Frustration of Contract
In the law of contracts, frustration of purpose is a defense to an action for non-performance based on the occurrence
of an unforeseen event which undermines a party's principal purpose for entering into a contract. Despite frequently arising
as a result of government action, any third party (or even nature) can frustrate a contracting party's primary purpose for
entering into the contract.
Frustration of purpose is often confused with the related doctrine of impossibility, which is closely related. The distinction
between the two is that impossibility concerns the duties specified in the contract, whereas frustration of purpose concerns
the reason a party entered into the contract. For example, say Jane enters into a lease with Bobby because she wants to open
a Chinese-food restaurant. If the government enacts a regulation which makes it illegal to rent the property or if the property
is destroyed, then it is impossible for Bobby to perform the contract. If the government enacts a regulation which makes it
illegal to run a restaurant on the property or people suddenly abandon eating Chinese food, then Jane's primary purpose for
entering into the lease has been frustrated. In the second scenario, the parties could still carry out their obligations under
the contract, but one of them has no longer has a reason to.
The Restatement of Contracts, Second § 265 defines frustration of purpose:
“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.”
A circumstance is not deemed to be a "basic assumption on which the contract is made" unless the change in circumstances
could not have been reasonably foreseen at the time the contract was made. As a result, it is rarely invoked successfully.
Successful invocations usually come in waves during times of substantial tumult, such as after the passage of Prohibition,
when bars and taverns no longer had a reason for their leases, or during major wars, when demand for many consumer goods and
services drops far below normal.
If successfully invoked, the contract is terminated, and the parties are left as they are at the time of the litigation.
The leading case in English law on the subject is the famous 1903 case of Krell v. Henry, which concerned a party who
had rented a room for the purpose of watching the coronation procession of Edward VII. When the king fell ill, the coronation
was indefinitely postponed. The buyer refused to pay for the room; the innkeeper sued for breach of contract and the buyer
counter-sued for the return of his deposit. The court determined that the cancellation of the coronation was unforeseeable
by the parties, and terminated the contract, leaving the parties as they were: the buyer lost his 1/3 deposit and the innkeeper
lost the rest of the rent.
This concept is also called commercial frustration.
Force majeure (French for "greater force") is a common clause in contracts which essentially frees one or both
parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as
war, strike, riot, crime, act of God (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their
obligations under the contract. However, Force Majeure is not intended to excuse negligence or other malfeasance of a party,
as where non-performance is caused by the usual and natural consequences of external forces (e.g., predicted rain stops an
outdoor event), or where the intervening circumstances are specifically contemplated.
Time-critical and other sensitive contracts may be drafted to limit the shield of this clause where a party does not take
reasonable steps (or specific precautions) to prevent or limit the effects of the outside interference, either when they become
likely or when they actually occur. A force majeure may work to excuse all or part of the obligations of one or both parties.
For example, a strike might prevent timely delivery of goods, but not timely payment for the portion delivered. Similarly,
a widespread power outage would not be a force majeure excuse if the contract requires the provision of backup power or other
contingency plans for continuity.