28. Contracts: Changed Circumstances

>> We've previously considered
the doctrine of mistake.

We will now consider three
doctrines that have a lot in

common with the doctrine
of mistake: impossibility,

impracticability, and
frustration of purpose.

These three doctrines will
be referred to collectively

as doctrines dealing with
changed circumstances.

The doctrine of mistake
deals with the parties

mistaken understanding of facts

that were in existence at
the time of contracting.

In contrast, the doctrines of

changed circumstances
deal with events that

occur after the contract
has been entered into,

but before the time for performance.

Despite these differences, mistake and

the doctrines dealing with change
circumstances all involves

situations in which the
basic assumptions on which

the parties were relying on
entering into the contract

are undetermined to so
great an extent that it

would be unfair to hold the adversely
affected party to its commitments.

The doctrines of a mistake
and the doctrines of

changed circumstances raise
the following common issues.

First is the issue of materiality.

Does the mistake or changed circumstance

so seriously impact the bargain entered

into by the parties that it can be said

to undermine the very
basis of that bargain.

Second is the question of risk.

Assuming that the very
basis of the bargain is

undermined by the mistake
or change circumstance,

did one of the parties assumed
the risk of this upset?

Let's explore the three doctrines
dealing with changed circumstances.

These doctrines relate
to events that occur

after the parties have contracted that

seriously undermine the
original expectations

of the parties in entering
into the contract.

The doctrines are invoked to excuse

one party from performing its
duties under the contract.

To understand these doctrines,

one must understand that,

historically, contractual liability
was considered strict liability.

A party who breached the contract
through no fault of his own,

perhaps as a result of the
occurrence of unforeseen events that

make it extremely burdensome or near
impossible to perform his duties,

nonetheless was held liable to
pay damages for that failure.

The doctrines dealing with
change circumstances arose to

mitigate the harsh results of
contractual strict liability.

The earliest form of this doctrine
was impossibility of performance.

As illustrated by the first
case in which it was applied,

the English case of Taylor v. Caldwell,

the scope of that doctrine
was fairly narrow.

In Taylor, the plaintiff
rented defendant's music hall,

which burned down after
the contract was made,

but before the time for
performance had arrived.

Because the defendant could not provide

the plaintiff with the performance venue,

the plaintiff sued the defendant
for breach of contract.

The court excused the defendant from
performing based on the idea that it was

a basic assumption of
the contracting parties

that the music hall would
continue to be in existence.

So long as the parties seeking
an excused from performing

his obligations under the contract was

not responsible for the unforeseen event,

the burning down of the music hall,

that party's performance would
be excused is impossible,

resulting in termination of the
contract with no liability for breach.

To invoke the doctrine of impossibility,

the unforeseen event must truly
have made performance impossible,

not simply more costly or more difficult.

The event must have completely defeated
one party's ability to perform.

The doctrine of impossibility of
performance continues to be embodied in

the Restatement Second of
contracts in Sections 262 and 263.

Section 262 excuses
instances of the death or

incapacity of a person necessary to
perform duties under a contract.

Section 263 deals with Taylor v.
Caldwell-like situations and excuses

instances in which a specific thing

necessary for performing a party's
obligations under a contract,

like a building, is destroyed.

Over time, the doctrine of

impossibility came to be
perceived as too restrictive.

Courts recognize that
there are events that

while not rendering performance
literally impossible,

nonetheless impose so great
and unexpected burden on

one party that fairness dictates

that some relief should
be given to that party.

Accordingly, the older
doctrine of impossibility has

given way to a more modern
doctrine of impact practicability.

That doctrine is embodied in Sections

261 through 272 of the Second Restatement.

Let's take a look at Section 261.

Let's explore this section.

Like the mistake doctrine,

the doctrine of impracticability assumes
that in entering into the contract,

the parties shared basic assumption
about the future course of events,

assumptions that were
central to the reasons

they mutually entered into the contract.

The impracticability doctrine protects

a party against the turn of
events that is so contrary to

those basic assumptions that it undermines

the very reasons that led the
parties to enter into the contract.

In other words, the supervening
event that occurs must have

a material effect on the expected
exchange between the parties.

One question that arises is whether
it is a prerequisite to invoking

the doctrine of impracticability that

the event was unforeseeable or unforeseen.

Few events are unforeseeable to apply so

strict a standard would preclude the
doctrine from ever being invoked.

Rather, courts ask whether
the event was unforeseen,

that is, whether the parties did not
contemplate it as a real likelihood.

In Taylor v. Caldwell,

surely a fire is foreseeable.

However, it is unlikely that such a fire

was contemplated by the
parties when they contracted.

What types of events are contemplated
by the doctrine of impracticability?

Generally, events that are
external to the contract,

events like war, natural disaster,

an embargo, or a labor strike.

But Section 264 makes clear that

even an unforeseen change in a governmental
regulation can be such an event.

Imagine in Taylor v. Caldwell that
the music hall did not burn down,

but the local authority
passed a regulation that

only governmental meetings could be
held in such venues in the future.

Assuming that the original contract

contemplated using the
venue for a music concert,

the defendant might well be
able to invoke the doctrine

of impracticability to avoid liability.

What is clear is that a mere change in

market conditions alone that
results in the contract being

less profitable for one
party is generally not

the type of event contemplated by
the impracticability doctrine.

In fact, a change in market
conditions is one important reason

for parties to enter into executory
contracts in the first place.

The buyer hopes that the price of

the good purchase will rise
by the time of performance,

the seller obviously hopes
that the price will drop.

Of course, if the change in market
conditions results from a natural disaster,

then the doctrine of
impracticability may come into play.

The bottom line is that the
event that occurs must have

such a severe impact on

one party's performance that it cannot

be rendered without a
great loss or hardship.

Finally, it is critical that the party
seeking to invoke the doctrine of

impracticability not have expressly or

impliedly assumed the
risk of the occurrence.

This is embodied in the
last phrase of Section 261,

unless the language of circumstances
indicate the contrary.

This is similar to the doctrine of mistake

well-illustrated by the [inaudible] case,

where the as is type language in
the purchase and sale agreement was

interpreted as placing the risk of

an undiscovered defect in
the property on the buyer.

In determining whether the
risk of the occurrence of

an unforeseen event is placed
on one of the parties,

one obviously begins by looking
at the contract language.

Among the types of clauses
that allocate such risk to

one party are so called
force majeure clauses.

Such clauses may, for example,

specifically allow that a shipper is
not liable for any delay caused by war,

revolution, natural disaster, etc.

Sometimes the allocation of risk is only
impliedly suggested in the contract.

For example, if the contract
assigns responsibility

to one party to obtain insurance
against unforeseen events,

one can reasonably conclude
that that party has

contractually assume the risk
of such events occurring.

We turn to the doctrine
of frustration of purpose

set forth in Section
265 of the restatement.

Like impracticability, the
doctrine of frustration of

purpose grew out of the older
doctrine of impossibility.

Even if a party could not show that

an unforeseen event rendered
performance impossible,

the newer doctrine allowed
a party to show that

the event so destroyed the value
of the transaction for him,

that the very purpose of the
contract was frustrated.

Like impracticability, the doctrine of

frustration of purpose deals
with an unforeseen event,

the non-occurrence of which was a
basic assumption of the contract.

Again, that event must
not have been caused

by the party seeking
relief from the contract.

In addition, that party must not have
assumed the risk of the event occurring.

The main difference
between the doctrine of

impracticability and that
doctrine of frustration of

purpose is that the latter
focus is not on whether

the unforeseen event made
performance more burdensome,

but rather on whether that event
undermines the very value or

usefulness of one parties entering
into the contract in the first place.

That is, does it frustrate
the contract central purpose?

Obviously, the purpose must be one that

can be reasonably viewed
as shared by the parties,

not a private motivation of one party
for entering into the contract.

In effect, the doctrine is just another
way of describing impracticability.

In all likelihood,

a set of facts that falls within

one doctrine can easily be made
to fit within the other doctrine.

A classic case illustrating
the frustration of

purpose doctrine is Krell v. Henry,

a 1903 British case.

In Krell, the plaintiff
phoned an apartment along

the parade route on which the coronation
of King Edward VII was to take place.

The defendant rented the apartment
for the two days of the coronation.

The king, however, became ill and
the coronation was postponed.

Not needing the apartment,

Henry left the city.

When Krell sued for the unpaid rental,

the court concluded that
both parties understood that

Henry's only purpose in renting the
apartment was to view the coronation.

The court determined that the cancellation
of the coronation was an event

unforeseen by either party that frustrated
the very purpose of the contract.

Accordingly, it excused Henry from

his performance requirement
to pay the rental fee.