Frustration of purpose
Encyclopedia
In the law
of contract
s, frustration of purpose is a defense to enforcement of the contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract, and both parties knew of this principal purpose at the time the contract was made. 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. This concept is also called commercial frustration.
For example, if Joe gets a mortgage for a new home, and, after three years, the house is destroyed, for whatever reason, at no fault of Joe's. Without a hell or high water clause
, Joe might be exempt from the remainder of the mortgage, as the principal purpose of the contract (to have a house to live in) has been compromised. However, he might still have a foreclosure
on his credit rating
.
Frustration of purpose is often confused with the closely related doctrine of impossibility
. 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, suppose entrepreneur Emily leases space from landlord Larry so she can open a restaurant that only serves Tibetan Speckled Lizard meat. If the city rezones the property to forbid commercial uses, or if the property is destroyed by a tornado, then both Larry and Emily are excused from performing the contract by impossibility.
However, if the Tibetan Speckled Lizard suddenly goes extinct, then Emily may be excused from performing the contract because Larry knew her primary purpose for entering into the lease was to serve Tibetan Speckled Lizard, and that purpose has been frustrated. In the second scenario, the parties could still carry out their obligations under the lease, but one of them no longer has a reason to.
The Restatement of Contracts, Second § 265 defines frustration of purpose:
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.
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 hirer refused to pay for the room; the owner sued for breach of contract
and the hirer then counter-sued for the return of his £25 deposit. The court determined that the cancellation of the coronation was unforeseeable by the parties, and discharged the contract, leaving the parties as they were: the hirer lost his one third deposit and the owner lost the rest of the rent.
In addition, the Court also noted that the doctrine of 'impossibility' could not be applied in this manner, because it would not have technically been 'impossible' for the lessee (the 'renter') to take possession of the flat on that prescribed day and merely sit in front of the window and view the street where the coronation parade was to have occurred. The point the Court was making is this: The illness of the King did not make the execution of the contract 'impossible.' Rather, the cancellation of the parade merely frustrated the purpose for which both men originally contracted.
Law
Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus...
of contract
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
s, frustration of purpose is a defense to enforcement of the contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract, and both parties knew of this principal purpose at the time the contract was made. 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. This concept is also called commercial frustration.
For example, if Joe gets a mortgage for a new home, and, after three years, the house is destroyed, for whatever reason, at no fault of Joe's. Without a hell or high water clause
Hell or high water clause
A hell or high water clause is a clause in a contract, usually a lease, which provides that the payments must continue irrespective of any difficulties which the paying party may encounter . The clause usually forms part of a parent company guarantee...
, Joe might be exempt from the remainder of the mortgage, as the principal purpose of the contract (to have a house to live in) has been compromised. However, he might still have a foreclosure
Foreclosure
Foreclosure is the legal process by which a mortgage lender , or other lien holder, obtains a termination of a mortgage borrower 's equitable right of redemption, either by court order or by operation of law...
on his credit rating
Credit rating
A credit rating evaluates the credit worthiness of an issuer of specific types of debt, specifically, debt issued by a business enterprise such as a corporation or a government. It is an evaluation made by a credit rating agency of the debt issuers likelihood of default. Credit ratings are...
.
Frustration of purpose is often confused with the closely related doctrine of impossibility
Impossibility
In contract law, impossibility is an excuse for the nonperformance of duties under a contract, based on a change in circumstances , the nonoccurrence of which was an underlying assumption of the contract, that makes performance of the contract literally impossible...
. The distinction between the two is that impossibility
Impossibility
In contract law, impossibility is an excuse for the nonperformance of duties under a contract, based on a change in circumstances , the nonoccurrence of which was an underlying assumption of the contract, that makes performance of the contract literally impossible...
concerns the duties specified in the contract, whereas frustration of purpose concerns the reason a party entered into the contract. For example, suppose entrepreneur Emily leases space from landlord Larry so she can open a restaurant that only serves Tibetan Speckled Lizard meat. If the city rezones the property to forbid commercial uses, or if the property is destroyed by a tornado, then both Larry and Emily are excused from performing the contract by impossibility.
However, if the Tibetan Speckled Lizard suddenly goes extinct, then Emily may be excused from performing the contract because Larry knew her primary purpose for entering into the lease was to serve Tibetan Speckled Lizard, and that purpose has been frustrated. In the second scenario, the parties could still carry out their obligations under the lease, but one of them no longer has a reason to.
The Restatement of Contracts, Second § 265 defines frustration of purpose:
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
Prohibition
Prohibition of alcohol, often referred to simply as prohibition, is the practice of prohibiting the manufacture, transportation, import, export, sale, and consumption of alcohol and alcoholic beverages. The term can also apply to the periods in the histories of the countries during which the...
, 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.
In English law
The leading case in English lawEnglish law
English law is the legal system of England and Wales, and is the basis of common law legal systems used in most Commonwealth countries and the United States except Louisiana...
on the subject is the famous 1903 case of Krell v. Henry
Krell v. Henry
Krell v Henry [1903] 2 KB 740 is an English case which sets forth the doctrine of frustration of purpose in contract law. It is one of a group of cases known as the coronation cases which arose from events surrounding the coronation of King Edward VII of the United Kingdom in...
, which concerned a party who had rented a room for the purpose of watching the coronation procession
Coronation of the British monarch
The coronation of the British monarch is a ceremony in which the monarch of the United Kingdom is formally crowned and invested with regalia...
of Edward VII
Edward VII of the United Kingdom
Edward VII was King of the United Kingdom and the British Dominions and Emperor of India from 22 January 1901 until his death in 1910...
. When the king fell ill, the coronation was indefinitely postponed. The hirer refused to pay for the room; the owner sued for breach of contract
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
and the hirer then counter-sued for the return of his £25 deposit. The court determined that the cancellation of the coronation was unforeseeable by the parties, and discharged the contract, leaving the parties as they were: the hirer lost his one third deposit and the owner lost the rest of the rent.
In addition, the Court also noted that the doctrine of 'impossibility' could not be applied in this manner, because it would not have technically been 'impossible' for the lessee (the 'renter') to take possession of the flat on that prescribed day and merely sit in front of the window and view the street where the coronation parade was to have occurred. The point the Court was making is this: The illness of the King did not make the execution of the contract 'impossible.' Rather, the cancellation of the parade merely frustrated the purpose for which both men originally contracted.