Impossibility; Indenture Agreement


In order to finance toll-road projects in China, Traffic Stream entered into an indenture agreement with Chase. As part of the agreement, Traffic Stream issued several Senior Secured Notes totaling US$ 119,000,000. Traffic Stream was required to make semi-annual interest payments on the notes. As collateral for the secured notes, Traffic Stream promised to deliver an LC in the amount of US$ 8,058,750 to Chase by 6 January 1999, and replace the LC with cash currency on or before 6 May 1999.

Traffic Stream defaulted on its obligation under the indenture agreement, first by failing to supply the required LC on time, then by failing to make the required semi-annual interest payment. Chase filed suit against Traffic Stream for breach of contract, replevin of collateral, specific enforcement of reporting obligations, an accounting, and recovery of collection costs. Chase moved for summary judgment on all counts.

In its answer, Traffic Stream admitted that it had defaulted, but argued that its defaults should be excused pursuant to a doctrine of contract law, impossibility of performance, due to a change in the policy of China's State Administration of Foreign Exchange (SAFE). In 1997, when the Chinese government realized that its foreign exchange reserve was being depleted by foreign investment projects, SAFE began enforcing its already existing laws that prohibited Chinese entities from guaranteeing income to their foreign partners. Operating income was not an issue, but guaranteed income from Chinese/foreign ventures could only be remitted abroad after receiving approval from SAFE. Traffic Stream contended that the delays imposed by SAFE made it impossible for it to comply with the terms of the indenture agreement.

The court noted Traffic Stream's evidence regarding the delays caused by SAFE's change in policy, but, it stated that "New York courts have been consistently hostile to the [impossibility of performance] defense, allowing it to excuse performance only in the most extreme circumstances". The party asserting the impossibility defense must pass a twopronged test.

First, "[i]mpossibility excuses a party's performance only when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible ... ." Here, The SAFE provisions - as conceded by Traffic Stream - did not proscribe remittance of funds from the toll-roads, but only delayed them. That was only a financial hardship, and as such, the Court found that Traffic Stream's evidence failed to support a condition of "objective impossibility".

Second, a claim of impossibility must also "have been produced by an unanticipated event that could not have been foreseen or guarded against in the contract ... ." Although the SAFE provisions were not being enforced at the time Traffic Stream entered the Indenture, it was reasonable to believe that the Chinese government may adopt new policies that would encourage steady enforcement of the SAFE provisions, resulting in a delayed remittance of funds out of China. Therefore, Traffic Stream's claim also failed the second prong.

Finally, the Court noted that the plain language of the indenture agreement "demand[ed] performance regardless of whether such performance is rendered 'impossible' by an uncontrollable act such as a change in law ... [Traffic Stream] could have included a force majeure provision in the indenture, but it failed to do so."

The court granted Chase's motion for summary judgment in its entirety, except for its request for an accounting which was denied as moot.



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.