>> 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.