George Mason School of Law

George Mason School of Law
Contracts II Impracticability This file may be downloaded only by registered students in my class, and may not be shared by them F.H. Buckley

Mistake vs. Impracticability and Frustration

The traditional understanding
Formation of Contract Frustration Condition Subsequent Mistake, Condition Precedent Time

Mutual Mistake: Prior to formation
Restatement 152: Where a mistake of both parties at the time of contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154.

Condition Precedent Restatement § 224 A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due. 5

Condition Precedent Restatement § 224 A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due. Must this be before formation? 6

Condition Subsequent: After Formation
Restatement § 230 “the occurrence of an event is to terminate an obligor’s duty” 7

Frustration Restatement § 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 circumstances [of the contract] indicate the contrary. 8

The traditional understanding
Formation of Contract Frustration Condition Subsequent Mistake, Condition Precedent Time

The modern rule blurs the timing question

Blurring the timing question
Frustration Restatement 266(2): Where, at the time a contract is made, a party’s principal purpose is substantially frustrated Restatement 265: “Where, after a contract is made, a party’s principal purpose is substantially frustrated

Blurring the timing question
Impracticability: Restatement 266(1): Where, at the time a contract is made, a party’s performance under it is impracticable Restatement 261: “Where, after a contract is made, a party’s performance is made impracticable

The Restatement understanding
Formation of Contract Impracticability Frustration Mistake Impracticability Frustration Time

So what is the difference?
Mistake §§ : basic assumption, material effect on agreed exchange of performances Impracticability § 266(1) Where, at the time a contract is made, a party’s performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non‐existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.

Mistake §§ : Basic Assumption, material effect on agreed exchange of performances Impracticability § 261 Where, after a contract is made, a party’s performance is made impracticable 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 duty to render that performance is discharged, unless the language or the circumstances indicate the contrary.

Mistake §§ : Basic Assumption, material effect on agreed exchange of performances Frustration §§ Where, at the time a contract is made, a party’s principal purpose is substantially frustrated, basic assumption Restatement 265: “Where, after a contract is made, a party’s principal purpose is substantially frustrated, basic assumption

Mistake : Basic Assumption, material effect on exchange Impracticability 261, 266: Basic Assumption, Impracticable Frustration : Basic Assumption, principal purpose substantially frustrated

Assumption of risk Restatement 152: Where a mistake of both parties at the time of contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in 154.

Restatement 154: Assumption of Risk
A party bears the risk of mistake when the risk is allocated to him by agreement of the parties, or he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. 19

Assumption of risk Impracticability § 266(1) Where, at the time a contract is made, a party’s performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non‐existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.

Regret Contingencies So the choice is between breach and excuse
When should the event give rise to liability by one of the parties?

Impracticability: The evolution
From strict liability to impossibility From impossibility to impracticability

From Strict Liability to Impossibility

Just when is performance impossible? Paradine Stees

Just when is performance impossible? In other words, never, if the obligation is to make something happen or pay damages if it doesn’t happen

An Impossibility Defense Succeeds Taylor v. Caldwell p. 85
Surrey Gardens Music Hall

Taylor v. Caldwell On the program: 35-40 piece military band fireworks
a wizard tight rope performances Parisian games (?!?)

Taylor v. Caldwell In what sense was performance impossible (as compared to Paradine?)

Taylor v. Caldwell The birth of the frustration doctrine
Personal services contracts Hyde v. Dean of Windsor on personal obligations (1597) Restatement 262: If the existence of a particular person is necessary…

Personal services contracts Contracts for the sale of goods Rugg v. Minett: Buyer liable if property has passed, but a mistake if property hasn’t passed

Personal services contracts Contracts for the sale of goods Risk passes with property (title) at common law, and on delivery under UCC 2-509(3)

Taylor v. Caldwell Contracts for the sale of goods
Restatement 263: If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made Res extincta

Taylor v. Caldwell Of the fire:
Blackburn: men would say, if it were brought to their minds, that there should be such a condition And why is that? Lord Blackburn

Taylor v. Caldwell Of the fire:
Blackburn: men would say, if it were brought to their minds, that there should be such a condition Isn’t it just a question of who should insure?

Taylor v. Caldwell What damages were suffered because of the fire?

Taylor v. Caldwell What damages were suffered because of the fire?
Licensor loses license fee of £400 Licensee loses gross profits less license fee of £400

Taylor v. Caldwell What possible allocation of risks can you imagine?

Taylor v. Caldwell What possible allocation of risks can you imagine?
Licensee takes risk and owes Licensor £400 for the license fee: Paradine

Licensee takes risk and owes Licensor £400 for the license fee: Paradine Licensor takes risk and owes lessee damages for foregone net profits

Licensee takes risk and owes Licensor £400 for the license fee: Paradine Licensor takes risk and owes lessee damages for foregone net profits Frustration: neither recovers anything

Frustration: neither recovers anything Why might this be the efficient result?

Frustration: neither recovers anything If risk falls on licensee, he’s not in a good position to evaluate the risk of fire

Frustration: neither recovers anything If risk falls on licensor, he’s not in a good position to evaluate licensee’s lost profits

Taylor v. Caldwell Can you distinguish Paradine?

Taylor v. Caldwell Can you distinguish Paradine?
A license? “Nothing however, in our opinion, depends on this.”

RNJ Interstate p. 88 Why a different result?

RNJ Interstate p. 88 Why a different result?
The contractor shall be responsible … until completion and acceptance of the entire work…

The contractor shall be responsible … until completion and acceptance of the entire work… Who should insure against fire?

The contractor shall be responsible … until completion and acceptance of the entire work… Who should insure against fire? In the absence of an express clause like the above, should the court adopt the work before pay rule of Stees?

The expansion of excuses
A person who promises to do something which turns out to be impossible can always be held liable in damages, if he takes the risk But not if the contract is frustrated

Frustration: Howell v. Coupland at 729
What was the contract? Lord Coleridge, L.C.J.

Howell v. Coupland What was the frustrating event?

Howell v. Coupland “It was a contract to deliver so many potatoes, of a particular kind, grown on a special place, if deliverable from that place”

Howell v. Coupland Seller grew 80 tons of potatoes and was 120 tons short. Could he have complied with the contract by going to the market and buying potatoes?

Howell v. Coupland Seller grew 80 tons of potatoes and was 120 tons short. Could he have complied with the contract by going to the market and buying potatoes? And why didn’t he try to do so?

Howell v. Coupland Was this a sale of goods?

Howell v. Coupland Was this a sale of goods?
U.C.C. § 2-107(2) A contract for the sale apart from the land of growing crops or other things attached to realty and capable of severance without material harm thereto … is a contract for the sale of goods within this Article whether the subject matter is to be severed by the buyer or by the seller even though it forms part of the realty at the time of contracting, and the parties can by identification effect a present sale before severance.

Howell v. Coupland How would UCC § handle this? § 2-615(a) Delay in delivery or non-delivery in whole or in part by a seller … is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

Howell v. Coupland How would UCC § handle this? § 2-615(b) Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.

Howell v. Coupland What about UCC § 2-613?
Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, … then (a) if the loss is total the contract is avoided

So when are goods “identified”?

Howell v. Coupland UCC In the absence of explicit agreement identification occurs (a) when the contract is made if it is for the sale of goods already existing and identified; (b) if the contract is for the sale of future goods other than those described in paragraph (c), when goods are shipped, marked or otherwise designated by the seller as goods to which the contract refers;(c) when the crops are planted or otherwise become growing crops or the young are conceived if the contract is for the sale of unborn young to be born within twelve months after contracting or for the sale of crops to be harvested within twelve months or the next normal harvest reason after contracting whichever is longer.

Passing of Risk § 2-509. Risk of Loss in the Absence of Breach.
(1) Where the contract requires or authorizes the seller to ship the goods by carrier (b) if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.

Passing of Risk § 2-509. Risk of Loss in the Absence of Breach.
(1) Where the contract requires or authorizes the seller to ship the goods by carrier (b) if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery. (3) In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery.

Sorting out the Jargon Acceptance and Cure Identification Risk

Limits to Frustration/Impracticability
When it’s not really a Personal Services Contract Seitz When a party should be thought to have assumed a risk Transatlantic

Seitz v. Mark-O-Lite 730

Seitz v. Mark-O-Lite Why didn’t the force majeur clause apply?
What is the eiusdem generis canon?

Seitz v. Mark-O-Lite Why not Restatement § 262?
Existence of a particular person is necessary for the performance of a duty…

Comment b: If the existence of a particular person is understood to be necessary by both parties

Comment b: Could Δ have delegated the job to someone else without breaching the contract?

Transatlantic 739 When should a party be thought to have assumed a risk so as to eliminate the possibility of frustration/impracticability?

Transatlantic What happened in 1956?

Transatlantic July 26: Egypt nationalizes Suez canal
July 30: PM Eden informs Nasser that Britain will prevent the takeover

Transatlantic July 26: Egypt nationalizes Sues canal
July 30: PM Eden informs Nasser that Britain will prevent the takeover Aug. 2: Britain mobilizes Sept 12: US, Britain, France announce their intention to impose a solution

July 30: PM Eden informs Nasser that Britain will prevent the takeover Aug. 2: Britain mobilizes Sept 12: US, Britain, France announce their intention to impose a solution Oct. 2: Charterparty executed

July 30: PM Eden informs Nasser that Britain will prevent the takeover Aug. 2: Britain mobilizes Sept 12: US, Britain, France announce their intention to impose a solution Oct. 2: Charterparty executed Oct 29: Israel invades Egypt, Anglo-French forces land, Nasser blocks canal

The blocked canal

Transatlantic What is the “doctrine of deviation”

Transatlantic What is the “doctrine of deviation”
What was the added burden on the carrier?

Transatlantic What is the “doctrine of deviation”
What was the added burden on the carrier? Added expense of $44K above contract price of $305K because of voyage around Cape of Good Hope

Transatlantic What is the standard for commercial impracticability?

Transatlantic What is the standard for commercial impracticabilty?
Unexpected regret contingency Risk not allocated Commercial impracticability

Transatlantic Did it make sense to assume that the carrier assumed the risk?

Transatlantic Why did it make sense to assume that the carrier assumed the risk? “They are in the best position to calculate the cost of performance by alternate routes”

Transatlantic Why did it make sense to assume that the carrier assumed the risk? “They are in the best position to calculate the cost of performance by alternate routes” Risk of closure a matter of public notice

Transatlantic Why did it make sense to assume that the carrier assumed the risk? “They are in the best position to calculate the cost of performance by alternate routes” Risk of closure a matter of public notice In which case the risk might have been factored into the price

Excuse vs. Assumption of Risk

Assumption of Risk and Least-Cost Risk Avoiders
Where one party is better able to reduce the risk or the harm Where one party is better able to value the loss Assuming risk aversion, where one party is wealthier than the other Assuming risk aversion, where one party is a better insurer because he can diversify the risk

When Excuses are granted
No one party is the least cost-risk avoider

Where excuses are granted Black Swans

When Excuses are granted
Risk-sharing makes sense

Risk-sharing: Taylor v. Caldwell
If risk falls on licensor, he’s not in a good position to evaluate licensee’s lost profits

Risk-sharing: Taylor v. Caldwell
If risk falls on licensor, he’s not in a good position to evaluate licensee’s lost profits If risk falls on licensee, he’s not in a good position to evaluate the possibility of fire

Transatlantic How would the case have been decided under UCC 2-614?
(1) Where without fault of either party the agreed berthing, loading or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.

Could Mistake and Impracticability displace Contract Enforcement?
From strict liability to impossibility From impossibility to impracticability The breadth of impracticability: Aluminum v. Essex

Aluminum v. Essex 749 Cf. p. 710: The choice of Greenspan’s non-labor production cost factor constituted a mistake

Aluminum v. Essex 749 Cf. p. 710: The choice of Greenspan’s non-labor production cost factor constituted a mistake Now we’re looking at the same issues under the rubric of impracticability and frustration.

Aluminum v. Essex 749 Cf. p. 710: The choice of Greenspan’s non-labor production cost factor constituted a mistake Now we’re looking at the same issues under the rubric of impracticability and frustration. Can it be all three at the same time?

Aluminum v. Essex 749 Can it be all three at the same time?
Teitelbaum: They overlap in time and scope

Aluminum v. Essex 749 What’s the difference between them?

Impracticability and Frustration
Impracticability: “focuses on greatly increased costs”

Frustration: “focuses on a party’s severe disappointment caused by circumstances that frustrate his purpose in entering into the contract”

In Impracticability and Frustration, more than mistake, the emphasis is on (economic) hardship

The limits of Aluminum v. Essex
Aluminum v. Essex does not permit a party to avoid a contract where he has assumed the risk A more conservative trend Transatlantic Canadian Industrial Alcohol Williamette , Wegematic, Westinghouse Eastern Air Lines

Canadian Industrial Alcohol 736

Assumption of Risk: Canadian Industrial Alcohol
Why did an industrial alcohol company need molasses (in the 1920s)

Canadian Industrial Alcohol
Why did an industrial alcohol company need molasses? + =

Why did Cardozo hold as he did?

Why might this be an efficient allocation of risk?

When does a party assume the risk of the event?
Williamette 744 What if it costs more than expected to finish a project on time?

Wegematic 746 “We see no basis for thinking that when an electronics system is promoted by its manufacturer as a revolutionary breakthrough, the risk of the revolution's occurrence falls on the purchaser” per Friendly J.

Westinghouse 745, 755

UCC § 2-615 2-615(a) Delay in delivery or non-delivery in whole or in part by a seller … is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

What was Easterbrook’s argument about the irrelevance of bankruptcy in Hoosier Energy at ?

Is Aluminum v. Essex an outlier?
Aluminum v. Essex does not permit a party to avoid a contract where he has assumed the risk A more conservative trend Transatlantic (Suez Canal cases) Williamette , Wegematic, Westinghouse Eastern Air Lines

Eastern Air Lines 747 Requirements contract upheld at 314

Eastern Air Lines How had Gulf protected itself against price increases (and why didn’t this work?)

Eastern Air Lines Now: Impracticability under UCC 2-615
Delay in delivery or non-delivery in whole or in part by a seller … is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made ….

Eastern Air Lines Now: Impracticability under UCC 2-615?
The Suez cases “offer little encouragement…”

“Those cases offer little encouragement…” “We will not allow a party to escape a bad bargain because it is burdensome”

“Those cases offer little encouragement…” “We will not allow a party to escape a bad bargain because it is burdensome” The price increase was foreseeable

Eastern Air Lines August 15, 1971: Nixon announces price controls to combat inflation June 27, 1972: Contract signed Oct. 6, 1973: Yom Kippur War Oct. 17, 1973: Arab members of OPEC announce an oil embargo on the US Nov 27, 1973: Emergency Petroleum Allocation Act

So what happened to oil prices in 1974?

Eastern Air Lines Is this case inconsistent with Alcoa?

Can the parties bargain into the impracticability regime they want?
How to bargain out of Aluminum v. Essex?

Can the parties bargain into the impracticability regime they want?
How to bargain out of Aluminum v. Essex? How to bargain into it?

Bargaining into Aluminum? Beaver Creek p. 754
Did the “gross inequity clause” do the trick? And why not?

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