This article is written by Shikha Pokhriyal. This article explains the kinds of contracts based upon the factor they cannot be performed due to impossibility, impracticality or frustration.

It has been published by Rachit Garg.

Introduction

A contract is a bargain between two or more parties that agree upon the terms and conditions of a deal. In our everyday lives, we have to take part in many agreements. An agreement is a meeting of two minds who agree upon to perform some obligation in return for some consideration. This is where the contract comes into place. A contract is an agreement, and it becomes legally enforceable when the business is legal and all the conditions of the agreement are fulfilled. 

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In the course of the performance of a contract, sometimes some situations arise where a contract cannot be performed due to some impossibility or frustration with the contract. In these cases, compensation needs to be provided by the party that is unable to perform the task.

In this article, we will talk about these impossibilities and frustrations that cause hindrances to the performance of the contract.

Agreement and contract: an overview 

An agreement between parties who have like minded ideas about doing any legal  business enters into a contract that highlights the rights and obligations of each party. The essential feature of a contract is consideration, which means one party is performing any service in return for some consideration. The parties to a contract must fulfill all the essential conditions of an agreement in order to constitute a valid contract. 

In the USA, the legislation pertaining to contract law varies from one state to another. In the USA, in order to govern the sale of goods, the Uniform Commercial Code (UCC) is followed. UCC is followed by many states in the USA, as this legislation lays out a framework for the contract laws. This piece of legislation is developed in the interest of business owners, as it helps to meet the demand of the modern world. The states can adopt the entire structure of the UCC  or can amend the structure as per their requirements. Every business owner, especially a foreigner who wants to run a business in any state of the USA, must know the fundamentals of UCC. 

In the USA, contracts are primarily governed by the common law or the precedents laid down by the courts. Some of the important provisions of a contract are information about the parties, rights and duties, duration of the contract, purpose of the contract, termination procedure, indemnity clause, guarantee clause, force majeure clause, jurisdictions, and relevant laws applicable to the parties as per the prevalent laws in the state of the USA.

Agreements that violate any prevailing law of the state, whose subject matter is illegal, or are executed under any threat or fraud are considered void and cannot be enforced.

An agreement is a promise between two or more parties where one party is under an obligation to perform a task highlighted in the agreement in return for consideration. Parties need to fulfill all the necessary conditions in order to enter into an agreement, and for a contract to be legally binding, it needs to follow the conditions. Some of the necessary conditions of a valid contract are explained below: 

Offer and acceptance

For a contract to exist, there must be some offer that is extended by the offeror to the offeree. Then that particular offer, containing all the terms and conditions, must be duly accepted by the offeree. A reasonable time period should be given to the person to whom the offer is extended to accept the offer. After an offer is accepted by the offeree, it can be termed an agreement.

In the case of Lonergan v. Scolnick (1954), the Court of Appeal of California said  that an advertisement in a newspaper is a mere invitation to offer and does not constitute a contract. 

In the case of Hendricks v. Behee (1990), the Missouri Court of Appeals, Southern District, Division Two, observed that in order to form a valid contract, one should communicate the acceptance to the offeror. Without communication and acceptance, a contract cannot exist. Also, in cases of revocation of a contract, it can only be effective if it is communicated to the other party within a reasonable time.

Consent

Consent means wishing to come to an agreement with the other party for some purpose. In order to have a valid contract, all the parties of a contract must give their free consent without any coercion or fraud. Every party to a contract must agree upon the terms and conditions of the contract with a free mind. If later it is revealed that the consent of either of the parties was taken unknowingly or with an intention to fraud them, such a contract shall be void. 

Mutual understanding is very important for a contract to be performed.

In the landmark case of Raffles v. Wichelhaus (1864), it was held that there was no consensus ad idem, therefore a contract cannot be binding on the parties.

Consideration

Consideration can be financial or any other thing that has some value. The basic meaning of consideration is quid pro quo, that means one person performs any task in return for something; basically, all the parties involved in an agreement get something out of it. Consideration is an essential feature of an agreement, as without this feature, an agreement cannot be legally valid. 

For example: Y promises Z to deliver his car in return for the amount quoted by Y and accepted by Z. So the amount that Z will pay to Y in return for getting his car shall be known as consideration. 

In the case of Kirksey v. Kirksey (1845), the the Supreme Court of Alabama stated that only a promise to pay a consideration cannot be legally enforceable. A mere  promise to pay cannot be termed a consideration. So in order for a contract to be binding, there must be a reasonable consideration.

Competent parties

Parties who wish to form a contract must be competent parties. Being competent means that the age of the person should be  major as per the prevalent law, the person should be of a sound mind, and the person should not be prohibited from entering into an agreement by any state legislation. Minors are not allowed to enter into the contract as per the majority of state laws. Also, contracts signed under the influence of threats or coercion are also held void and cannot be legally binding.

In businesses, employees can form a contract on behalf of the company, but the employees who are signing the contract must have the authority to do so.

Legal enforceability   

For a contract to be legally binding, the transaction must be as per the prevalent state laws. The parties to a contract must agree to only perform actions that are in accordance with the legislation where that contract is entered into. An illegal activity cannot be legally enforceable. 

Identification

Identification means knowing all the parties to a contract. The contract must specify the names and addresses of all the involved parties. A contract must contain the names of the parties, the address of their residence or office, and their rights and obligations under the contract.

Breach of contract

When a contract is executed, it comes with terms and conditions that need to be performed by all the parties to the contract. But sometimes there is a situation where the obligations of the contract are not fulfilled. So, breach of contract means violating the terms of the contract or breaking the contract. Anything  that violates the terms of the contract can be termed a breach of contract. This breach of contract depends upon one case to another. For example: delay in payment, a delay in delivering goods or services, or another case as stated in the contract. In cases where a breach occurs when one party is not able to fulfill the terms and conditions of the contract, they have to compensate the other party. If the conditions of the contract are not being followed by the performing party, it can also amount to a breach of contract.

One of the defenses that the obligated party uses to fight off the cases of breach of contract is that they try to prove that the executed contract was not a valid one and was not legally forceable.

Remedies for violation of contract 

When an obligated party is not able to fulfill their end of the bargain in accordance with the terms of the contract, a breach occurs. The party against whom such a breach occurs can sue the other party for claiming compensation or damages. At the time of drafting the contract, it is important to draft the clauses of breach and force majeure very carefully. Following are the remedies that one can claim in cases of breach of the contract:

Damages

Damages are awarded in cases where a breach of the contract occurs. When an obligated party is not able to perform as per the contract, they have to pay the damages according to the clauses to the other party due to the non performance. The whole concept of damages is to make sure that the other party who was expecting the performance of the contract should not suffer financially, and damages help them to restore their original position. The calculation of compensatory damages is calculated based on the losses the other party has suffered due to non performance of the contract. The remedy of damages can be categorized into these kind of damages: compensatory, liquidated, nominal and punitive 

Specific performance

Under this remedy, an obligated party has to perform their end of the bargain in the case of breach of the contract. This remedy is used when the monetary compensation is not enough or the terms and conditions of the contract are unique in nature. In the state of New York, the courts order the specific performance of contracts in the following cases:

  • The contract in question must adhere to all essential conditions of a valid contract.
  • The court has a valid reason to believe that the plaintiff can perform their end of the bargain or has already performed.
  • The performing party, the defendant, can perform their obligations mentioned in the contract but is not doing so.
  • The most important feature of specific performance is that monetary compensation is not sufficient.

Injunction

The term injunction can be defined as the order or instruction of the court that prohibits a person from performing a certain specific action. Injunctions can be categorized into two kinds: permanent injunctions and temporary injunctions.

  • Temporary injunction: A temporary injunction is an interim relief granted by the court until the final judgment is delivered by the court. The court temporarily prohibits one party from taking any action regarding the subject matter. This action of the court aims to protect the subject matter of the contract from getting destroyed, sold or harmed in any way by the other party. This injunction is granted for a limited time while the court proceedings are going on.
  • Permanent injunction: This type of injunction is also known as perpetual injunction. A permanent injunction is the relief that is delivered by the court at the end, where the court permanently prohibits or restrains another party from committing any action concerning the subject matter of the contract.

What do you mean by impossibility of contract

Doctrine of impossibility 

The doctrine of impossibility is a defense that protects the promisor when they are not able to deliver the services or goods that were expected from them in accordance with a contract due to the occurrence of any unforeseeable event. First time doctrine of impossibility in a contract law was discussed in the case of Taylor v. Caldwell (1863), where a music hall was burned down before the night of the music concert. It was held that when the terms and conditions of a contract are dependent upon the existing person or thing, and if the existing person or thing is dead or destroyed due to some natural cause or unreasonable explanation, then relief must be granted to the promisor. 

The word ‘impossibility’ can be defined as a situation that makes the performance of the terms and conditions of a contract difficult or impossible. Non-performance of a contract due to some situation that was not foreseeable by the party who was supposed to perform the task is often excused from paying compensation to the party who suffered the loss. The impossibility to perform a contract is a defense against the non-performance of the contract. 

For example: during the coronavirus pandemic, many parties were unable to perform the contract. This event of the pandemic was unforeseeable and was out of the hands of any person; therefore, this acted as a defense for the impossibility of a contract. There are two features of impossibility: one is unforeseenability, and the second is supervening nature. 

In the case of impossibility, the parties must not contemplate the situation that made the parties incapable of performing the contract. In order to claim this defense, every party must apply all the necessary resources in order to prevent such an event from happening.

The laws pertaining to the case of the impossibility of performing a contract vary from one state to another. But some of the essentials that the courts consider in the case of the impossible performance of a contract are:

  • Death of the party or any health disability that does not allow the party to perform the duty mentioned in the contract.
  • Destruction of any item or goods that formed a part of the transaction of the contract where the defaulting party had no fault and there exists no reasonable justification
  • After finalizing the contract in accordance with the current legislation, a new piece of law is enacted or any amendments are added to the current law that make the contract void or illegal. 
  • There has been an economic crisis or announcement of war. 

The impossibility to perform a contract causes losses to both the parties, but this kind of situation is often not in the hands of the parties. In the business world, the balance of payment is disturbed if either of the parties is not able to perform their duties as per the contract. In the USA, though every state has its own laws on non-performance of contract, they do follow the basic structure of Uniform  Commercial Code.

In many states of the USA, the courts consider a situation impossible when there is an unforeseeable supervening situation that hinders the performance of the contract. Below are some judicial interpretations in the following states of the USA of the impossibility to perform a contract. 

Massachusetts

In the state of Massachusetts, a situation of impossibility to perform a contract arises when  the basic principle of that contract does not exist without the fault of any party.

As per the courts of Massachusetts, the doctrine of impossibility is applied when a supervening event occurs and hinders the performance of the performing party. The courts here apply the doctrine of impossibility with the doctrine of frustration; as per them, they go hand in hand. 

Also, as per the laws prevailing in the state of Massachusetts, a party to a contract cannot claim the defense of the doctrine of impossibility whenever a government imposes a ban upon the purpose of the contract. 

California

As per the California Civil Code, no person can be held liable for an act that he has no control over. When any alarming or triggering situation arises, the performing party can be excused from paying compensation to the other party. The California courts, in order to apply the doctrine of impossibility, considers the following conditions enumerated below: 

  • The present situation that is causing impossibility to perform the contract should not have been foreseen at the time of entering into the contract and should not fall within the ambit of force majeure (that is, an act of god) clause of the contract.
  • The parties who wanted to claim the benefit of impossibility should show that they took genuine and sufficient measures to prevent the situation that is causing impossibility of the performance of the contract. 

In the case of Autry v. Republic Productions (1947), the Court observed that in order to constitute the doctrine of impossibility, it has to understand that impossibility does not mean not being able to perform but also includes severe loss, injury or difficulty to the performing party. In the present case, the plaintiff was allowed to use the defense of impossibility as the contract was affected by economic changes. 

Impracticability of contract

The doctrine of impracticability is used as a relief when one party breaches the terms and conditions of a contract. Impracticability can be defined as situations that are very unusual, and either of the parties have anticipated those situations while entering into an agreement. 

We can understand the commercial impracticability of a contract, when the performing parties are not able to execute the terms and conditions of the contract due to some unfeasible situations that could not have been anticipated by either of the parties.

The concept of impracticality, or commercial impracticability, can be found in the UCC. The provisions in this legislation that deal with the sale of goods provide for the impracticality of a contract. 

Universal Commercial Code: doctrine of impracticability 

The UCC is a very elaborative piece of legislation that governs commercial transactions between the parties to a contract  in the USA. UCC is not considered a federal law but is followed by each state of the USA to govern commercial transactions. This law is also known as “the backbone of American commerce”.

In Article 2 of the UCC, the sale of goods is provided, wherein impracticality of contract is also given. Under Article 2-615 of the UCC, the doctrine of impracticability is provided “excuse by failure of presupposed conditions.” Under this provision, a seller can claim an excuse for the non-performance of the contract or delivery of the goods on the following points:

  • At the time of executing the contract, there was no assumption that a contingency situation might arise in the future that would make the delivery of the goods or performance of the contract impracticable. 
  • At the time of executing the contracts, the parties in good faith complied with all the foreign and domestic regulations that were in place, and in future, they were declared invalid.

As per USA legislation, the non performance of the contract can only be excused under the doctrine of impracticability if the conditions are extreme and out of the hands of the parties. The mere rise and fall of commodity prices cannot be excused as a reason for non-performance until it shakes the whole economy and causes tremendous stress to the economy. The provisions under the UCC state that the seller should always give their best to fulfill the terms and conditions of the contract. The sellers, if they are not fully affected by any impracticability, must perform a part of the contract or deliver as much as they can. The sellers under the UCC are under an obligation to inform the other party regarding the late delivery or no delivery of the commodities. A notice should be given to the other party, who will suffer the loss due to seller

The whole concept of the doctrine of impracticability is based on the following conditions:

  • There must be a contingency situation. 
  • Such situation has not been assumed at the time of executing the contract in question and 
  • Due to the occurrence of such contingency situation, the obligated party is not able to fulfill the conditions of the contract. 

In the case of Dillon v. United States (2010), the US Supreme Court said that failure to provide crop due to the damage cannot be included under the situation of impracticability based upon the fact that the seller needed to procure the goods at the increased price. The Court said this situation of the seller not being able to provide fell within the parameters of lack of sources rather than the impracticability of the situation.  

Restatement (Second) of Contract 

The Restatement contains several regulations and treaties that govern various areas of law like contract law. These are created for the courts to understand the common law through judicial precedents and statutes from different jurisdictions in the country. These are known as secondary sources. In the USA, the doctrine of impracticability is governed by the Restatement (Second) of Contract. Under the Restatement (Second) of Contracts, Section 261 deals with the concept of impracticability. Under this provision, a contract can be rendered as impracticable to perform in the following situations:

  • Contingency: There must exist an unforeseeable contingency that does not allow the obligated party to perform their duties.
  • Risk: There must be a risk to the obligated party if they try to perform the obligations
  • Supervening event: Due to occurrence of a contingent situation or any supervening event that creates a risk or tremendous stress upon the performing party, such party can be excused from performing the obligations of the contract and can be excused under the doctrine of impracticability. 

Under both the legislation, the UCC and the Restatements (Second) of Contract, the burden upon the obligated party is whether the specific situation that made the performance of the contract impracticable  was foreseeable or not. Here, the courts need to examine the matter, considering all the facts and circumstances revolving around the contract. 

One of the first cases where UCC’s Section 2-615 was applied was in the Transatlantic Finance Corp. v. United States (1966). In this case, the US Court of Appeals for the District of Columbia Circuit held that the closing of the Suez Canal was a contingent situation that was not known to either of the parties, as the route to deliver the goods was only through the canal. Therefore, non delivery of the goods was given the benefit of an impracticable situation. The obligated party had no other route to deliver the goods. 

In the USA, in the case of a fixed price contract, the obligated party must always assume the risk of an increased price in the future for performing the contract. As the obligated party cannot, at the time of performing the contract, say that prices of the raw materials or the goods increased.  

The legislation of the USA, while explaining the doctrine of impracticability, does not clearly define unforeseeable situations or any supervening event. 

Frustration of contract

The doctrine of frustration is based on the principle of absolute liability, which is an essential condition of the contract. The basic principle of a contract is that it binds the parties legally, and they are under an obligation legally to perform the conditions of the contract. If either of the parties breaches the terms and conditions of the contract, they are under an obligation to compensate the other party that suffered the losses. But as the commercial world grew, this approach to compensation was supported with exceptions to excuse the breacher for non-performance of the contract.

One of the remedies that an obligated party can use is the doctrine of frustration. Frustration of contracts can be understood as the concept where the terms and conditions of the contract become impossible to perform, which, as a result, makes the whole contract void. The doctrine of frustration of contracts is applied when the contract is rendered void or the performance of the contract is absurd or financially not worth it. In the USA, the laws regarding the applicability of this doctrine of frustration become complicated as every state has its own set of regulations.

The doctrine of frustration can only be applied when any intervening event or situation under which the performance of the contract was supposed to be taken changes, as the contract is a legally binding document and neither party can change or skip the performance of the same as per their convenience. In order to invoke this doctrine of frustration, only proving different situations or circumstances is not enough; one needs to show that if the contract is performed, that would change the entire meaning of the terms and conditions that were originally entered into. Commercial frustration of contracts may arise in the following enumerated situations:

  • The whole idea of the contract is changed or exhausted
  • The situation hindering the performance of the contract must be unforeseeable at the time of executing the contract 
  • The supervening event must be not be because of any mistake by the obligated party who is asking for relief
  • The economic value of the contract is not a consideration for the party, even though performance of terms and conditions of the contract is possible. This means the contract is worthless in monetary terms for the person for whom that service was supposed to be performed. 

In the case of Wal-Mart Stores, Inc. v. AIG Life Insurance Co. (2006), Walmart purchased life insurance policies in order to avail of the tax concessions. But after a while, the USA prohibited tax benefits from the policies; therefore, Walmart claimed a doctrine of frustration by stating that the whole purpose of the contract had been changed due to the amendment. The Delaware Court, in this case, observed that while taking the life insurance policies, Walmart assumed that the tax deduction would be allowed in the interest of its employees. Therefore, after the amendment, Walmart was not allowed to claim the doctrine of frustration.

Under the scope of frustration, mutual mistake events are included, like where the value or the terms and conditions of the contract are drastically lost for the buyer. Therefore, in these types of cases, the buyer proves that, due to some present changes, the goods or services outlined in the contract do not serve a purpose. 

Another unexpected circumstance where the doctrine of frustration can be applied is in situations where the manufacturer or seller is impacted by the increased prices of production that further affect the market. In these kinds of cases, both parties get mutually affected by the conditions as the cost of performing the contract increases, thereby increasing the amount of money that the buyer or consumer has to pay for it. This kind of inflation of prices due to any economic or supervening situation affecting both parties creates a difference between the existing market price and the contract price, thereby crossing the terms and conditions of the existing contract. 

The doctrine of frustration was first applied as an excuse for non-performance in the case of Krell v. Henry (1903). In this case, Henry rented an apartment from the Krell to see the coronation of the King of England, as the apartment provided the best view. But on the day of the coronation, the king got ill, and the whole event was canceled. Here, the court, excused Henry from paying the rent to the Krell as per the contract by stating that while executing the contract, both parties had not foreseen that the event would be canceled, and the whole purpose of the contract had changed with it thereby frustrating the whole idea of the contract. 

In the USA, the doctrine of frustration is also provided in the Restatement Second of Contracts under Section 265. This provision focuses on situations where a contract is frustrated and parties can claim the benefit under this doctrine:

  • After executing the terms and conditions of the contract, the principal purpose of the contract has been changed, thereby frustrating the whole contract
  • The change must not be fault of either of the parties
  • Even if there is a chance to perform the contract, the value of the contract is diminished or exhausted due to occurrence of an unforeseeable situation.

In order for the courts to apply this doctrine, the “two part test” must be applied. The court stated that this test must be followed in a strict sense to determine whether the parties are entitled to get the benefit of the frustration of the contract. In order to pass this test, the parties must show two things: one, an event that made the contract frustrating must not have been anticipated by the parties to a contract, and the second is that due to this event, the value of the contract has been diminished or completely rendered the contract worthless. 

Frustration of contract and force majeure 

The concept of force majeure can also be known as an act of god that is beyond the expectations of any human. These situations are not in the control of any human being. So in order to manage the risks that are beyond the understanding of any human being, every commercial contract includes the clause of force majeure. Some of the essentials of force majeure include:

  • Occurrence of any situation that makes performance of the contract very difficult. 
  • Such an event must not have been expected by anyone.
  • The two essentials of such an event are unforeseeability and unpredictability. 
  • There is an occurrence of any supervening event 
  • The party claiming the benefit of this clause must take all the necessary steps to minimize the losses of the other party.

The principle of frustration of contract originated in Roman contract law. Here, the debtors were excluded from performing the contract due to occurrence of events that were out of their hands. The doctrine of frustration comes into picture when the contract does not include the clause of force majeure. 

The principle of frustration of contract allows the party to claim non-performance upon the happening of any event that is beyond their control. The doctrine of frustration can only be applied when there are impossible situations in which the parties are not able to perform the contract. Another situation where the doctrine of frustration can be invoked is when the terms and conditions of the contract entered into are completely changed and the whole purpose of the contract is changed. The events that cause the non-performance of the contract due to frustration shall not have been foreseen by either of the parties. Alterations in the situations concerning the subject matter of the contract cannot provide entitlement to the obligated parties to use the doctrine of frustration. 

The fundamental risk allocation 

A contract can be breached when the obligated party does not perform the task they are obligated to do. This breach can be caused by some risk that prevented the party from executing their end of the deal. Parties to a contract cannot assume all the risks that might occur in the future affecting their terms and conditions of the contract; therefore, all the parties to the contract must take all the necessary steps to prevent such risks that hinder the performance of the contract.

Some of the common examples of risks are weather conditions, financial conditions, health conditions, cost errors or scheduling errors, or any kind of natural disaster that is beyond the hands of any human being. Depending on the nature of the contract, there are also some specific risks to the terms and conditions of the contract.

The whole idea behind the concept of a construction contract is to allocate the specific risks to which that contract is affected and also provide consultation on how to prevent such risks from hindering its performance. Risk allocation is important for all types of commercial contracts, as every party wants to earn maximum profits and minimize the risks associated with the contract. One of the key features to minimize the risk is drafting and negotiating the terms and conditions of the contract.

Some of the important clauses that are used in commercial contracts in order to manage the risks associated with it are enumerated below: 

Indemnification

The basic definition of indemnification is to compensate for a loss or injury. In commercial contracts, an indemnification clause plays a major role as it states that one party, known as the indemnifying party, shall compensate the other party, known as the indemnified party, for specific losses and expenses from the other party. The indemnity clause helps to reduce the chances of dragging the issue to court as the obligations are stated clearly in the contract. The provision of indemnification includes factors like, who is the eligible party to claim compensation; under this, what kind of claims can be covered; if there are any exceptions; and the time period of the obligation to indemnify. 

Some of the exceptions to indemnification are:

  • Carelessness or negligent action performed by the indemnified party
  • Not using the products or services as instructed
  • The indemnified party did not comply with the obligations mentioned in the contract.

Guarantees and warranties

The provision of a guarantee and warranty is always provided in commercial agreements or with the goods that one purchases. This clause shifts all the liability to the manufacturer or seller of the product. If the maker represents the product in one way and it does not perform like that, then a direct claim can be instituted against the manufacturer and seller of the product. Therefore, under these provisions, the whole risk is managed by the manufacturer or the seller. The concept of warranty is also covered by the UCC, which divides the warranty into two parts: direct and indirect. The most common example of a warranty is purchasing an electronic item where the warranty is applicable for up to one year from the date of purchase. 

Limitation of liability 

The provision of limitation of liability states that one party shall be obligated to compensate the other party upon the happening of an event mentioned in the contract. This kind of clause defines the scope of the rights and obligations of all the parties in a strict sense. This kind of liability can be applied as per the terms of the agreement. It can be applied to the whole contract, a part of the contract, any individual transaction or can be applied upon all the parties to a contract. 

Force majeure

This clause of force majeure gained importance after the outbreak of COVID-19. The force majeure clause allows the non performance of the contract upon the occurrence of any unforeseeable situation that makes the performing party incapable of delivering its services or goods. Both the parties, the obligors and the obligees, should know the scope of this clause. The obligors must know that if they are taking the risk of non-performance of the contract, that event must be covered under the force majeure clause to avail its benefit. The obligee must know what events are to be included under the purview of this clause so that they can understand the non performance of the contract by the obligor before filing any legal action. 

Default rule review

The concept of the default rule was enacted to help the parties to a contract in case of any irregularity when the legislation does not provide specific laws for the irregularity. The concept of the default rule was formulated by the common law that was developed by the courts in order to fill in the gaps or irregularities in terms of commercial contracts. In the USA, the default rules were drafted by the two lawmaking bodies, the American Law Institute and the National Conference of the Commission on Uniform State Law. 

Earlier, there were no remedies for breach or non-performance of contract, and the only solution to these were the claims for debt. So as the industrial revolution happened, the courts realized that there might be irregularities in the performance of the contract. Though the drafters of default review were not able to implement the rules efficiently in a standard manner, in the practical world of business, the parties to a contract try to manage the risk associated with a contract. But there are times when unforeseeable events happen that cause the non-performance of the contract. Even after every effort, every contract remains incomplete, therefore creating irregularities between the contract’s direct and indirect provisions. When parties are not able to judge the contingent events that cause irregularity, then the default rules can be applied in order to utilize the profit jointly.

The default rule was implemented to protect the interests of the parties to a contract where there are no legal provisions available to deal with the issue. But still, the default rule, being the supplementary rule, was not able to provide assistance to the contracts.

  • The default rules were not as elaborate as they should have been, as they do provide assistance in efficiently fulfilling the irregularities of the contracts.
  • The rules are very normative in nature, as they do not propose solutions to the problems but, in return, provide default standards.
  • The institution of common law is more flexible than the private institutions; therefore, they are more capable of making laws that would be accepted by the parties to a contract.

American contract regulations are a blend of common law and dispute resolution laws. The default rules originated in the common courts and included offer and acceptance, terms and conditions, impossibility of performance, damages, foreseeability and uncertainty.

Default implied risk terms

The common meaning of an implied term of the contract is that it includes those terms and conditions of the contract that are not mentioned in the contract but both parties have a fair idea about it. While executing a contract, parties negotiate the risks associated with the contract, and in accordance with that, they draft the contract. But no contract can ever be complete, as neither of the parties to a contract can predict future markets and situations. Therefore, the risk of non-performance of the mentioned terms and conditions is always there. Implied terms of the contract are beneficial for both parties, as at the time of lack of drafting or unclear events, implied terms fill the gap between any irregularities. This feature of implied contracts helps to reduce litigation and facilitate quick dispute resolution, thereby saving time and money for the parties involved in a contract. 

Though there are a number of benefits to the implied conditions of a contract, they can only be useful when the parties trust each other and have an understanding. The implied conditions of a contract can create uncertainty and contradict the terms of the contract, giving rise to bigger problems. The courts have to consider many points while taking into consideration the implied terms and conditions of the contract, like communication, agreement, rules and regulations.

In order for the default rules to be effective, institutions need to contribute to the same. The default rules were enacted to fill in the gaps between the contracting parties and the legislation.

Impracticability versus impossibility 

The parties, once they sign the contract, are legally bound to perform the terms and conditions of the contract. The doctrine of impracticability and impossibility gives the performing party relief from paying compensation for non-performance of a contract due to some supervening event that was out of their hands.

Relief from impossibility can be claimed in the following situations:

  • The subject matter of the contract is declared illegal after execution of the contract.
  • The subject matter of the contract gets damaged by any situation that is out of control of either of the parties.
  • The parties to a contract are not capable enough to fulfill the conditions of the contract due to any health disability or death.
  • The performance of the contract is hindered by natural disaster or act of God.
  • If the performance of the contract takes place, it would cause injury or loss to the other party.

The relief of impossibility can only be availed when either of the parties has not anticipated the risk or event that hindered the performance. Even after non-performance, the obligated party can be held liable to pay the damages to the other party if the contract specifically states the risks due to which non-performance occurred.

For example: Sam and Cam decided to enter into a contract where Sam was under an obligation to sell his mobile phone to Cam. In that contract, it was expressly mentioned that before the sale, all the costs of the malfunction of the electronic item would be handled by Sam. So at the time of sale, Cam finds some faults in the phone, so therefore Sam is under an obligation to pay for the damages as this risk was already contemplated by the parties to a contract.

The principle of impracticability can be claimed for the non-performance of a contract when a situation that was not anticipated by either of the parties arises, making it difficult for the parties to perform and causing loss to the parties. 

The key difference between impracticability and impossibility is that in the case of impracticability, the performance of a contract can be done to some extent, though the result of such performance shall result in some expense or loss.

Under this principle, obligated parties can get relief if it is shown that non-performance of the contract was not their fault.

For example: Sam and Cam entered into an agreement where Sam was under an obligation to provide some raw materials of cloths to Cam. After the execution of the said agreement, the government increased the tax on the cloths. This tax increased the cost of performance as the whole structure of the market rate was changed. At the time of execution of the contract, the parties could not anticipate that the government would increase the taxes on the said raw material. Here, Sam can provide cloths to Cam, but this performance of contract shall result in loss to both parties. So here, the benefit of non-performance can be given to Sam to prevent financial burdens on both parties due to some governmental change.

In the times of COVID-19, both principles were applied to give benefit to the obligated parties, as neither of them could have anticipated a situation like the coronavirus that made it impossible as well as impracticable for the parties to perform their terms and conditions as per the contract. Due to the pandemic, all the parties of contract were unable to perform the contract as the party delivering the goods did not have enough supply and the party who was supposed to pay for the goods did not have that much capital to pay.

Frustration versus impracticability

The principle of impracticability or impossibility gives immunity to the party breaching the contract if it is shown that, due to some unforeseeable situation, the party was not able to perform their end of the bargain. The concept of impracticability is recognised under the UCC. The courts can grant the principle of impracticability in cases of damage to the subject matter, death or any physical disability or change in the relevant laws.

During the time of COVID-19, many parties to a contract claimed the benefit of the impossibility doctrine. The cases where the obligated party was excused for non-performance of contract under this principle included a shortage of raw materials because of the nationwide lockdown, transportation and supply of raw materials were affected; no one was allowed to meet anybody as there was a fear of COVID infection; and hotels were not able to organize events that were promised to other parties due to the shutdown.

The laws governing the legislation pertaining to the doctrine of impracticability vary from one state to another. Some of the states in the USA do not allow the application of the doctrine of impracticability where there already exists a clause of force majeure. 

Frustration of contracts happens when there is an occurrence of events that make the performance of contracts very difficult, resulting in frustrating the subject matter of contracts. For this doctrine to be applicable, there must be a legally binding contract between the parties, and the performance of the contract is affected by conditions that are out of the hands of the party. The principle of frustration is applicable to the performance of the whole contract and not one single transaction, unlike in cases of impracticability. Under the principle of impracticability, the part performance of a contract is still possible.

In order to invoke the benefit of these doctrines of impossibility,impracticability or frustration, it is necessary to prove that certain events that led to non-performance were out of the hands of the performing party.

There are two essentials of every principle that save the party from non-performance:

  • Impact on subject matter: The parties have to show that the certain supervening event is concerned with the subject matter of the whole contract or certain terms and conditions of the contract.  Relief for non-performance can only be granted when the impact of such an impossible condition is huge on the terms and conditions of the contract.
  • Risk factor and management: When the parties enter into a contract, they cannot foresee all the risks associated with the contract. But the parties must take all the necessary steps in order to minimize the risks and manage the contract in an efficient way. The courts will only allow the non performance of a contract if they are satisfied that the performing party wanted to perform the contract, and for that, they took all the precautions and steps as much as possible. The courts need to know that the obligated party was genuinely out of options and not just seeking these remedies to skip their part of obligation mentioned in the contract.

Case laws

Mel Frank Tool & Supply v. Di-Chem (1975)

Facts

In this case, Di Chem deals with the chemicals, and Mel Frank leases the storage facilities. Both companies were in communication when Di Chem wanted to rent a storage facility from Mel Frank. The whole transaction was handled by the agents of both the parties. The lease was executed in the name of Di Chem, leasing the store to them for “storage and distribution”. During the time when Di Chem was storing their chemicals in the premises, an audit was conducted by the state authorities, and it was found that Di Chem was storing hazardous chemicals in the premises, which they were not allowed to do. The Di Chem was also in violation of the city code, like fire sprinklers, exhaust systems and other systems that should be maintained by the tenant. The Di Chem notified Mel Frank of their intention to vacate the premises as they would not be able to comply with the state’s regulations.

Mel Frank sued Di Chem for violating the terms and conditions of the lease and for damage that was caused by the defendant to the premises. In order to avoid the case, Di Chem used many defenses, like mutual consent, the contract being illegal, and fraud. 

The court of the lower district, in response to this, stated that it was very unlikely for Mel Frank to know that Di Chem was using their premises for storing the hazardous chemicals that were prohibited by the city officials.

Issue

Can a contract be rescinded under the principle of frustration, when only part of the whole contract was interrupted by the supervening events?

Observations

  • The Supreme Court upheld the decision given by the lower court. The Court said that the doctrine of frustration and impossibility can only be applied when a contract is executed with a specific subject matter in mind. 
  • Here, the lease was violated by the defendants by storing the hazardous chemicals and also by not making the payment for the lease as per the conditions of the contract.
  • The courts here stated that the plaintiff did not know anything about the storage of hazardous chemicals in the premises, that allowed the courts to reject the appeal of the defendant in order to claim the benefit of the doctrine of frustration for non-payment of the amount due to the plaintiff.  

Transatlantic Financing Corp. v. U.S. (1966)

Facts

In this case, Transatlantic Financing Corporation filed the claim against the United States of America, as they asked their voyage charter to take the long route. The shorter route for voyage was through the Suez Canal, but at that time the route of the Suez Canal was blocked and obstructed. Due to this, the plaintiff was compelled to take the long route, that added to the additional cost of transportation. Therefore, the plaintiff requested the USA Department of Agriculture compensate him for the expenses he had incurred. The only route to pass the goods was through the Suez Canal. But due to the occurrence of supervening events in the Suez Canal, it became impossible for them to perform this task.

Issues

The issues that arose in this case was:

  • Whether the doctrine of impossibility can be made applicable to the task performed by the plaintiff? 
  • Can the plaintiff claim the additional expenses for the longer route that they took in order to perform the obligations of the contract?

Observations

The Court in this case observed the following:

  • As per the legal point of view, a thing can be considered impossible if it is not practicable and what makes a thing impracticable is the cost that has been invested to perform the obligations of the contract.
  • In this case, the Appellant emphasized two points: first, the purpose of renting the premises was to store their chemicals; this purpose was frustrated, and the second, the drafting of the lease contract excludes them from paying the rent as in accordance with the terms and conditions of the contract. 
  • The Court, while analyzing the applicability of the doctrine of impossibility, focuses on three points that make the claim of impossibility weak. The Court reasonably applies three points in order to understand the contingent situation that changed the whole course of the contract; first is an unforeseeable situation that was not expected by either of the parties; second, the risk that made the task impossible must not have been covered in the contract or by any custom; and third is the contingent situation made the performance of the contract impossible. 
  • The courts, while deciding this case, stated that in this situation there was a contingent situation. It was obvious for the plaintiff’s that, as the contract did not provide for the route that was to be taken for the delivery, the usual and shorter route will be preferred, that was passing through Suez Canal. But at the time of delivery, the usual route was closed making it impossible for the plaintiff’s to deliver the goods. 
  • In this situation, using the longer route raises the problem, as more money was invested into it rendering the performance impracticable. The contract in this case, does not specify any route that is to be used nowhere in the contract it is stated that the goods must pass through Suez Canal or route related to Suez Canal.
  • In this case, the plaintiff’s crew and the goods were in a fit position and there was no harm to them. Therefore, the performance of the contract here was not rendered impracticable as significant increase in expenses while completing the contract cannot be the only condition to avail the benefit of the doctrine. The plaintiff is the professional, he knows the best alternative routes and risks associated while delivering the goods therefore he was in the good position to get the insurance for the same. 
  • Here the court stated that the attempt of the plaintiff to cast the entire burden of the occurrence of an event on one party for the profit was not acceptable. Whenever there is no fault and impracticability occurs, the courts always try to find equitable solutions for both the parties. 

Dorn v. Goetz (1948)

Facts

In the case, the plaintiffs decided to sell their house to the defendants, as they bought a new land upon which they wanted to construct their new home. Regarding this sale, a contract was executed between the parties. After the execution of the contract, the president approved the Veterans Emergency Housing Act of 1946, which prevented the plaintiff’s from building their new home. 

The courts found that the plaintiffs were not able to start the construction of their new home at the time they wanted to. These new regulations stated that the first preference for the construction of houses will be given to veterans. Whatever raw materials their houses will need shall be treated as first priority, thereby delaying the projects of the general public.

Due to these conditions, the plaintiff pleaded that the contract must be canceled, as the whole purpose of the contract was that the plaintiff’s desire to build the new home due to which they wanted to sell their current home, was frustrated when the government introduced new regulations.

Issue

Whether the plaintiff has the right to claim the doctrine of frustration as due to governmental regulation he was not able to continue with building his dream house?

Observations

  • As per Williston, frustration of commercial contract can be defined as performance of a contract being possible, but after the performance, the whole value of such contract will be depreciated or will hold no value due to some unforeseeable event not anticipated by either of the parties. 
  • In cases where courts have to determine the applicability of doctrine of frustration, they have to consider the equities revolving around the case in accordance with the legislation and also the unforeseeable event, happening of which was not known to either of the parties, especially the promiser. 
  • In the present case, a contract was executed for the sale of the old home of the plaintiff, and this was the desired objective of this contract. The plaintiff’s claim about the construction of his new home is not mentioned anywhere in the current contract. The whole purpose of the contract between the plaintiff and defendant was regarding the sale of the old house. The only common thing between these two situations was the timing and delivery of the property that would take place. Therefore, if the plaintiff is not able to build his home, it cannot be counted as a frustrated situation because, while determining cases like these, courts have to take into consideration every party.
  • While entering into this kind of contracts, all the parties had an idea that there is a risk of long delivery that could happen due to a shortage of raw materials or labor. Also, the courts implemented the new regulations for the welfare of the veterans, that could be counted as an anticipated delay. These regulations only delayed the plan for construction by almost a year.
  • Therefore, the Court of California stated that the temporary inability to perform the terms and conditions does not affect the whole purpose of the original contract. So the principle of frustration cannot be applied in the present case. The performing party must perform their part of obligation if there is no damage that is caused to another party.

U.S. Trading Corp. v. Newmark G. Co. (1922)

Facts:

This case contains two parts. The first part is where the plaintiff and defendant came to an agreement where the defendant was under an obligation to sell barley to the plaintiff at the specific rate agreed upon by both parties mutually. This delivery was made from California to New Orleans through cars free on board. During the time of delivery, the defendant delivered half of the product and refused to deliver the rest of the product, as he alleged that the market price of the barley and fee on board cars increased.

The second part states that the plaintiff and the defendant came to an agreement where the defendant was under an obligation to sell barley to the plaintiff for a specific price. At the time of delivery, the defendant denied the delivery of the barley to the plaintiff, as he claimed that the market value of the executed contract was less than the existing market price. 

Issue

Can the defendant claim the doctrine of frustration in the above stated two instances?

Observations

  • In this case,the courts stated that it is an obligation of the defendant to supply the barley to the plaintiff on time. It was also observed that, unless the parties are not going against their terms and conditions of the contract, they are under an obligation to submit the irregularities they are facing. 
  • The courts in the present case held that the doctrine of frustration cannot be applied to the facts of the present case, as the embargo concerning this case only suspends the executed contract and does not disqualify the parties from performing their obligations. 
  • In cases of impossibility of performance, the seller who is under an obligation to sell his goods falls at great risk if they are not able to deliver the items. The only way a seller can be excused from performance is upon happening of unforeseen events and supervening conditions that are out of the hands of the seller.
  • In general, the courts make a point by saying that a seller cannot be excused from the performance of the terms and conditions of the contract only depending upon the fact that the routes are closed due to weather conditions or any other conditions unless it is mentioned in the contract or by any other situation, even the fluctuation of market prices, as while executing the contract, the parties must have anticipated this risk that prices of the item of the contract might increase or decrease.

Conclusion

A contract is legally valid when there is consensus among the parties and mutual understanding. Along with these things, clarity on the terms and conditions of the contract is also necessary. If the parties become part of a contract, they are under a legal obligation to perform the tasks mentioned in the contract. There are many situations where a promising party is not able to perform their tasks. If an obligated party is not able to hold their end of the bargain, they have to prove in court that this is due to the interference of events that were out of the hands of the parties. In this article, we dealt with the principles that provide immunity to the parties who are not able to perform the obligations mentioned in the contract. Here, we dealt with three doctrines; impossibility, impracticability and frustration of contracts. All these doctrines help the sellers or the parties who were not able to perform their task due to circumstances that were not anticipated by them or the happening of any natural event. To avail of the benefits of these doctrines, one needs to prove that there was an occurrence of an unforeseeable situation that can cause a natural disaster, death, any kind of disability, or any kinds of risks that were not anticipated. 

All these principles are not the same but different from each other. In the USA, many states recognise the doctrine of frustration, and some states include the doctrine of impossibility in their legislation.

One of the common conditions amongst these principles is that the obligated party must have good faith and sincerity towards the performance of the contract, but they were not able to do so despite taking all the necessary steps. These principles can be understood in terms of the occurrence of the pandemic COVID-19, when the whole world shut down and no one was able to do anything but seek help from these doctrines in order to claim defense from paying the damages as per the contract.

Frequently asked questions

What is the meaning of frustration of a contract?

Frustration of the contract happens when there is an occurrence of any supervening event that makes the performance of the contract impossible. Even if the parties perform their end of the bargain when the subject matter of the contract is frustrated, it would only cause expenses for both parties. 

What is the impossibility and impracticability of the contract?

The impossibility or impracticability is the situation where an obligate party is not able to perform their end of the contract due to situations that are out of the hands of the performing party. The key difference between impracticability and impossibility is that in the case of impracticability, the performance of a contract can be done to some extent, though the result of such performance shall result in some expense or loss.

References

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