Understanding Mistake, Impracticability, and Frustration in Contract Law

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

2. Mistake vs. Impracticability and Frustration

3. The traditional understanding Formation of Contract Frustration Condition Subsequent Mistake, Condition Precedent Time

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.

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

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

7. Condition Subsequent: After Formation Restatement § 230 “the occurrence of an event is to terminate an obligor’s duty” 7

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

9. The traditional understanding Formation of Contract Frustration Condition Subsequent Mistake, Condition Precedent Time

10. The modern rule blurs the timing question

11. Blurring the timing question • Frustration • Restatement 266(2): Where, at the time a contract is made, a party’s principal purpose is substantially frustrated • Restatement 265: “Where, after a contract is made, a party’s principal purpose is substantially frustrated

12. Blurring the timing question • Impracticability: • Restatement 266(1): Where, at the time a contract is made, a party’s performance under it is impracticable • Restatement 261: “Where, after a contract is made, a party’s performance is made impracticable

13. The Restatement understanding Formation of Contract Impracticability Frustration Mistake Impracticability Frustration Time

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 party’s 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.

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 party’s 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.

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

17. Assumption of risk • 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.

18. Restatement 154: Assumption of Risk • A party bears the risk of mistake when the risk is allocated to him by agreement of the parties, or he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so. 18

19. Assumption of risk • Impracticability § 266(1) Where, at the time a contract is made, a party’s 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.

20. Regret Contingencies • So the choice is between breach and excuse • When should the event give rise to liability by one of the parties?

21. Impracticability: The evolution • From strict liability to impossibility • From impossibility to impracticability

22. From Strict Liability to Impossibility

23. From Strict Liability to Impossibility • Just when is performance impossible? • Paradine • Stees

24. From Strict Liability to Impossibility • Just when is performance impossible? • In other words, never, if the obligation is to make something happen or pay damages if it doesn’t happen

25. An Impossibility Defense SucceedsTaylor v. Caldwell p. 85 Surrey Gardens Music Hall

26. Taylor v. Caldwell • On the program: • 35-40 piece military band • fireworks • a wizard • tight rope performances • Parisian games (?!?)

27. Taylor v. Caldwell • In what sense was performance impossible (as compared to Paradine?)

28. Taylor v. Caldwell • The birth of the frustration doctrine • Personal services contracts • Hyde v. Dean of Windsor on personal obligations (1597) • Restatement 262: If the existence of a particular person is necessary…

29. Taylor v. Caldwell • The birth of the frustration doctrine • Personal services contracts • Contracts for the sale of goods • Rugg v. Minett: Buyer liable if property has passed, but a mistake if property hasn’t passed

30. Taylor v. Caldwell • The birth of the frustration doctrine • Personal services contracts • Contracts for the sale of goods • Risk passes with property (title) at common law, and on delivery under UCC 2-509(3)

31. 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

32. 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? Lord Blackburn

33. Taylor v. Caldwell • Of the fire: • Blackburn: men would say, if it were brought to their minds, that there should be such a condition • Isn’t it just a question of who should insure?

34. Taylor v. Caldwell • What damages were suffered because of the fire?

35. Taylor v. Caldwell • What damages were suffered because of the fire? • Licensor loses license fee of £400 • Licensee loses gross profits less rent

36. Taylor v. Caldwell • What possible allocation of risks can you imagine?

37. Taylor v. Caldwell • What possible allocation of risks can you imagine? • Licensee takes risk and owes Licensor £400 for the license fee: Paradine

38. 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

39. 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

40. Taylor v. Caldwell • What possible allocation of risks can you imagine? • Frustration: neither recovers anything • Why might this be the efficient result?

41. Taylor v. Caldwell • What possible allocation of risks can you imagine? • Frustration: neither recovers anything • If risk falls on licensee, he’s not in a good position to evaluate the risk of fire

42. Taylor v. Caldwell • What possible allocation of risks can you imagine? • Frustration: neither recovers anything • If risk falls on licensor, he’s not in a good position to evaluate licensee’s lost profits

43. Taylor v. Caldwell • Can you distinguish Paradine?

44. Taylor v. Caldwell • Can you distinguish Paradine? • A license? “Nothing however, in our opinion, depends on this.”

45. RNJ Interstate p. 88 • Why a different result?

46. RNJ Interstate p. 88 • Why a different result? • The contractor shall be responsible … until completion and acceptance of the entire work…

47. 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?

48. 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?

49. 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

50. Frustration: Howell v. Coupland at 729 • What was the contract? Lord Coleridge, L.C.J.