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1 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 fbuckley@gmu.edu Slide 2 Mistake vs. Impracticability and Frustration 2 Slide 3 The traditional understanding 3 Time Formation of Contract Mistake, Condition Precedent Frustration Condition Subsequent Slide 4 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. 4 Slide 5 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. 5 Slide 6 6 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 Slide 7 7 Condition Subsequent: After Formation Restatement 230 the occurrence of an event is to terminate an obligors duty 7 Slide 8 8 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 Slide 9 The traditional understanding 9 Time Formation of Contract Mistake, Condition Precedent Frustration Condition Subsequent Slide 10 The modern rule blurs the timing question 10 Slide 11 Blurring the timing question 11 Frustration Restatement 266(2): Where, at the time a contract is made, a partys principal purpose is substantially frustrated Restatement 265: Where, after a contract is made, a partys principal purpose is substantially frustrated Slide 12 Blurring the timing question 12 Impracticability: Restatement 266(1): Where, at the time a contract is made, a partys performance under it is impracticable Restatement 261: Where, after a contract is made, a partys performance is made impracticable Slide 13 The Restatement understanding 13 Time Formation of Contract Mistake Impracticability Frustration Impracticability Frustration Slide 14 So what is the difference? Mistake 152-53: Basic Assumption, material effect on agreed exchange of performances Impracticability 266(1) Where, at the time a contract is made, a partys 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. 14 Slide 15 So what is the difference? Mistake 152-53: Basic Assumption, material effect on agreed exchange of performances Impracticability 261 Where, after a contract is made, a partys 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. 15 Slide 16 So what is the difference? Mistake 152-53: Basic Assumption, material effect on exchange Impracticability 261, 266: Basic Assumption, Impracticable Frustration 265-66: Basic Assumption, principal purpose substantially frustrated 16 Slide 17 Impracticability: The evolution From strict liability to impossibility From impossibility to impracticability 17 Slide 18 From Strict Liability to Impossibility 18 Slide 19 From Strict Liability to Impossibility Just when is performance impossible? Paradine Stees 19 Slide 20 An Impossibility Defense Succeeds Taylor v. Caldwell p. 85 20 Surrey Gardens Music Hall Slide 21 Taylor v. Caldwell On the program: On the program: 35-40 piece military band fireworks a wizard tight rope performances Parisian games (?!?) 21 Slide 22 Taylor v. Caldwell In what sense was performance impossible (as compared to Paradine?) 22 Slide 23 Taylor v. Caldwell The birth of the frustration doctrine Personal services contracts Hyde v. Dean of Windsor (1597) Restatement 262: If the existence of a particular person is necessary 23 Slide 24 Taylor v. Caldwell The birth of the frustration doctrine Personal services contracts Coggs v. Bernard? 24 Slide 25 Taylor v. Caldwell The birth of the frustration doctrine Personal services contracts Coggs v. Bernard? Contracts for the sale of goods?!? Rugg v. Minett: Buyer liable if property has passed. 25 Slide 26 Taylor v. Caldwell The birth of the frustration doctrine Personal services contracts Coggs v. Bernard? Contracts for the sale of goods?!? Risk passes with property (title) at common law, and on delivery under UCC 2-509(3) 26 Slide 27 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 27 Slide 28 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? 28 Lord Blackburn Slide 29 Taylor v. Caldwell Of the fire: Blackburn: men would say, if it were brought to their minds, that there should be such a condition Isnt it just a question of who should insure? 29 Slide 30 Taylor v. Caldwell What damages were suffered because of the fire? 30 Slide 31 Taylor v. Caldwell What damages were suffered because of the fire? Licensor loses license fee of 400 Licensee loses gross profits less rent 31 Slide 32 Taylor v. Caldwell What possible allocation of risks can you imagine? 32 Slide 33 Taylor v. Caldwell What possible allocation of risks can you imagine? Licensee takes risk and owes Licensor 400 for the license fee: Paradine 33 Slide 34 Taylor v. Caldwell What possible allocation of risks can you imagine? Licensee takes risk and owes Licensor 400 for the license fee: Paradine Licensor takes risk and owes lessee damages for foregone net profits 34 Slide 35 Taylor v. Caldwell What possible allocation of risks can you imagine? 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 35 Slide 36 Taylor v. Caldwell What possible allocation of risks can you imagine? Frustration: neither recovers anything Why might this be the efficient result? 36 Slide 37 Taylor v. Caldwell What possible allocation of risks can you imagine? Frustration: neither recovers anything If risk falls on licensee, hes not in a good position to evaluate the risk of fire 37 Slide 38 Taylor v. Caldwell What possible allocation of risks can you imagine? Frustration: neither recovers anything If risk falls on licensor, hes not in a good position to evaluate licensees lost profits 38 Slide 39 Taylor v. Caldwell Can you distinguish Paradine? 39 Slide 40 Taylor v. Caldwell Can you distinguish Paradine? Nothing however, in our opinion, depends on this. 40 Slide 41 RNJ Interstate p. 88 Why a different result? 41 Slide 42 RNJ Interstate p. 88 Why a different result? The contractor shall be responsible until completion and acceptance of the entire work 42 Slide 43 RNJ Interstate p. 88 Why a different result? The contractor shall be responsible until completion and acceptance of the entire work Who should insure against fire? 43 Slide 44 RNJ Interstate p. 88 Why a different result? 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? 44 Slide 45 45 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 fbuckley@gmu.edu Slide 46 Next day Anticipatory Breach The Contractual measure of Damages Scott 94-103, 841-46 Rest. 344-53 46 Slide 47 The Restatement understanding 47 Time Formation of Contract Mistake Impracticability Frustration Impracticability Frustration Slide 48 So what is the difference? Mistake 152-53: Basic Assumption, material effect on exchange Impracticability 261, 266: Basic Assumption, Impracticable Frustration 265-66: Basic Assumption, principal purpose substantially frustrated 48 Slide 49 Conditions and Promises I can promise to do X on the condition that the crick doesnt rise But can I also promise that the crick wont rise? 49 Slide 50 Regret Contingencies An occurs: what are the possibilities? One party only wants out: Alleges a Breach by the other party Alleges an excuse Condition precedent, mistake, frustration 50 Slide 51 Regret Contingencies So the choice is between breach and excuse When should the event give rise to liability by one of the parties? 51 Slide 52 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 52 Slide 53 Frustration: Howell v. Coupland at 729 What was the contract? 53 Lord Coleridge, L.C.J. Slide 54 Howell v. Coupland What was the frustrating event? 54 Slide 55 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 55 Slide 56 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? 56 Slide 57 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 didnt he try to do so? 57 Slide 58 Howell v. Coupland Was this a sale of goods? 58 Slide 59 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. 59 Slide 60 Howell v. Coupland How would UCC 2-615 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. 60 Slide 61 Howell v. Coupland How would UCC 2-615 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. 61 Slide 62 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 62 Slide 63 Howell v. Coupland What about UCC 2-613? So when are goods identified? 63 Slide 64 Howell v. Coupland UCC 2-501. 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. 64 Slide 65 Howell v. Coupland UCC 2-501. 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. 65 Slide 66 Howell v. Coupland UCC 2-501. 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. 66 Slide 67 Howell v. Coupland UCC 2-501. 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. 67 Slide 68 Limits to Frustration/Impracticability When its not really a Personal Services Contract Seitz When a party should be thought to have assumed a risk Transatlantic 68 Slide 69 Seitz v. Mark-O-Lite 730 69 Slide 70 Seitz v. Mark-O-Lite Why didnt the force majeur clause apply? What is the eiusdem generis canon? 70 Slide 71 Seitz v. Mark-O-Lite Why not Restatement 262? Existence of a particular person is necessary for the performance of a duty 71 Slide 72 Seitz v. Mark-O-Lite Why not Restatement 262? Comment b: If the existence of a particular person is understood to be necessary by both parties 72 Slide 73 Seitz v. Mark-O-Lite Why not Restatement 262? Comment b: Could have delegated the job to someone else without breaching the contract? 73 Slide 74 Transatlantic 739 When should a party be thought to have assumed a risk so as to eliminate the possibility of frustration/impracticability? 74 Slide 75 Transatlantic What happened in 1956? 75 Slide 76 Transatlantic July 26: Egypt nationalizes Suez canal July 30: PM Eden informs Nasser that Britain will prevent the takeover 76 Slide 77 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 77 Slide 78 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 Oct. 2: Charterparty executed 78 Slide 79 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 Oct. 2: Charterparty executed Oct 29: Israel invades Egypt, Anglo-French forces land, Nasser blocks canal 79 Slide 80 The blocked canal 80 Slide 81 Transatlantic What is the doctrine of deviation 81 Slide 82 Transatlantic What is the doctrine of deviation What was the added burden on the carrier? 82 Slide 83 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 83 Slide 84 Transatlantic What is the standard for commercial impracticability? 84 Slide 85 Transatlantic What is the standard for commercial impracticabilty? Unexpected regret contingency Risk not allocated Commercial impracticability 85 Slide 86 Transatlantic Did it make sense to assume that the carrier assumed the risk? 86 Slide 87 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 87 Slide 88 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 88 Slide 89 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 89 Slide 90 Excuse vs. Assumption of Risk 90 Slide 91 91 1.Where one party is better able to reduce the risk or the harm 2.Where one party is better able to value the loss 3.Assuming risk aversion, where one party is wealthier than the other 4.Assuming risk aversion, where one party is a better insurer because he can diversify the risk Assumption of Risk and Least-Cost Risk Avoiders Slide 92 When Excuses are granted No one party is the least cost-risk avoider 92 Slide 93 When Excuses are granted Risk-sharing makes sense 93 Slide 94 Risk-sharing: Taylor v. Caldwell If risk falls on licensor, hes not in a good position to evaluate licensees lost profits 94 Slide 95 Risk-sharing: Taylor v. Caldwell If risk falls on licensor, hes not in a good position to evaluate licensees lost profits If risk falls on licensee, hes not in a good position to evaluate the possibility of fire 95 Slide 96 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. 96 Slide 97 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. 97 Slide 98 Could Mistake and Impracticability displace Contract Enforcement? From strict liability to impossibility From impossibility to impracticability The breadth of impracticability: Aluminum v. Essex 98 Slide 99 Aluminum v. Essex 749 Cf. p. 710: The choice of Greenspans non-labor production cost factor constituted a mistake 99 Slide 100 Aluminum v. Essex 749 Cf. p. 710: The choice of Greenspans non-labor production cost factor constituted a mistake Now were looking at the same issues under the rubric of impracticability and frustration. 100 Slide 101 Aluminum v. Essex 749 Cf. p. 710: The choice of Greenspans non-labor production cost factor constituted a mistake Now were looking at the same issues under the rubric of impracticability and frustration. Can it be all three at the same time? 101 Slide 102 Aluminum v. Essex 749 Can it be all three at the same time? Teitelbaum: They overlap in time and scope 102 Slide 103 Aluminum v. Essex 749 Whats the difference between them? 103 Slide 104 Impracticability and Frustration Impracticability: focuses on greatly increased costs 104 Slide 105 Impracticability and Frustration Frustration: focuses on a partys severe disappointment caused by circumstances that frustrate his purpose in entering into the contract 105 Slide 106 Impracticability and Frustration In Impracticability and Frustration, more than mistake, the emphasis is on (economic) hardship 106 Slide 107 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 107 Slide 108 Canadian Industrial Alcohol 736 108 Slide 109 Assumption of Risk: Canadian Industrial Alcohol 109 Why did an industrial alcohol company need molasses (in the 1920s) Slide 110 Canadian Industrial Alcohol 110 Why did an industrial alcohol company need molasses? + = Slide 111 Canadian Industrial Alcohol 111 Why did Cardozo hold as he did? Slide 112 Canadian Industrial Alcohol 112 Why might this be an efficient allocation of risk? Slide 113 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? 113 Slide 114 When does a party assume the risk of the event? 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. 114 Slide 115 When does a party assume the risk of the event? Westinghouse 745, 755 115 Slide 116 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. 116 Slide 117 When does a party assume the risk of the event? What was Easterbrooks argument about the irrelevance of bankruptcy in Hoosier Energy at 744-45? 117 Slide 118 Eastern Air Lines 747 Requirements contract upheld at 314 118 Slide 119 Eastern Air Lines How had Gulf protected itself against price increases (and why didnt this work?) 119 Slide 120 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 . 120 Slide 121 Eastern Air Lines Now: Impracticability under UCC 2- 615? The Suez cases offer little encouragement 121 Slide 122 Eastern Air Lines Now: Impracticability under UCC 2- 615? Those cases offer little encouragement We will not allow a party to escape a bad bargain because it is burdensome 122 Slide 123 Eastern Air Lines Now: Impracticability under UCC 2- 615? 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 123 Slide 124 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 124 Slide 125 So what happened to oil prices in 1974? 125 Slide 126 Eastern Air Lines Is this case inconsistent with Alcoa? 126 Slide 127 Can the parties bargain into the impracticability regime they want? How to bargain out of Aluminum v. Essex? 127 Slide 128 Can the parties bargain into the impracticability regime they want? How to bargain out of Aluminum v. Essex? How to bargain into it? 128 Slide 129 Bargaining into Aluminum? Beaver Creek p. 754 Did the gross inequity clause do the trick? And why not? 129