Impossibility, Impracticability, and Frustration : Contract law
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Impossibility, Impracticability, and Frustration
Distinguish: frustration is about the principal purpose being frustrated; whereas impracticability is about performance having become impracticable.
Common Law has evolved narrow doctrines to excuse performance:
Impossibility: Prof notes: Rst. 2d, 262-264: Principal situations where a court will excuse: when a person whose existence is necessary for the performance dies or is incapacitated prior to performance (262); when a specific object necessary for the performance is destroyed or fails to come into existence (263); and when performance is prevented by gov’t regulation (264).
Prof notes: Krell v. Henry (1903): “frustration of purpose” doctrine. D contracted, at a huge sum, to rent a room from P to view the King’s coronation. King’s illness forced cancellation of coronation. Court decided D should get his money back: since the coronation was the “foundation of the contract…the court discharged both parties from further performance.”
Rst. 2d, 265: “Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.”
The fundamental issue is what general position the law should take concerning long-term contracts. One view: if courts are unwilling to intervene when the truly unexpected and disastrous occurs, law will be, in effect, scaring off parties from entering long-term contracts in the first place. Another view: Courts should be reluctant to grant reformation. The willingness of courts to reform contracts on the basis of subsequent knowledge may undermine the policy of finality which is so essential and revered in contract law.
Karl Wendt Farm Equipment Co. v. International Harvester Co.
Wendt and IH entered into a contract that established Wendt as a dealer of IH’s farm equipment goods in Marlette; There was an extreme downturn in the farm equipment market; as a result, IH negotiated an agreement to sell its farm equipment to Case/Tenneco; There were conflicted areas, though, where both a Case and IH dealership were located–Marlette, MI was one of those areas, and Wendt was not offered a Case franchise; W sued, alleging breach of contract; IH asserted defense of impracticability & jury found for IH; High Court reversed that shit right up–impracticability should not have gone to the jury; IH had other options it could have exercised.
Under MI law, the doctrine of impossibility is a valid defense not only when performance is actually impossible, but also when supervening events make performance impracticable (Rst. 2d 261).
Prof. notes: 2d 261: “Where a party’s performance is made impracticable w/out his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render performance is discharged, unless the language or circumstances indicate the contrary.”
Court finds guidance in comments d and b to section 261: d states that “a mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is the sort of risk that a fixed price contract is intended to cover.
b states that “the continuation of existing market conditions and of the financial situation of one of the parties are ordinarily NOT circumstances the non-occurrence of which was a basic assumption by the parties–mere market shifts or financial inability do not usually effect discharge under the rule stated in sec 261.”
Court holds that, even though facts show that IH suffered severely from the downturn in the market, comment b makes clear that this does not excuse non-performance.
Frustration: Prof. notes: Rst. 2d 265: “Where a party’s principal purpose is substantially frustrated w/out his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or circumstances indicate the contrary”
The defense requires establishing three factors:
The purpose frustrated by the supervening event must have been the “principal purpose” of the party making the contract. Cmt a: the object must be so completely the basis of the contract, as both parties understand it, that without it the transaction would make little sense
Frustration must be substantial: frustration must be so severe that it is not fairly regarded as within the risks to be assumed by a party under the agreement.
Frustrating event must have been a “basic assumption” of the contract the non-occurrence of which was assumed by both parties
Alabama Football, Inc. v. Wright
Facts: Π hired Δ to play football for them, and gave a $75k signing bonus. When Π and the league folded, Π requested Δ remit the $75k. Δ countersued that Π failed to provide him with a forum to perform the contract.
Re: Bonus: Wright says the act of signing the contract with AL is itself full consideration for the bonus paid; and furthermore, Wright provided additional consideration by forbearing to negotiate with the Dallas Cowboys, Wright’s employer at the time, and with all other professional football teams, AND by allowing AL to publicize Wright’s name in promotions for the AL team. (Court agrees)
Rule re: impossibility: Impossibility occurs where 1) an unexpected contingency occurs, 2) the risk of which was not allocated either by agreement or custom, and 3) the occurrence of the contingency has made performance impossible.
Court holds that AL’s financial failure was unexpected; the risk of bankruptcy was not expressly or impliedly allocated to either party, and there’s no evidence of conversations b/w the parties w/ regard to the possibility; and the dissolution of the WFL makes performance of the rest of the contract impossible.
Result: Δ was allowed to keep the $75k as it was consideration for a performance Δ actually did: sign the contract. Π was not granted any damages in the countersuit because it was impossible.
