Eastern Air Lines, Inc. v Gulf Oil Corp.

Facts

Defendant and Plaintiff had an executed agreement under which Defendant was to provide jet fuel to Plaintiff. The agreement was drafted by Defendant but negotiated extensively by both parties to reflect their longstanding business relationship. The contract provided that Plaintiff would purchase from Defendant any jet fuel it needed in certain cities. In turn, Defendant would make the necessary arrangements to satisfy Plaintiff’s reasonable, good-faith jet-fuel needs in those cities. The contract also provided that payment would be calculated according to a price escalation provision tied to postings in Platt’s Oilgram Crude Oil Supplement. During the period of energy crises in 1973 and 1974, Defendant repudiated its contract with Plaintiff.

Plaintiff sued Defendant for breach of contract, seeking injunctive relief that requires specific performance of the contract. In defending against an action for breach of contract, Defendant alleged that the contract was not binding because it lacked mutuality of obligation and that Eastern had breached the contract by fuel freighting in which Plaintiff took on more or less fuel at certain Defendant’s stations, regardless of actual operating requirements, depending on the relative prices at the stations. Defendant also alleged that its performance under the contract had become commercially impracticable for two reasons: (1) the price escalation provision that tied payment to Platt’s no longer represented the intent of the parties because of a two-tier pricing model imposed by the government, and (2) the worldwide oil shortage caused substantial increases in crude oil prices, and there was no corresponding increase in the escalation clause. Plaintiff  still contended that it was entitled to specific performance because both parties knew an embargo was imminent, and they had tied the contract price to domestic postings in an oil publication. The record at trial also showed that Defendant’s profits went up proportionally to the cost of foreign oil in the 1973-1974 period, and in fact, Defendant’s 1974 profits exceeded 1973 profits. Nor did Defendant’s evidence of increased costs demonstrate hardship since the costs it proved were related to transfer pricing–the costs associated with intra-company costs of moving goods from one segment of the corporation to another. The record also showed that Defendant executives were in close contact with government policy makers preceding imposition of the new pricing policies.