalation clause was tied to the posted price of West Texas Sour crude oil as published in a trade journal, Platt's Oilgram.
In the fall of 1973, following years of Middle East volatility, the OPEC oil embargo caused a 400% increase in the price of foreign crude oil.
Concurrently, the U.S. government implemented a "two-tier" price control system that froze the price of "old" domestic oil (including West Texas Sour) at a low level, while allowing "new," "released," and foreign oil to sell at much higher market prices.
The contract's price mechanism was tied to the government-controlled "old" oil price, while Gulf's costs were based on a blend of cheap "old" oil and expensive foreign and "new" oil.
Gulf recorded its highest profits in history in 1973, and its 1974 profits were 25% higher than in 1973.
On March 8, 1974, Gulf demanded Eastern agree to a price increase or face a cutoff of its fuel supply within fifteen days.

Procedural Posture:

Eastern Air Lines, Inc. filed a complaint against Gulf Oil Corporation in the U.S. District Court for the Southern District of Florida, alleging breach of contract and seeking injunctive relief.
By agreement of the parties, the court entered a preliminary injunction on March 20, 1974, compelling Gulf to continue performing under the contract pending a final decision.
Gulf filed an answer, asserting that the contract was unenforceable and that its performance was excused by the doctrine of commercial impracticability.
The case proceeded to a non-jury trial on the merits before the District Judge.

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Issue:

Does a significant increase in the cost of crude oil, resulting from the 1973 OPEC embargo and the U.S. government's two-tier pricing system, excuse a seller's performance of a requirements contract under the doctrine of commercial impracticability pursuant to UCC § 2-615?

Opinions:

Majority - James Lawrence King

No. A seller's performance is not excused under the doctrine of commercial impracticability when the contingency causing increased costs was foreseeable. To claim impracticability under UCC § 2-615, a party must prove that an unforeseeable contingency occurred, the non-occurrence of which was a basic assumption of the contract, and the occurrence of which has made performance commercially impracticable. Here, Gulf's defense fails for three primary reasons. First, the price escalation clause in the contract was clear and unambiguous, and the specified price indicator, Platt's Oilgram, continued to be published; the mechanism did not fail. Second, Gulf did not meet its burden of proving commercial impracticability, as it failed to show it would suffer actual, substantial losses. Gulf's cost calculations included intra-company profits, obscuring its true cost, and its overall corporate profits were at record highs. Mere unprofitability does not render performance impracticable. Third, the events of the energy crisis, including the oil embargo and price controls, were foreseeable to a sophisticated party like Gulf, which was well aware of the volatility of the Middle East and the history of government intervention in the oil market. Because the contingency was foreseeable, Gulf is deemed to have assumed the risk of such an event.

Analysis:

This case establishes a very high bar for successfully asserting the commercial impracticability defense under UCC § 2-615, particularly for sophisticated commercial parties. The court's decision signals that foreseeable market fluctuations, even if severe, are considered business risks that are implicitly allocated in a fixed-price contract. Furthermore, the ruling emphasizes that a defendant must present clear evidence of substantial, not just marginal, losses and that courts may scrutinize internal accounting practices, such as intra-company profits, when evaluating claims of financial hardship. The case serves as a strong precedent against sellers attempting to escape contracts that have become unprofitable due to predictable market shifts.

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