Sometimes, parties do not live up to their end of the contract, and yet those parties are not necessarily liable for breach of contract. One important reason for escaping liability, frequently, is because of excuse doctrines. These rules mean that sometimes parties do not have to perform what they agreed to perform because something that was not anticipated by either side that changes the deal in some fundamental way.
We're going to begin exploring two doctrines in this lesson that excuse parties from contract performance, either entirely or in part. Those doctrines are known as impracticability, and frustration of purpose. So let's dive right into those. The doctrine of impracticability of performance actually has its origin in an older doctrine called impossibility of performance. There, the idea was that a party literally, physically, could not perform the contract because something made such performance impossible.
impossible. The classic case on point is Taylor v. Caldwell, an 1863 English case, where a concert venue was to be rented to perform a concert. But then it turns out it burns down.
As a result of that fire, there was really nothing more to rent, and the court held that there was not. a breach of contract on the part of the landlord for that facility because providing the venue was literally impossible. It's not there anymore. The doctrine has since softened a little bit to deal with impracticability.
Sometimes, although there is perhaps a literal possibility of performance, it is so difficult, so onerous, and so different from what the parties originally anticipated, that the law will sometimes excuse parties from the contract. This rule is in Restatement Second of Contract, Section 261, and it also appears in Uniform Commercial Code in its own version in Section 2-615. Our other major excuse doctrine in this lesson is frustration of purpose.
The classic case there is the 1903 English case of Crell v. Henry. where there was to be a coronation parade for the new King of England, Edward VII. But that parade was canceled because the king fell ill. The contracted issue involved renting space on a balcony that was on the parade route so that the tenant would be able to watch the festivities. And the price charged for that rental for one day was far above the market price for that space on any other non-eventful day.
The English court there excused the renter in that case, even though it was literally possible to perform the contract. The space was there, it could be used, and it could be rented at the agreed price. All of these things were possible. But the court excused performance based on frustration of purpose.
The entire purpose for that particular contract was to watch the coronation parade. That purpose was frustrated when the parade was canceled. There was no reason to perform the contract, even though the parties literally could have performed it. Both of these are excuse doctrines that exist in contract law today, and so we are going to look at them in some depth. Our first case on excuse, and the one that's the focus of this unit, is Carl Wendt Farm Equipment Company versus International Harvester Company.
It's a useful case for us to begin with because it actually deals with both of these excuse doctrines. The background here was that International Harvester had many branches of its business, including one that was a farm equipment division. It would sell individual pieces of equipment to farmers. That business suddenly turned down in the early to mid-1980s, and ultimately International Harvester decided to sell all the assets of its farm equipment division to another company, which for purposes of this case was an amalgamation of Case and Tenneco. And that's why you see the reference to Case slash Tenneco.
Now, Case was also a manufacturer of farm equipment, but importantly for this case is the fact that the sale of the farm equipment business did not include the franchise network that International Harvester had with its own dealer. It was primarily an asset purchase agreement. We're not purchasing the business. We're just purchasing assets of the business.
So essentially, the equipment business assets were purchased by Case, which was already selling a lot of farm equipment in other places. There were about 400 so-called conflicted areas where both Case and International Harvester dealerships. were located, so many of those would be shut down.
Case either would or wouldn't reach a new deal with those potential dealers, and one of those dealers was the Carl Wendt Farm Equipment Company. Notice, though, that because this is an asset purchase agreement, International Harvester retained its contractual liability. Thus, International Harvester, at this point, is in breach of its contract with Carl Wendt Farm Equipment because it is no longer providing, as it had agreed to do, International Harvester farm equipment that Carl Wendt could then sell to the general farming public. When Wendt did not get a case franchise, it had nothing to sell. And so that was a problem for the local farm equipment company in Michigan.
At trial in this case, two defenses were raised by International Harvester as to why it should not be liable on its contract. No surprise, it's the two that we just discussed a moment ago. The first of these was impracticability of performance. That went to the jury, and the jury said there was no claim there.
So International Harvester lost on that at trial. Furthermore, the court ordered a directed verdict. which means the jury didn't even get to hear it because there was nothing to decide in the court's view, on International Harvester's second defense of frustration of purpose. So the appeal that we are reading now in your casebook deals with both of the claims by International Harvester raising defenses, and it says that there were errors as to how the lower court decided them. Restatement section 261 is our...
basic rule on impracticability, and it provides 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 the performance is discharged, unless the language or the circumstances indicate the contrary. Now, it may be easier to understand how a party must prove this excuse if we take the terms of Section 261 and break it up into elements, as I've done on the screen here. All of these parts must come together in order for there to be an impracticability excuse.
First, unless language or circumstances indicate the contrary. What that means is that if the parties have contracted that a party will be liable under certain circumstances, then there is no excuse. Because in that situation, the parties already thought about this. Courts then will honor that part of the contract and enforce it. But assuming that's not out there and the parties haven't dealt with it in their actual contract terms, a contract must first be made.
And the excuse... has to be after the making of the contract. Next, a party's performance must be made impracticable. Not impossible again, but so extraordinarily difficult as it wouldn't be reasonable to go forward with the contract.
Also, that difficulty cannot be the party's own fault. You cannot create your own excuse. The excuse must be because of the occurrence of an event, the non-occurrence of which was a basic assumption, probably an unstated one, on which the contract was made.
All five of these elements, including the absence of language in the contract addressing the situation, must come together for the common law impracticability excuse to work. So let's see how the court dealt with that one. The appellate court said that in its view, Section 261 requires a finding that impracticability is inappropriate, is an inappropriate defense in this case. Why not?
Well, the fact that International Harvester experienced a dramatic downturn in the farm equipment market and decided to go out of that business does not excuse its unilateral termination of its dealership agreements due to impracticability. In other words, a party can't make a decision as to how it's going to deal with its own business and then say, well, tough luck for you, other contracting party. This is now impracticable for us to continue.
We don't sell farm equipment anymore. That argument simply won't fly. So you can't create your own impracticability. International Harvester further argued that although unprofitability by itself does not excuse performance, and you should remember that, merely losing money doesn't get you out of a contract, here it said the losses were so significant and the market shifts were so dramatic in the farm equipment market between 1980 and 1985 that there should be a special application of the defense in this case.
And look on the screen at how extreme the losses are. International Harvester said it was losing $2 million per day. and that the company's standing, International Harvester was a large company, the standing in the Fortune 500 list dropped from 27 to 104. International Harvester also put on evidence that if it had not sold its farm equipment division, then the entire company might well have tanked, and it might have had to declare bankruptcy. The court concluded, While the facts suggest that International Harvester suffered severely from the downturn in the farm equipment market, neither market shifts nor the financial inability of one of the parties changes the basic assumptions of the contract such that it may be excused under the doctrine of impracticability.
Put another way, International Harvester, you made your contract and now you have to live with it. The fact that business has turned down is not good enough. And the fact that you have changed the business model of your company and what lines of business you are or are not pursuing is not good enough either. The official comments to Section 261 of the Restatement elaborate on this notion a bit more.
Comment D says that mere change in the degree of difficulty or expense due to causes such as increased wages, so say maybe there's a strike and the price of labor goes up, prices of raw materials or costs of construction, You can think of like the oil price rapid increase we saw in the Nanakuli paving case earlier. Those are not going to work unless they are, quote, well beyond. the normal range. And that's what International Harvester was trying to argue here. Additionally, look at the flip side.
A severe shortage of raw materials or of supplies due to war, embargo, crop failure, or unforeseen shutdown of major sources of supply, which either causes a marked increase in cost or prevents performance altogether, may. bring the case within this rule. You might say if you take the first paragraph and the second paragraph and put them together that the comment speaks with forked tongue. And what that means is we kind of have a gray area. So notice, however, that as extreme as the losses were for International Harvester, it wasn't a bad enough situation for there to be commercial impracticability.
What has to happen here, as comment B says, is that the non-occurrence must deal with a basic assumption of the contract. One thing that cannot be a basic assumption is the continuation of existing market conditions. You can't simply say that, well, the market is this way now, and so we assume it will be this way forever.
That is so unrealistic as to be something that courts will not entertain, and so parties must account for some degree of future uncertainty. Also note in comment B that the financial situation of one of the parties is also not a permissible assumption. Now again, you could work something about the financial situation into the contract, but in general we're not going to assume that that matters. It is very hard then to prove impracticability of performance, but International Harvester did try in the Carl Wendt case.
International Harvester also raised frustration of purpose, which Section 261 calls discharge by supervening frustration. The rule there says where, after a contract is made, a party's performance is substantially frustrated, meaning it no longer has the purpose for which it is designed. 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, the party's, duty to render that performance is discharged. And, just like with impracticability, unless the language or the circumstances indicate the contrary.
So, parties can anticipate certain changes and deal with them in the contract. And, frustration of purpose only comes up if the parties do not. Now, we could also break this rule into elements, just like we did with impracticability. Notice that the elements for frustration of purpose and impracticability are almost identical. The main difference is only with the element that the party's performance here is substantially frustrated rather than made impracticable.
The entire purpose for which the contract was made has to be something that no longer exists. And now we're about to see that the Court of Appeals didn't think much of International Harvester's frustration of purpose argument either. Here's why.
The court noted, The primary purpose of the agreement was to establish the dealership and the terms of interaction, and it was not, as International Harvester claimed, mutual profitability. By the way, if profitability were counted always as a primary purpose for a contract, consider that most any time a contract became a bad deal or against the expectation of one of the parties, the losing party would be able to claim frustration of purpose. Well, the court here, the Sixth Circuit, did not allow that, nor, frankly, would other courts.
Continuity of market conditions or the financial situation of the parties were not basic assumptions or implied conditions for the enforcement of a contract. So, it is not going to matter that the contract went down or that the party's financial situation went down. Continuing.
Rather, like the doctrine of impracticability, the court says, the doctrine of frustration is an equitable doctrine, which is meant to apportion risk between the parties in light of, pay attention to this, unforeseen circumstances. Notice that both of these excuse doctrines require that whatever change happens must be something that's unforeseeable. We didn't know that this was coming. who could possibly have predicted this turn of events? It cannot be something like a generic market downturn.
As a result, the court says, excuses are an implied term, which is meant to apportion risk as the parties would have had the necessity of doing so occurred to them. Contract law wants to apportion risk into what the parties themselves would have done if they had thought of this unforeseeable event happening. In the Carl Wendt farm case, the excuses out there but the alleged frustrating event is a problem that International Harvester itself created by selling all of its farm equipment assets to Case and going out of that line of business. So while International Harvester, the court says, might have determined that such a move was economically required, and by the way, the court here is not disputing that, International Harvester may not then assert that its obligation under existing agreements are discharged in light of its decision. Put another way, you cannot create your own excuse circumstances.
It has to be brought in by the outside. That reasoning by the court makes some sense because parties cannot conduct their business such that profitability, if it is frustrated, will then define the purpose as simply being mutual profitability. That's far too broad. On both of these claims, Carl Wendt Farm Equipment won, and the case went forward on the question of damages, and that's about all we're going to look at for this part of the case. So, before we leave the topic, let's look at the official comments to Section 265 of the restatement, the section on frustration of purpose.
Here, the drafters note, it is not enough that the contracting party had in mind a specific object without which he could not have made the contract, or he would not have made the contract. That kind of goes to International Harvester's claim about profitability. That's what it was thinking about, but that's not in the contract.
Look at the second sentence. The object must be so completely the basis of the contract that, as both parties understand, without it, the transaction would make little sense. Once again, the idea is that one of the parties might, if you will, flake out and decide to quit the business. That is not going to create frustration of purpose, and the commenters continue to note, it is not enough that the transaction has become less profitable.
Well, that's exactly what happened to International Harvester, for the affected party, or even that he will sustain a loss. Contracts cause losses all the time, and you need to remember that, professionals, as you're dealing with contracts. Parties don't want to have a loss.
They wouldn't enter into a contract intentionally, usually, to create a loss. But it's a frequent occurrence, and that is not alone going to be an excuse. The frustration we see back on the screen must be so severe that it is not fairly to be regarded as within the risks that the party assumed under the contract. So again, both frustration of purpose and impracticability of performance have to be something that the parties just didn't expect, didn't think to account for, and it can't be because of a fault of one of the parties.
That brings us to the end of this first lesson on excuse doctrines for contracts. Our next lesson will explore some of the limits of the excuse doctrines.