Defining Frustration of Purpose
Frustration of purpose refers to a legal doctrine in contract law whereby a contracting party is relieved from the contractual obligations due to a supervening event. Such an event frustrates the learning purpose of the contract. Frustration of purpose should not be confused with other legal concepts like impossibility, frustration and necessity, and force majeure. These doctrines also excuse a contracting party from performing certain obligations but differ from frustration of purpose. For example , while frustration of purpose relieves a party from a contractual obligation when that obligation has as its purpose enabling that party to enjoy a benefit that has been destroyed due to an event, frustration of purpose would not apply to relieve a party from a contractual obligation when the contract’s purpose – here to enjoy a benefit – has not been destroyed.
Tracing the History of Frustration of Purpose
Hindsight shows, as in most legal doctrines, that the law of frustration of purpose has evolved through both legislative enactments and judicial decisions. Some of the earlier decisions governing this principle occurred in the 1800s. One such case occurred in 1863 in Taylor v. Caldwell, 122 Eng. Rep. 309. English property owners intended to rent their music hall to a band with whom they had previously successfully done business, for a series of concerts. But their music hall was ultimately destroyed by a fire before the concert series began. The court held that the owners could not be expected to continue with their part of the contract when the hall was no longer available. Therefore, it found that the performance was legally discharged due to impossibility of performance and no damages were awardable to the band for the owners’ breach of contract.
The courts go to great lengths to distinguish this early decision from later cases to better reflect the evolution of its application and reasoning. To that end, the "impossibility of performance" rule is not primarily applicable to the doctrine of frustration of purpose. Impossibility of performance focuses on the revocation of the ability to perform. The frustration of purpose doctrine is concerned with the effect on a contractual agreement, when the purpose or expected result of the contract fails due to the likelihood that the economic benefits will not be whole. In other words, the heart of the frustration of purpose rule is that performance needed to fulfill the contract may still take place, but the essence of the contract is no longer valid. The famous example of this distinction is the following: A contract to see a rare painting would be discharge by impossibility of performance if the painting were stolen or destroyed, but it would fall under the frustration of purpose doctrine if the painting were simply displayed at a private exhibition to which the contract purchaser was not invited.
Another significant case involving the frustration of purpose rule arose in 1918 in the English case, Fibrosa Spolka Akcyjna v. Fairbairn Lawson Combe Barbour, Ltd., [1943], 2 All E.R. X1V. In this case the applicants sought to buy machinery from the respondents that would be shipped across the ocean from England to Poland. However, in estimating the delivery date, both parties agreed that the shipment could take place after the war once the zone was clear of active Warfare. However, the Eastern European zone, where the applicants intended to use the machinery was no longer accessible to the respondents because adverse weather conditions had closed in. Therefore, the court found that the stampede of the war had rendered the contract to be almost completely frustrated and, therefore, void.
Over the next 60 years, as World War II ripped through Europe, the essential purpose of the frustration of purpose doctrine was redefined as the need to protect the expectations of the parties to an agreement. In the United States, the general rules of contract were codified in 1932 with the publication of the Restatement Second of Contracts. Section 265 of Chapter 16 of the Restatement provided that "where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by an event of the type that the parties contemplated when they made the contract, a court on a request for relief granted excuses them from that duty unless the Language or the circumstances indicate the contrary." Dealing primarily with the principles of frustration of purpose, section 265 continues to represent a critical evolutionary step as the modern face of frustration of purpose doctrine.
Elements Needed to Prove Frustration of Purpose
There are certain legal requirements for the doctrine of frustration of purpose to be trigged. First, the event that frustrated the contract must have substantially frustrated a material purpose of the contract. In other words, you must be able to prove that the purpose of the contract was as such that it is deserving of being discharged by the frustrating event. With this said, the frustrating event need not have totally frustrated the contract, only one of the purposes of the contract.
Second, the frustrating event must occur without fault of either party. Importantly, it doesn’t necessarily mean that the event had to be unforeseeable, or that neither party could have prevented it. Rather, the parties’ faults or the event’s foreseeability will be considered in determining whether it has substantially frustrated the contract.
Third, the frustrating event must have been truly unforeseen in the sense that it was not brought about through human intervention but rather due to extreme natural occurrences. For example, an earthquake that causes a restaurant, the subject of a contract, to be closed is unfortunate but reasonably foreseeable. An act of government, such as a statute invalidating a contract, is not considered to be of an unforeseen kind. For another example, say that a company bids on an air force contract. Part way through the contract proceedings they suffer a severe nuclear reactor accident causing them to lose a significant portion of their labor force, and thus be unable to fulfill the terms of the contract. The accident was unforeseeable, and thus frustration of the contract by the nuclear reactor accident would likely be found.
Ultimately, a court will make a determination as to whether the doctrine of frustration of purpose applies to the given facts of a case. These facts vary widely from case-to-case and often the courts are given substantial discretion in considering such issues.
How Frustration of Purpose Differs from Impossibility
The differences between frustration of purpose and impossibility are subtle but significant. Frustration of purpose typically involves a situation where the performance of the contract becomes substantially frustrated or thwarted by the obstructive action of a third party to or collateral event affecting the contract; by contrast, impossibility involves scenarios where the performance of a contract becomes actually or legally impossible due to the act or event amounting to force majeure.
Frustration of purpose may refer to a situation in which the primary purpose of the contract becomes legally non-existent as a result of relevant government acts such as the taking of land by condemnation resulting in a forfeiture of the leasehold or a building/ lease for commercial purposes.
In Goldberger v. L.M. Rabinowitz Co., 98 A.D.2d 400 (N.Y. 1984), for example, the New York Supreme Court held that the purpose of the lease agreement was frustrated because:
- (1) the lessor did not have the power to lease the premises to the tenant because the government seized it by eminent domain, destroying the tenant’s business;
- (2) the tenant was aware of the leasing limitations prior to execution of the lease but, notwithstanding, sought to avoid the risk through the use of a commitment and indemnity clause in accordance with GOL § 5-322.1; and
- (3) the lessor failed to exercise the defense against obtaining a commitment and indemnity from a title insurance company (see GOL § 5-323) prior to the execution of the lease containing the offending clause.
Impossibility, in turn, may define a situation, for example, where performance of the contract is rendered impossible due to a change in the governing law or an act of a government entity having a direct bearing on the contract. In such a case, the Act of Congress or Action of Government exception under paragraph 13 of the Force Majeure clause would apply.
In S & R Corporation v. Atlas Environmental, Inc., 88 F.3d 414 (6th Cir. 1996), for instance, the U.S. Court of Appeals for the Sixth Circuit ruled that:
- (1) the doctrine of impossibility of performance excuses a promisor whose performance has been made impossible, even by a supervening event which was not caused by either party, from liability for damages resulting from nonperformance;
- (2) the impracticality must be due to occurrences "the causes of which are beyond the realm of reasonable foreseeability and which may fairly be regarded as a basic assumption upon which the contract was made";
- (3) the impossibility must be of a material, not a partial, nature; and
- (4) excuse of a promisor’s performance must not be due to the fault, neglect or carelessness of the promisor.
The Distinction Between Frustration of Purpose and Force Majeure
Frustration of purpose must be distinguished from force majeure because a few courts have incorrectly interpreted it as being synonymous with "force majeure." A force majeure clause deals with the unexpected action of a third party that makes performance of one party’s contractual duties impossible. By contrast, frustration of purpose deals only with an unexpected event that would totally defeat a party’s primary purpose in entering into the contract. Force majeure clauses usually contain specific events for which a party will not be liable for a failure to perform. Frustration of purpose, on the other hand, is a judicially-created doctrine to excuse performance, and a court should only grant relief based upon objective proof that the performance of the contract would frustrate the basic purpose of the contract. Where an unexpected event renders performance impossible, a party could argue that force majeure may excuse the party’s breach of contract.
However, in light of the COVID-19 pandemic, it is more likely that courts will consider the doctrine of frustration rather than a force majeure clause. This is especially true where the dispute is with a private entity, as explained below.
With respect to government contracts, a frustration of purpose defense may be available for prime contractors that have already disclosed their performance difficulties to the contracting officer and have been denied an equitable adjustment (or had their money taken out of the contract) . Indeed, these prime contractors are likely tracing their steps back to CICA and the Contract Disputes Act of 1978, § 10(a)(1)(A)-(D), as well as their Contract Disputes clause, which may already encompass the frustration of purpose doctrine. The challenges, however, will be for prime contractors to establish that they are not at fault in the initial decision-making process and the culpability lies with the cost-reimbursable contract. The frustration of purpose doctrine—whether it will apply and whether it will be an available defense—should be analyzed as an affirmative defense.
Where a prime contractor is in privity with another contractor, the United States Court of Federal Claims has recognized that frustration of purpose may be available as well. To the extent that the contract does not have a force majeure clause, the prime contractor could interpose a frustration of purpose defense. However, if the contract does have a force majeure clause, to the extent it is invoked, the term "force majeure" would trump any argument of frustration of purpose. Any argument that the doctrine of frustration applies would, therefore, depend on a court’s willingness to limit the scope of the term "force majeure" under the circumstances.
Court Cases that Illustrate Frustration of Purpose
Leading cases in the United States demonstrating frustration of purpose and its exceptions include:
- Lloyd v. Murphy, 25 Cal.2d 54 (1944): This case involved the frustration of purpose doctrine based on the defendant’s invasion of Japanese-controlled China. The issue was whether the defendant could close its showroom and terminate a leasing agreement with the plaintiff based on the Japanese invasion and the resulting U.S. embargo against Japan. The court found that the U.S. embargo effectively frustrated the plaintiff’s purpose; thus, the defendant was relieved from its obligations under the contract.
- Jordan v. Talaga, 157 A.2d 144 (Conn. 1960): Here, the Yale football team was denied entry into the game at Harvard Stadium because the stadium’s seating plan violated building codes. The court held that the plaintiff could not recover damages in this case for breach of contract because the performance of the contract had become impossible based on the stadium’s inability to accommodate the audience in a manner that complied with the building codes.
- United States v. Wegematic Corp., 360 F.2d 674 (2nd Cir. 1966): The plaintiff in this case relied on frustration of purpose to avoid its license agreement after a new tax law required it to pay additional taxes on imports from other countries. The court quickly disposed of the argument, holding that the agreement lacked a time limitation and, therefore, the federal government must allow the defendant to take 30 days in which to determine whether the law would be continued, rescinded or expire under its own terms. Because the licensee had a contractual right to suspend Eximbank Import and Export Licenses, its purpose for entering into the license did not frustrate the purpose of the contract.
- La Salle Extension University v. Ky. Unemployment Ins. Comm’n, 872 S.W.2d 75 (Ky. Ct. App. 1994): In this case, the plaintiff was attempting to avoid its obligations under an education contract with the defendant, an unemployment insurance program, under a theory of frustration of purpose. The plaintiff argued that the defendant’s failure to obtain licensure and subsequent notice of said failure essentially preempted all of its advertising efforts. The court held that the defendant was liable to the plaintiff for damages incurred as a result of its inability to obtain licenses in Florida, Texas and North Carolina.
Practical Uses of Frustration of Purpose
In order to prevent litigation over frustration of purpose, the parties may want to include additional clauses in their contract giving rise to implied conditions and/or limiting their obligation to pay, as well as eliminating frustration of purpose altogether.
First, the parties may want to include an implied condition in their contract, such as an implied condition precedent. This is done through language and will require the court to imply a condition into the contract (this approach is not favored by most courts). An example of an implied condition in a contract can be the following: "The parties agree that the payment obligation does not arise unless the item is delivered free of defect." If the condition is not met, then the party is relieved from its payment obligation and the other party will have to sue for breach of contract.
The parties can also eliminate the risk of frustration of purpose down the line by having the party that might be at risk of frustration of purpose provide some form of insurance. For instance, the contract can have a clause that requires insurance or security for either party’s performance of the contract.
Additionally, if one party expects to be frustrated after a certain point but wants to preserve the transaction behind the contract, it can have a rescission clause. The parties can agree that the contract terminates upon the occurrence of a certain event, making the party who clearly cannot perform her obligations "whole" (i.e., gets her money back).
The parties may also want to consider having a force majeure clause, which will likely contain a list of events that both parties agree will "relieve" them of their obligations under the contract if the event occurs (so that there are no surprises!). However, if the force majeure clause is not sufficiently clear in defining events, then it could be voided or ineffective by a court.
Alternatively, the parties can agree to a pre-written excuse clause, which lists out certain events that will excuse performance and means that performance will be delayed. For example, contracts can list out events that might make performance impossible (for instance, a natural disaster), which would allow the party to fulfill its obligations at a later date or with an extension to accommodate the other party’s inability to perform.
Another example of a type of limiting clause is a limitation of liability clause that limits a party’s liabilities in the event of a breach. This is important because it warrants the party’s breach, which would be otherwise excused because of frustration of purpose. Limitations of liability clauses can also limit damages when there is an excused breach. To be clear, these clauses do not list out any events; instead, they list out the effects of events that, under the normal rules of contract law, would be considered frustrating circumstances.
It’s important that the limiting clauses discussed above are drafted carefully so that the parties know how to avoid frustration of purpose and each party’s obligations under the contract. Consider the following example: "The parties understand and agree that, in the event of a natural disaster, each party will be excused from its obligations under this contract until either party is able to perform such obligations." This clause is clear. Each party is on notice that, if a natural disaster occurs, then the party does not have to uphold her end of the bargain for as long as the disaster affects the contract.
Finally, the parties may agree that the breach of a warranty will be excused with respect to damage to property. Remember that a breach cannot be excused if it results in a material change of risk. A good example of one of these clauses at work is a damage waiver clause. This language could indicate that each party waives its claims and liabilities to the other if damage arises from some external common source, such as a fire. This clause will provide guidance before a contract is executed and will protect the parties from potential litigation.
Recent Cases When Frustration of Purpose May Apply
While the doctrine of frustration of purpose is well-established, its application in modern jurisprudence continues to evolve. In one recent case, a party seeking to use the doctrine at trial needed to demonstrate "inevitability of harm" by showing not only that there was a significant probability of frustration occurring, but also that the result of that harm was so foreseeable that the other party should have prevented it. Such applications highlight the doctrines continued development beyond its traditional formulation and further signals the willingness of courts to enforce the fundamental principle of preventing unfairness that underlies the doctrine.
Other recent case law has highlighted the fact that in some instances, issues that would ordinarily be addressed in the context of anticipatory breach are instead analyzed under the rubric of frustration of purpose. This is especially true where a contract is voidable , as opposed to void, since the former allows the injured party to either uphold or rescind the contract, while the latter form of avoidance extinguishes the contract. Therefore, if mutuality is lacking in a contract, the Courts tend to find that lack of mutuality is a circumstance that will also render the contract voidable. Courts then take the next logical step and find that such an event may frustrate the contractual purpose, creating an alternative, but equally effective, remedy for the offended party in the form of frustration of purpose.
The foregoing does not mean that parties may freely substitute the analysis usually reserved for anticipatory breach in their frustration of purpose ("Frustration of Purpose") analyses, but rather, where the purposes of both doctrines are met, they may be properly used interchangeably when analyzing objections to a contract.