13.4 Discharge by Operation of Law when Performance Becomes Very Difficult

Every contract contains some element of risk: the buyer may run out of money before he can pay; the seller may run out of goods before he can deliver; the cost of raw materials may skyrocket, throwing off the manufacturer’s financial calculations. Should the obligor’s luck run out, ordinarily he is stuck with the consequences. He must either perform or risk paying damages for breach of contract, even if his failure is due to events beyond his control. Of course, an obligor can always limit his liability by using the contract language to minimize risk. For instance, instead of obligating himself to deliver one million widgets, he can restrict his obligation to “one million units or factory output, whichever is less.” Instead of guaranteeing to finish a job by a certain date, he can agree to use his “best efforts” to do so. Similarly, damages in the event of breach can be limited. A party can even include a clause canceling the contract in the event of an untoward happening. But if these provisions are absent, the obligor is generally held to the terms of his bargain. To avoid the harsh consequences of meeting the terms of a contract that has been impacted by circumstances outside the parties’ control, there are exceptions which include the concepts of impossibility, impracticability, and frustration of purpose.

Impossibility

If performance is impossible, the duty is discharged on grounds of impossibility. The categories here are death or incapacity of a personal services contractor, destruction of a thing necessary for performance, and performance prohibited by government order.

Death or Incapacity of a Personal Services Contractor

Whether the death of a promisee impacts the performance of a contractual duty depends on the type of contract at issue. If the contract is personal in nature, performance is usually excused due to death or incapacity. If Buyer makes a contract to purchase a car and dies before delivery, Buyer’s estate could be held liable; it is not impossible (for the estate) to perform. But, the estate of a painter hired to complete a portrait cannot be sued for damages if the painter dies before she could complete the work.

Destruction or Deterioration of a Thing Necessary for Performance

When a specific object is necessary for the obligor’s performance, its destruction or deterioration making its use impracticable (or its failure to come into existence) discharges the obligor’s duty. Diane’s Dyers contracts to buy the annual wool output of the Sheepish Ranch, but the sheep die of an epidemic disease before they can be shorn. Since the specific thing for which the contract was made has been destroyed, Sheepish is discharged from its duty to supply Diane’s with wool, and Diane’s has no claim against the Ranch. However, if the contract had called for a quantity of wool, without specifying that it was to be from Sheepish’s flock, the duty would not be discharged; since wool is available on the open market, Sheepish could buy that and resell it to Diane’s.

Performance Prohibited by Government Regulation or Order

When a government promulgates a rule after a contract is made, and the rule either bars performance or will make it impracticable, the obligor’s duty is discharged. An obligor is not required to break the law and risk the consequences. Financier Bank contracts to sell World Mortgage Company certain collateralized loan instruments. The federal government, in a bank reform measure, prohibits such sales. The contract is discharged. If the Supreme Court later declared the prohibition unconstitutional, World Mortgage’s duty to buy (or Financier Bank’s to sell) would not revive.

Common-Law Impracticability

Impracticability is said to exist when there is a radical departure from the circumstances that the parties reasonably contemplated would exist at the time they entered into the contract; on such facts, the courts might grant relief. They will do so when extraordinary circumstances (often called “acts of God” or “force majeure”) make it unjust to hold a party liable for performance. Although the justification for judicial relief could be found in an implied condition in all contracts that extraordinary events shall not occur, the Restatement eschews so obvious a bootstrap logic and adopts the language of UCC Section 2-615(a), which states that the crux of the analysis is whether the nonoccurrence of the extraordinary circumstance was “a basic assumption on which the contract was made.” If it was—if, that is, the parties assumed that the circumstance would not occur—then the duty is discharged if the circumstance later does occur.

In one well-known case, Autry v. Republic Productions, the famous cowboy movie star Gene Autry had a contract to perform to the defendant. He was drafted into the army in 1942; it was, temporarily at least, impossible for him to perform his movie contractual obligations incurred prior to his service. When he was discharged in 1945, he sued to be relieved of the prewar obligations. The court took notice that there had been a long interruption in Autry’s career and of “the great decrease in the purchasing power of the dollar”—postwar inflation—and determined that to require him to perform under the old contract’s terms would work a “substantial hardship” on him. A world war is an extraordinary circumstance. The temporary impossibility had transformed into impracticability.

Impracticability refers to the performance, not to the party doing it. Only if the performance is impracticable is the obligor discharged. The distinction is between “the thing cannot be done” and “I cannot do it.” The former refers to that which is objectively impracticable, and the latter to that which is subjectively impracticable. That a duty is subjectively impracticable does not excuse it if the circumstances that made the duty difficult are not extraordinary. A buyer is liable for the purchase price of a house, and his inability to raise the money does not excuse him or allow him to escape from a suit for damages when the seller tenders the deed.  If Andy promises to transport Anne to the football stadium for ten dollars, he cannot wriggle out of his agreement because someone smashed into his car (rendering it inoperable) a half hour before he was due to pick her up. He could rent a car or take her in a taxi, even though that will cost considerably more than the sum she agreed to pay him. But if the agreement was that he would transport her in his car, then the circumstances make his performance objectively impracticable—the equivalent of impossible—and he is excused.

Commercial Impracticability

This common-law concept of impracticability has been adopted by the UCC. When performance cannot be undertaken except with extreme difficulty or at highly unreasonable expense, it might be excused on the theory of commercial impracticability. However, “impracticable” (the action is impossible) is not the same as “impractical” (the action would yield an insufficient return or would have little practical value). The courts allow a considerable degree of fluctuation in market prices, inflation, weather, and other economic and natural conditions before holding that an extraordinary circumstance has occurred. A manufacturer that based its selling price on last year’s costs for raw materials could not avoid its contracts by claiming that inflation within the historical range had made it difficult or unprofitable to meet its commitments. Examples of circumstances that could excuse might be severe limitations of supply due to war, embargo, or a natural disaster. Thus, a ship-owner who contracted with a purchaser to carry goods to a foreign port would be excused if an earthquake destroyed the harbor or if war broke out and the military authorities threatened to sink all vessels that entered the harbor. But if the ship-owner had planned to steam through a canal that is subsequently closed when a hostile government seizes it, his duty is not discharged if another route is available, even if the route is longer and consequently more expensive.

Frustration of Purpose

If the parties made a basic assumption, express or implied, that certain circumstances would not arise, but those circumstances do arise, then a party is discharged from performing his duties if his principal purpose in making the contract falls under the doctrine of frustration of purpose. The frustration of purpose doctrine comes into play when circumstances make the value of one party’s performance virtually worthless to the other. This is not a rule of objective impossibility. It operates even though the parties easily might be able to carry out their contractual duties. The frustration of purpose rule does not permit one party to escape a contract simply because he will make less money than he had planned or because one potential benefit of the contract has disappeared. The purpose that is frustrated must be the core of the contract, known and understood by both parties, and the level of frustration must be severe; that is, the value of the contract to the party seeking to be discharged must be destroyed or nearly destroyed.

The classic illustration of frustration of purpose is the litigation that gave birth to the rule: the so-called coronation cases. In 1901, when King Edward VII was due to be crowned following the death of Queen Victoria, a parade route was announced for the coronation. Scores of people rented rooms in buildings that lined the streets of the route to watch the grand spectacle. But the king fell ill, and the procession was canceled. Many expectant viewers failed to pay, and the building owners took them to court; many lessees who had paid took the owners to court to seek refunds. The court declared that the lessees were not liable because the purpose of the contract had been frustrated by the king’s illness.

Supervening government regulations (though here different from illegality), floods that destroy buildings in which an event was to take place, and business failures may all contribute to frustration of purpose. But there can be no general rule: the circumstances of each case are determinative. Suppose, for example, that a manufacturer agrees to supply a crucial circuit board to a computer maker who intends to sell his machine and software to the government for use in the international space station’s ventilation systems. After the contract is made but before the circuit boards are delivered, the government decides to scrap that particular space station module. The computer manufacturer writes the circuit board maker, canceling the contract. Whether the manufacturer is discharged depends on the commercial prospects for the computer and the circuit board. If the circuit board can be used only in the particular computer, and it in turn is only of use on the space station, the duty to take the boards is discharged. But if the computer can be sold elsewhere, or the circuit boards can be used in other computers that the manufacturer makes, it is liable for breach of contract, since its principal purpose—selling computers—is not frustrated.

As before, the parties can provide in the contract that the duty is absolute and that no supervening event shall give rise to discharge by reason of frustration of purpose.

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