Discharge by impracticability or frustration of purpose

    Most bargains reflect gambles by both parties about the future.  The seller promising today the future delivery of 1,000,000 gallons of oil at $25/barrel is gambling that price for oil futures will not rise tomorrow to $30/barrel because of a decision by OPEC ministers to restrict oil production in the Middle East.   The buyer promising today to pay $25/barrel for that oil is gambling that price for oil futures will not drop tomorrow to $20/barrel because of a decision by OPEC ministers to increase oil production in the Middle East.  The value of contract as a social institution for encouraging economic activity would be gutted if one party could avoid its obligation any time it loses the gamble.  Accordingly, a party's obligations under a contract are not discharged simply because the bargain did not turn out as favorably as that party had hoped.   Nevertheless, at some point, a point sometimes difficult to identify, events subsequent to formation of a contract make performance of the bargain by one party so far beyond the parameters of its gamble that a court will deem it just to discharge that party's obligation without liability for breach.

    Events that occur after the parties conclude their bargain may make performance of a contractual obligation by one party impossible or extraordinarily difficult or uneconomical.  The parties may have anticipated such a possibility and either expressly agreed that the occurrence of such events would excuse a party's obligation to perform (an express condition).  We refer to a clause excusing future performance on account of subsequent events that render performance difficult or impossible as a "force majeure" clause (from the French, literally "superior force").  Read the force majeure clause quoted in Power Engineering & Mft., Ltd. v. Krug Int'l.  On the other hand, parties may have expressly agreed that a party is to perform irrespective of subsequent impediments to performance.   We refer to a clause requiring performance irrespective of difficulties imposed by subsequent events as a "hell or high water" clause (i.e. a party will perform its obligations "come hell or high water").  The original use of that phrase may have been in 19th century cattle ranching.     

     If the parties have not expressly agreed to such a condition, however, or if the event that occurs does not fall within the compass of the express condition, a party's performance of its obligation(s) may nevertheless be discharged without liability in some cases under the contract rule of impossibility or under the more modern and broader formulation, the contract rule of commercial impracticability.

     R.2d Contracts describes three situations in which courts have traditionally discharged performance on account of supervening impossibility:  death or incapacity of a person necessary for performance (R.2d Contracts 262); destruction or failure to come into existence of a specific thing necessary for performance (R.2d Contracts 263); government regulation or order (R.2d Contracts 264).  Reflecting development of the case law and the enactment of the Commercial Code, R.2d Contracts, drawing from language in U.C.C. 2-615, also makes the rule broader and more flexible by discharging an obligation upon the occurrence of any event that makes performance of the obligation impracticable, if the non-occurrence of the event was a basic assumption on which the contract was made, unless language or circumstances indicate the contrary.  See R.2d Contracts 261 - "Discharge by Supervening Impracticability."  Comment d to R.2d Contracts 261 describes impracticability:  "Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved."

     In addition to the general statutory rule of U.C.C. 2-615 ("Excuse by Failure of Presupposed Conditions"), which is applicable to transactions in goods, Article 2 of the U.C.C. includes some special rules on casualty (e.g. fire, theft) to identified goods (U.C.C. 2-509, 2-510, U.C.C. 2-613, 2-709(1)) and rules on substituted performance when the manner of delivery required by the contract becomes commercially impracticable or the method of payment fails becomes of government regulation (U.C.C. 2-614).

     Some events occurring after formation of a contract do not make performance of an obligation impossible, or extraordinarily difficult or uneconomical, but do substantially frustrate the principle purpose for which one of the parties entered the contract.  In some of these cases the contract rule of frustration of purpose discharges obligations without liability for breach.  See R.2d Contracts 265 - "Discharge by Supervening Frustration."

     Taylor v. Caldwell is the classic case on impossibility.  7200 Scottsdale Road General Partners v. Kuhn Farm Machinery, Inc. and Power Engineering & Mft., Ltd. v. Krug Int'l, both prompted by the Gulf War of 1991, explore the operation of some of these rules in a familiar recent context.

     In attempting to apply both the common law and U.C.C. Article 2 rules on these issues to new cases, you may be comforted by the following observation of Professors White and Summers in their treatise on the Uniform Commercial Code:   "In spite of the attempts by all of the contract scholars and even in the face of eloquent and persuasive general statements, it remains impossible to predict with accuracy how the law will apply to a variety of relatively common cases. . . . Students who . . . have found that the cases somehow slip through their fingers when they try to apply them to new situations, may take some comfort in knowing that they are in good company."  J. White & R.Summers, Uniform Commercial Code 143 (5th Ed. 2000).   It seems to me that this difficulty necessarily inheres in the attempt to distinguish between those cases in which a party whose bargain turns out badly should be stuck with the consequences of the original gamble and those cases in which it would be just to discharge the obligation.

     Supplementary reading:  Farnsworth 9.5 - 9.9; White & Summers 3-10.