Wisconsin Electric Power Compa v. Union Pacific Railroad Company

In the
United States Court of Appeals
For the Seventh Circuit
No. 08-2693
W ISCONSIN E LECTRIC P OWER C OMPANY,
Plaintiff-Appellant,
v.
U NION P ACIFIC R AILROAD C OMPANY,
Defendant-Appellee.
Appeal from the United States District Court
for the Eastern District of Wisconsin.
No. 06-C-515—Rudolph T. Randa, Chief Judge.
A RGUED JANUARY 7, 2009—D ECIDED M ARCH 2, 2009
Before P OSNER, R IPPLE, and R OVNER, Circuit Judges.
P OSNER, 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
2 No. 08-2693
two issues: whether a force majeure clause in the con-
tract authorized the railroad to increase its rate for ship-
ping the coal, and whether the railroad breached its
duty of good-faith performance of its contractual obliga-
tions 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 unrea-
sonably costly (and sometimes downright impossible)
for a party to carry out its contractual obligations. If
the doctrine is successfully invoked, the contract is re-
scinded 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 con-
tingency 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
No. 08-2693 3
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 party 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 (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 per-
forming 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 “insur-
ance” 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 (1919), the doctrine
of impossibility was successfully invoked when a war-
time 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).
4 No. 08-2693
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 dam-
ages 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 pur-
pose similar to that of the impossibility doctrine. But it is
No. 08-2693 5
essential to an understanding of this case that a force
majeure clause must always be interpreted in ac-
cordance 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 Con-
struction 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 per-
forming party (the railroad) from performing the con-
tract. 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 con-
tract 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 Colo-
rado mines to WEPCO was specified as $13.20 per ton if
6 No. 08-2693
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 in-
tended 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 in-
voked 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
No. 08-2693 7
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 invoker to make reasonable efforts to
eliminate or abate the force majeure. It argues that the
railroad violated its duty of prompt notice and by doing
so waived its right to declare a force majeure. But
another clause in the contract provides that a failure of a
party to insist on a right that the contract confers on it
shall not be deemed a waiver. That scotches WEPCO’s
argument except insofar as it wishes to complain not
about the declaration of force majeure as such but
simply about the breach of the duty of prompt notice.
A “no waiver” clause is appropriate in a complex multi-
year contract that imposes (as we will see) duties of
performance on both parties, as distinct from a simple
sales contract in which one party performs and the
other pays. If a party lost a contract right through
waiver by failing to assert it as soon as it was violated, the
process of amicable adjustment of contingencies bound
to arise in the course of performing the contract would be
impeded by premature assertion of legal claims. Monarch
Coaches, Inc. v. ITT Industrial Credit, 818 F.2d 11, 13 (7th
8 No. 08-2693
Cir. 1987); S & R Co. of Kingston v. Latona Trucking, Inc., 159
F.3d 80, 85-86 (2d Cir. 1998); S.H.V.C. v. Roy, 450 A.2d
351, 353 (Conn. 1982); Sean J. Young, “Reaping the
Benefits of ‘Forbearance’ in Contract Through the
Doctrine of Election,” 9 Florida Coastal Law Rev. 65, 85-89
(2007) (“the waiver regime discourages forbearance
because it gives the injured party a strong incentive to
object, which necessarily rules out forbearance”); Jason
Scott Johnston, “The Return of Bargain: An Economic
Theory of How Standard-Form Contracts Enable Coopera-
tive Negotiation Between Businesses and Consumers,” 104
Mich. L. Rev. 857, 891 (2006). When the parties were
getting along and there was some possibility that Geneva
Steel would not be liquidated, the railroad was dis-
inclined to stand on its rights. But at about the same time
that the steel mill closed irrevocably, WEPCO threatened
the railroad with a lawsuit over alleged poor service.
Since WEPCO was standing on its claimed rights, the
railroad decided to stand on its own. We cannot see
anything wrong in that. Cf. 2 Farnsworth, supra, § 8.19a,
p. 543.
It is true that while nonwaiver clauses are no longer
unenforceable, e.g., Roboserve, Inc. v. Kato Kagaku Co.,
Ltd., 78 F.3d 266, 277 (7th Cir. 1996); DeValk Lincoln Mer-
cury, Inc. v. Ford Motor Co., 811 F.2d 326, 334 (7th Cir. 1987);
Klipsch, Inc. v. WWR Technology, Inc., 127 F.3d 729, 735-
36 (8th Cir. 1997), there is still some authority for
treating them as themselves waivable. E.g., Exxon Corp. v.
Crosby-Mississippi Resources, Ltd., 40 F.3d 1474, 1491-
92 (5th Cir. 1995); Westinghouse Credit Corp. v. Shelton, 645
F.2d 869 (10th Cir. 1981); but see DeValk Lincoln
No. 08-2693 9
Mercury, Inc. v. Ford Motor Co., supra, 811 F.2d at 334. But
if that notion were taken literally, no-waiver clauses
would be worthless. Fortunately, it is not taken literally;
the waiver of a no-waiver clause must be “proved by
clear and convincing evidence,” Chicago College of Osteo-
pathic Medicine v. George A. Fuller Co., 776 F.2d 198, 202 (7th
Cir. 1985); see also Roboserve, Inc. v. Kato Kagaku Co., Ltd.,
supra, 78 F.3d at 277-78, a condition not fulfilled here.
Granted, the cases that we have cited are not Wisconsin
cases; the only case that we can find from Wisconsin is
an unpublished, nonprecedential intermediate appellate
opinion, 121 Langdon Street Group v. Heiligman, 2005 WL
613493 (Wis. App. Mar. 17, 2005), which, however,
for what it is worth, rules that no-waiver clauses are en-
forceable and does not suggest any limitations on their
enforceability.
A claim arising from breach of the prompt-notice
clause might have merit were there doubt whether
there really had been an event of force majeure. The
argument would be that for want of receiving prompt
notice WEPCO had lost an opportunity to investigate
and discover that there was no such event. But
WEPCO does not suggest that the steel mill may not
really have shut down, for good as it later turned out, in
November of 2001. It does argue that if notified promptly
of the shut down it might have explored alternative ways
of obtaining coal at a rate below the higher, no-backhaul
rate. The contract required WEPCO to ship specified
minimum tonnages of coal by the railroad, but it
shipped more, and conceivably would have shipped
10 No. 08-2693
less—perhaps making up the difference from some other
coal mine—had it been able to find a cheaper rate from
some other railroad. But there is no evidence that such
alternatives ever existed, or, more to the point, existed
in 2001 but evaporated by 2004.
Not only has WEPCO failed to show any detrimental
reliance on the failure to receive prompt notice of the
higher rate; it refuses, contrary to the most elementary
principles of damages, to acknowledge that had it relied
to its detriment any damages caused by that reliance
would have to be reduced by $7 million. That is the cost
WEPCO saved as a result of the railroad’s forbearance to
invoke the force majeure clause at the earliest possible
opportunity.
WEPCO argues that the railroad made no reasonable
effort to abate the force majeure, as the contract re-
quired. The railroad did not explore the possibility of
finding some other commodity, besides iron ore, to ship
west. (It couldn’t be iron ore, because Geneva Steel was
the only buyer of iron ore served by the railroad.) But that
is not what the duty of abatement contemplated. The
event of force majeure—the event that the railroad was
required to exert reasonable efforts to abate—was an
event that prevented the railroad from reloading its
cars with iron ore for the trip back west.
Had Geneva Steel owed the railroad some small amount
of money and begged it to forbear to sue to collect
because that would force the company into bankruptcy,
forbearance to sue might conceivably be a reasonable
effort to avoid the railroad’s having to send its trains
No. 08-2693 11
west without a backhaul, and therefore an effort that the
railroad was obligated to undertake. But there is no
suggestion of that. WEPCO’s argument, rather, is that
the railroad should have looked for something else to
carry back in its trains. But that would have placed on
the railroad a burdensome open-ended duty to explore
the possibility of reconfiguring its operations, which
would have required searching for, finding, and making
contracts with other shippers and perhaps purchasing or
renting railcars optimized to carry those shippers’ com-
modities. Disputes over the adequacy of the railroad’s
efforts would present unmanageable issues for litigation.
This cannot have been what the abatement clause en-
visaged.
The point about unmanageability goes far to resolve
the other issue presented by the appeal. Article VI of the
contract required WEPCO to notify the railroad monthly
of how many tons of coal (within the maximum
tonnage specified by the contract) it wanted shipped the
next month, and “the parties agree to make good faith
reasonable efforts to meet the Monthly Shipping Sched-
ule.” Nowhere did the contract require the railroad to
comply with the schedule; it merely had to make, in
good faith, a reasonable effort to do so. Article VII did
require the railroad to transport tonnages specified by
WEPCO, but only if WEPCO supplied the railcars for
the shipment, and it did not; the railroad did; during
the period in which WEPCO charges that the railroad
was acting in bad faith, the railroad transported in its
own cars 84 percent of the total shipments of coal re-
quested by WEPCO.
12 No. 08-2693
Not enough, argues WEPCO. Without specifying the
minimum percentage that would have demonstrated
good faith, it argues that it would have exceeded
90 percent. It says that the railroad shipped less because
it had other customers who paid higher rates. WEPCO
invokes the legal duty of good faith in the performance
of a contract. The duty entails the avoidance of conduct
such as “evasion of the spirit of the bargain, lack of dili-
gence and slacking off, willful rendering of imperfect
performance, abuse of a power to specify terms, and
interference with or failure to cooperate in the other
party’s performance.” Foseid v. State Bank, 541 N.W.2d
203, 213 (Wis. App. 1995).
But the duty of good faith does not require your
putting one of your customers ahead of the others, even
if the others are paying you more. “Parties are not pre-
vented from protecting their respective economic inter-
ests.” John Edward Murray, Jr., Murray on Contracts § 90,
p. 501 (4th ed. 2001). As we explained, interpreting Wis-
consin law in Market Street Associates Ltd. Partnership v.
Frey, 941 F.2d 588, 594 (7th Cir. 1991), “even after you
have signed a contract, you are not obliged to become
an altruist toward the other party and relax the terms if
he gets into trouble in performing his side of the bargain.”
Another customer of the railroad might be paying a
very high rate because it had an urgent need for ser-
vice—so could it charge the railroad with bad faith if it
had a contract similar to the railroad’s contract with
WEPCO and the railroad told it, very sorry, but we
cannot serve you; it is not that we love you less, but that
No. 08-2693 13
we love WEPCO more? “A duty of good faith does not
mean that a party vested with a clear right is obligated
to exercise that right to its own detriment for the
purpose of benefiting another party to the contract.” Rio
Algom Corp. v. Jimco Ltd., 618 P.2d 497, 505 (Utah 1980).
And it certainly doesn’t mean exercising that right to the
detriment of another party with which it has a contract.
Again WEPCO invites the court to undertake an unman-
ageable judicial task—that of working out an equitable
allocation of Union Pacific’s railcars among its various
customers. Cf. Exacto Spring Corp. v. Commissioner, 196
F.3d 833, 838 (7th Cir. 1999); Micro Data Base Systems, Inc.
v. Nellcor Puritan Bennett, Inc., 165 F.3d 1154, 1156 (7th
Cir. 1999).
A FFIRMED.
3-2-09