Contracts II
Breach
An aggrieved party always has a right to damages caused by a breach.
Material Breach
Common Law
Restatement Second of Contracts § 241
Restatement Second of Contracts § 241Circumstances Significant in Determining Whether a Failure Is Material
In determining whether a failure to render or to offer performance is material, the following circumstances are significant:
- the extent to which the injured party will be deprived of the benefit which he reasonably expected;
- the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived;
- the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
- the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances;
- the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.
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- Factors (a) & (b) are about the non-breaching party.
- Factors (c) & (d) are about the breaching party.
- Factor (e) is about a party acting in bad faith.
Total Breach
If a material breach is not cured, the aggrieved party can elect to treat the breach as total or as partial.
Electing to treat a breach as total will terminate the contract.
Electing to treat a breach as partial will still allow the aggrieved party to withhold its performance until the conditions for it are met, but still obligates both parties to fulfill their obligations.
Restatement Second of Contracts § 242
Restatement Second of Contracts § 242Circumstances Significant in Determining When Remaining Duties Are Discharged
In determining the time after which a party's uncured material failure to render or to offer performance discharges the other party's remaining duties to render performance under the rules stated in [R2C § 237 and R2C § 238], the following circumstances are significant:
- those stated in [R2C § 241];
- the extent to which it reasonably appears to the injured party that delay may prevent or hinder him in making reasonable substitute arrangements;
- the extent to which the agreement provides for performance without delay, but a material failure to perform or to offer to perform on a stated day does not of itself discharge the other party's remaining duties unless the circumstances, including the language of the agreement, indicate that performance or an offer to perform by that day is important.
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Restatement Second of Contracts § 237
Restatement Second of Contracts § 237Effect on Other Party's Duties of a Failure to Render Performance
Except as stated in [R2C § 240], it is a condition of each party's remaining duties to render performances to be exchanged under an exchange of promises that there be no uncured material failure by the other party to render any such performance due at an earlier time.
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Sales of Goods under the UCC
Perfect Tender Rule
UCC § 2-601
Buyer's Rights on Improper Delivery.
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Subject to the provisions of this Article on breach in installment contracts ([UCC § 2-612]) and unless otherwise agreed under the sections on contractual limitations of remedy ([UCC § 2-718 and UCC § 2-719]), if the goods or the tender of delivery fail in any respect to conform to the contract, the buyer may
- reject the whole; or
- accept the whole; or
- accept any commercial unit or units and reject the rest.
Official Comment
. . .
- . . . Partial acceptance is permitted whether the part of the goods accepted conforms or not. The only limitation on partial acceptance is that good faith and commercial reasonableness must be used to avoid undue impairment of the value of the remaining portion of the goods. . . . In this respect, the test is not only what unit has been the basis of contract, but whether the partial acceptance produces so materially adverse an effect on the remainder as to constitute bad faith.
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UCC § 2-602
Manner and Effect of Rightful Rejection.
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- Rejection of goods must be within a reasonable time after their delivery or tender. It is ineffective unless the buyer seasonably notifies the seller.
- Subject to the provisions of the two following sections on rejected goods ([UCC § 2-603 and UCC § 2-604]),
- after rejection any exercise of ownership by the buyer with respect to any commercial unit is wrongful as against the seller; and
- if the buyer has before rejection taken physical possession of goods in which he does not have a security interest under the provisions of this Article ([UCC § 2-711(3)]), he is under a duty after rejection to hold them with reasonable care at the seller's disposition for a time sufficient to permit the seller to remove them; but
- the buyer has no further obligations with regard to goods rightfully rejected.
- The seller's rights with respect to goods wrongfully rejected are governed by the provisions of this Article on Seller's remedies in general ([UCC § 2-703]).
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Tender
Tender is a formal offer to buy or sell something.
UCC § 2-503
Manner of Seller's Tender of Delivery.
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- Tender of delivery requires that the seller put and hold conforming goods at the buyer's disposition and give the buyer any notification reasonably necessary to enable him to take delivery. The manner, time and place for tender are determined by the agreement and this Article, and in particular
- Where the case is within the next section respecting shipment tender requires that the seller comply with its provisions.
- Where the seller is required to deliver at a particular destination tender requires that he comply with subsection (1) and also in any appropriate case tender documents as described in subsections (4) and (5) of this section.
- Where goods are in the possession of a bailee and are to be delivered without being moved
- tender requires that the seller either tender a negotiable document of title covering such goods or procure acknowledgment by the bailee of the buyer's right to possession of the goods; but
- tender to the buyer of a non-negotiable document of title or of a record directing the bailee to deliver is sufficient tender unless the buyer seasonably objects, and except as otherwise provided in Article 9 receipt by the bailee of notification of the buyer's rights fixes those rights as against the bailee and all third persons; but risk of loss of the goods and of any failure by the bailee to honor the non-negotiable document of title or to obey the direction remains on the seller until the buyer has had a reasonable time to present the document or direction, and a refusal by the bailee to honor the document or to obey the direction defeats the tender.
- Where the contract requires the seller to deliver documents
- he must tender all such documents in correct form, except as provided in this Article with respect to bills of lading in a set ([UCC § 2-323(2)]); and
- tender through customary banking channels is sufficient and dishonor of a draft accompanying or associated with the documents constitutes non-acceptance or rejection.
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UCC § 2-307
Delivery in Single Lot or Several Lots.
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Unless otherwise agreed all goods called for by a contract for sale must be tendered in a single delivery and payment is due only on such tender but where the circumstances give either party the right to make or demand delivery in lots the price if it can be apportioned may be demanded for each lot.
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UCC § 2-504
Shipment by Seller.
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Where the seller is required or authorized to send the goods to the buyer and the contract does not require him to deliver them at a particular destination, then unless otherwise agreed he must
- put the goods in the possession of such a carrier and make such a contract for their transportation as may be reasonable having regard to the nature of the goods and other circumstances of the case; and
- obtain and promptly deliver or tender in due form any document necessary to enable the buyer to obtain possession of the goods or otherwise required by the agreement or by usage of trade; and
- promptly notify the buyer of the shipment.
Failure to notify the buyer under paragraph (c) or to make a proper contract under paragraph (a) is a ground for rejection only if material delay or loss ensues.
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UCC § 2-507
Effect of Seller's Tender; Delivery on Condition.
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- Tender of delivery is a condition to the buyer's duty to accept the goods and, unless otherwise agreed, to his duty to pay for them. Tender entitles the seller to acceptance of the goods and to payment according to the contract.
- Where payment is due and demanded on the delivery to the buyer of goods or documents of title, his right as against the seller to retain or dispose of them is conditional upon his making the payment due.
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UCC § 2-511
Tender of Payment by Buyer; Payment by Check.
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- Unless otherwise agreed tender of payment is a condition to the seller's duty to tender and complete any delivery.
- Tender of payment is sufficient when made by any means or in any manner current in the ordinary course of business unless the seller demands payment in legal tender and gives any extension of time reasonably necessary to procure it.
- Subject to the provisions of this Act on the effect of an instrument on an obligation ( Section 3-310), payment by check is conditional and is defeated as between the parties by dishonor of the check on due presentment.
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Exceptions to the Perfect Tender Rule
- Bad Faith
- See comment in UCC § 2-601
- Cure
UCC § 2-508
Cure by Seller of Improper Tender or Delivery; Replacement.
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- Where any tender or delivery by the seller is rejected because non-conforming and the time for performance has not yet expired, the seller may seasonably notify the buyer of his intention to cure and may then within the contract time make a conforming delivery.
- Where the buyer rejects a non-conforming tender which the seller had reasonable grounds to believe would be acceptable with or without money allowance the seller may if he seasonably notifies the buyer have a further reasonable time to substitute a conforming tender.
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- Installment Contract
UCC § 2-612
"Installment Contract"; Breach.
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- An "installment contract" is one which requires or authorizes the delivery of goods in separate lots to be separately accepted, even though the contract contains a clause "each delivery is a separate contract" or its equivalent.
- The buyer may reject any installment which is non-conforming if the non-conformity substantially impairs the value of that installment and cannot be cured or if the non-conformity is a defect in the required documents; but if the non-conformity does not fall within subsection (3) and the seller gives adequate assurance of its cure the buyer must accept that installment.
- Whenever non-conformity or default with respect to one or more installments substantially impairs the value of the whole contract there is a breach of the whole. But the aggrieved party reinstates the contract if he accepts a non-conforming installment without seasonably notifying of cancellation or if he brings an action with respect only to past installments or demands performance as to future installments.
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- Acceptance
-
UCC § 2-606
What Constitutes Acceptance of Goods.
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- Acceptance of goods occurs when the buyer
- after a reasonable opportunity to inspect the goods signifies to the seller that the goods are conforming or that he will take or retain them in spite of their non-conformity; or
- fails to make an effective rejection ([UCC § 2-602(1)]), but such acceptance does not occur until the buyer has had a reasonable opportunity to inspect them; or
- does any act inconsistent with the seller's ownership; but if such act is wrongful as against the seller it is an acceptance only if ratified by him.
- Acceptance of a part of any commercial unit is acceptance of that entire unit.
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Effect of Acceptance; Notice of Breach; Burden of Establishing Breach After Acceptance; Notice of Claim or Litigation to Person Answerable Over.
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- The buyer must pay at the contract rate for any goods accepted.
- Acceptance of goods by the buyer precludes rejection of the goods accepted and if made with knowledge of a non-conformity cannot be revoked because of it unless the acceptance was on the reasonable assumption that the non-conformity would be seasonably cured but acceptance does not of itself impair any other remedy provided by this Article for non-conformity.
- Where a tender has been accepted
- the buyer must within a reasonable time after he discovers or should have discovered any breach notify the seller of breach or be barred from any remedy; and
- if the claim is one for infringement or the like ([UCC § 2-312(3)]) and the buyer is sued as a result of such a breach he must so notify the seller within a reasonable time after he receives notice of the litigation or be barred from any remedy over for liability established by the litigation.
- The burden is on the buyer to establish any breach with respect to the goods accepted.
- Where the buyer is sued for breach of a warranty or other obligation for which his seller is answerable over
- he may give his seller written notice of the litigation. If the notice states that the seller may come in and defend and that if the seller does not do so he will be bound in any action against him by his buyer by any determination of fact common to the two litigations, then unless the seller after seasonable receipt of the notice does come in and defend he is so bound.
- if the claim is one for infringement or the like ([UCC § 2-312(3)]) the original seller may demand in writing that his buyer turn over to him control of the litigation including settlement or else be barred from any remedy over and if he also agrees to bear all expense and to satisfy any adverse judgment, then unless the buyer after seasonable receipt of the demand does turn over control the buyer is so barred.
- The provisions of subsections (3), (4) and (5) apply to any obligation of a buyer to hold the seller harmless against infringement or the like ([UCC § 2-312(3)]).
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Unless later revoked
UCC § 2-608
Revocation of Acceptance in Whole or in Part.
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- The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
- on the reasonable assumption that its non-conformity would be cured and it has not been seasonably cured; or
- without discovery of such non-conformity if his acceptance was reasonably induced either by the difficulty of discovery before acceptance or by the seller's assurances.
- Revocation of acceptance must occur within a reasonable time after the buyer discovers or should have discovered the ground for it and before any substantial change in condition of the goods which is not caused by their own defects. It is not effective until the buyer notifies the seller of it.
- A buyer who so revokes has the same rights and duties with regard to the goods involved as if he had rejected them.
Copyright, The American Law InstituteCopyright, The American Law Institute - The buyer may revoke his acceptance of a lot or commercial unit whose non-conformity substantially impairs its value to him if he has accepted it
- Acceptance of goods occurs when the buyer
-
UCC § 2-605
Waiver of Buyer's Objections by Failure to Particularize.
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- The buyer's failure to state in connection with rejection a particular defect which is ascertainable by reasonable inspection precludes him from relying on the unstated defect to justify rejection or to establish breach
- Payment against documents made without reservation of rights precludes recovery of the payment for defects apparent in the documents.
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Anticipatory Repudiation
Anticipatory repudiation occurs if a promisor, prior to the time set for performance, indicates that he will not substantially perform when the time comes.
While repudiation does not have to be in words, it must be sufficiently positive to be reasonably interpreted to mean that the party will not perform.
Common Law
Restatement Second of Contracts § 250
Restatement Second of Contracts § 250When a Statement or an Act Is a Repudiation
A repudiation is
- a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under [R2C § 243], or
- a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.
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Restatement Second of Contracts § 253
Restatement Second of Contracts § 253Effect of a Repudiation as a Breach and on Other Party's Duties
- Where an obligor repudiates a duty before he has committed a breach by non-performance and before he has received all of the agreed exchange for it, his repudiation alone gives rise to a claim for damages for total breach.
- Where performances are to be exchanged under an exchange of promises, one party's repudiation of a duty to render performance discharges the other party's remaining duties to render performance.
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Assurance
Restatement Second of Contracts § 251
Restatement Second of Contracts § 251When a Failure to Give Assurance May Be Treated as a Repudiation
- Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach under [R2C § 243], the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.
- The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.
Comments:
. . .
- Nature and time of assurance. Whether an assurance of due performance is "adequate" depends on what it is reasonable to require in a particular case taking account of the circumstances of that case. The relationship between the parties, any prior dealings that they have had, the reputation of the party whose performance has been called into question, the nature of the grounds for insecurity, and the time within which the assurance must be furnished are all relevant factors.
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UCC § 2-609
Delegation of Performance; Assignment of Rights.
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- A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.
- Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
- Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.
- After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
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Restatement Second of Contracts § 243
Restatement Second of Contracts § 243Effect of a Breach by Non-Performance As Giving Rise to a Claim for Damages for Total Breach
- With respect to performances to be exchanged under an exchange of promises, a breach by non-performance gives rise to a claim for damages for total breach only if it discharges the injured party's remaining duties to render such performance, other than a duty to render an agreed equivalent under [R2C § 240].
- Except as stated in Subsection (3), a breach by non-performance accompanied or followed by a repudiation gives rise to a claim for damages for total breach.
- Where at the time of the breach the only remaining duties of performance are those of the party in breach and are for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach.
- In any case other than those stated in the preceding subsections, a breach by non-performance gives rise to a claim for total breach only if it so substantially impairs the value of the contract to the injured party at the time of the breach that it is just in the circumstances to allow him to recover damages based on all his remaining rights to performance.
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A borrower's failure to make unrelated installment payments does not constitute a total breach when that is the only performance remaining in the contract.
Acceleration Clause
An acceleration clause in a lending agreement says that if the borrower defaults under any obligation, including failing to make a payment on time, the lender has the right to accelerate the entire loaned amount to be due, also called "calling the loan."
Restatement Second of Contracts § 254
Restatement Second of Contracts § 254Effect of Subsequent Events on Duty to Pay Damages
- A party's duty to pay damages for total breach by repudiation is discharged if it appears after the breach that there would have been a total failure by the injured party to perform his return promise.
- A party's duty to pay damages for total breach by repudiation is discharged if it appears after the breach that the duty that he repudiated would have been discharged by impracticability or frustration before any breach by non-performance.
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Restatement Second of Contracts § 255
Restatement Second of Contracts § 255Effect of a Repudiation as Excusing the Non-Occurrence Of a Condition
Where a party's repudiation contributes materially to the non-occurrence of a condition of one of his duties, the non-occurrence is excused.
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Restatement Second of Contracts § 256
Restatement Second of Contracts § 256Nullification of Repudiation or Basis for Repudiation
- The effect of a statement as constituting a repudiation under [R2C § 250] or the basis for a repudiation under [R2C § 251] is nullified by a retraction of the statement if notification of the retraction comes to the attention of the injured party before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.
- The effect of events other than a statement as constituting a repudiation under [R2C § 250] or the basis for a repudiation under [R2C § 251] is nullified if, to the knowledge of the injured party, those events have ceased to exist before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.
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Restatement Second of Contracts § 257
Restatement Second of Contracts § 257Effect of Urging Performance in Spite of Repudiation
The injured party does not change the effect of a repudiation by urging the repudiator to perform in spite of his repudiation or to retract his repudiation.
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Sales of Goods under the UCC
UCC § 2-610
Anticipatory Repudiation.
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When either party repudiates the contract with respect to a performance not yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may
- for a commercially reasonable time await performance by the repudiating party; or
- resort to any remedy for breach ([UCC § 2-703] or [UCC § 2-711]), even though he has notified the repudiating party that he would await the latter's performance and has urged retraction; and
- in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods ([UCC § 2-704]).
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UCC § 2-611
Retraction of Anticipatory Repudiation.
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- Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved party has since the repudiation cancelled or materially changed his position or otherwise indicated that he considers the repudiation final.
- Retraction may be by any method which clearly indicates to the aggrieved party that the repudiating party intends to perform, but must include any assurance justifiably demanded under the provisions of this Article ([UCC § 2-609]).
- Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the aggrieved party for any delay occasioned by the repudiation.
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Assurance
Restatement Second of Contracts § 251
Restatement Second of Contracts § 251When a Failure to Give Assurance May Be Treated as a Repudiation
- Where reasonable grounds arise to believe that the obligor will commit a breach by non-performance that would of itself give the obligee a claim for damages for total breach under [R2C § 243], the obligee may demand adequate assurance of due performance and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.
- The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances of the particular case.
Comments:
. . .
- Nature and time of assurance. Whether an assurance of due performance is "adequate" depends on what it is reasonable to require in a particular case taking account of the circumstances of that case. The relationship between the parties, any prior dealings that they have had, the reputation of the party whose performance has been called into question, the nature of the grounds for insecurity, and the time within which the assurance must be furnished are all relevant factors.
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UCC § 2-609
Delegation of Performance; Assignment of Rights.
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- A contract for sale imposes an obligation on each party that the other's expectation of receiving due performance will not be impaired. When reasonable grounds for insecurity arise with respect to the performance of either party the other may in writing demand adequate assurance of due performance and until he receives such assurance may if commercially reasonable suspend any performance for which he has not already received the agreed return.
- Between merchants the reasonableness of grounds for insecurity and the adequacy of any assurance offered shall be determined according to commercial standards.
- Acceptance of any improper delivery or payment does not prejudice the aggrieved party's right to demand adequate assurance of future performance.
- After receipt of a justified demand failure to provide within a reasonable time not exceeding thirty days such assurance of due performance as is adequate under the circumstances of the particular case is a repudiation of the contract.
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Excuse Defense
The excuse doctrine allows certain defenses to be raised for a breach when there is a change as to a basic assumption on which the contract was formed.
Impracticability
Impracticability, traditionally called impossibility, is is a doctrine that discharges a party's duty of performance (usually the seller's in a sale of goods case) due to additional circumstances that have impeded his performance.
It is similar to the doctrine of mistake, except mistake is when there would be a material effect, not a legal impossibility. Also, mistake is measured at the contract's formation, while impracticability comes later.
The doctrines are not exclusive, but mistake is much more likely to be present.
Mistake
Restatement Second of Contracts § 151
Restatement Second of Contracts § 151Mistake Defined
A mistake is a belief that is not in accord with the facts.
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Restatement Second of Contracts § 152
Restatement Second of Contracts § 152When Mistake of Both Parties Makes a Contract Voidable
- Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in [R2C § 154].
- In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.
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A mistake must be about the nature of the good exchanged, not merely the value.
Only the party disadvantaged by the mistake can raise the defense.
Restatement Second of Contracts § 153
Restatement Second of Contracts § 153When Mistake of One Party Makes a Contract Voidable
Where a mistake of one party at the time a contract was made as to a basic assumption on which he made the contract has a material effect on the agreed exchange of performances that is adverse to him, the contract is voidable by him if he does not bear the risk of the mistake under the rule stated in [R2C § 154], and
- the effect of the mistake is such that enforcement of the contract would be unconscionable, or
- the other party had reason to know of the mistake or his fault caused the mistake.
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Restatement Second of Contracts § 154
Restatement Second of Contracts § 154When a Party Bears the Risk of a Mistake
A party bears the risk of a mistake when
- the risk is allocated to him by agreement of the parties, or
- he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or
- the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
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Restatement Second of Contracts § 157
Restatement Second of Contracts § 157Effect of Fault of Party Seeking Relief
A mistaken party's fault in failing to know or discover the facts before making the contract does not bar him from avoidance or reformation under the rules stated in this Chapter, unless his fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing.
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To find the performance of a contract impracticable, three steps must have occurred:
- Unforeseeable Contingency
- Unallocated Risk
- Impracticability
(From Transatlantic)
Common Law
Restatement Second of Contracts § 261
Restatement Second of Contracts § 261Discharge by Supervening Impracticability
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 that performance is discharged, unless the language or the circumstances indicate the contrary.
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Restatement Second of Contracts § 262
Restatement Second of Contracts § 262Death or Incapacity of Person Necessary for Performance
If the existence of a particular person is necessary for the performance of a duty, his death or such incapacity as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.
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Restatement Second of Contracts § 263
Restatement Second of Contracts § 263Destruction, Deterioration or Failure to Come Into Existence of Thing Necessary for Performance
If the existence of a specific thing is necessary for the performance of a duty, its failure to come into existence, destruction, or such deterioration as makes performance impracticable is an event the non-occurrence of which was a basic assumption on which the contract was made.
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Restatement Second of Contracts § 264
Restatement Second of Contracts § 264Prevention by Governmental Regulation or Order
If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.
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Restatement Second of Contracts § 266
Restatement Second of Contracts § 266Existing Impracticability or Frustration
- Where, at the time a contract is made, a party's performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.
- Where, at the time a contract is made, a party's principal purpose is substantially frustrated without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty of that party to render performance arises, unless the language or circumstances indicate the contrary.
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Restatement Second of Contracts § 269
Restatement Second of Contracts § 269Temporary Impracticability or Frustration
Impracticability of performance or frustration of purpose that is only temporary suspends the obligor's duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.
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Restatement Second of Contracts § 270
Restatement Second of Contracts § 270Partial Impracticability
Where only part of an obligor's performance is impracticable, his duty to render the remaining part is unaffected if
- it is still practicable for him to render performance that is substantial, taking account of any reasonable substitute performance that he is under a duty to render; or
- the obligee, within a reasonable time, agrees to render any remaining performance in full and to allow the obligor to retain any performance that has already been rendered.
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To find contracts impracticable due to increased cost, it must become excessive and unreasonable. The dissent in City of Vernon points out that this usually requires it to be on the order of 10 or 12 times as expensive.
Sales of Goods under the UCC
UCC § 2-613
Casualty to Identified Goods.
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Where the contract requires for its performance goods identified when the contract is made, and the goods suffer casualty without fault of either party before the risk of loss passes to the buyer, or in a proper case under a "no arrival, no sale" term ([UCC § 2-324]) then
- if the loss is total the contract is avoided; and
- if the loss is partial or the goods have so deteriorated as no longer to conform to the contract the buyer may nevertheless demand inspection and at his option either treat the contract as avoided or accept the goods with due allowance from the contract price for the deterioration or the deficiency in quantity but without further right against the seller.
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Copyright, The American Law Institute
UCC § 2-614(1)
Substituted Performance.
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- Where without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of delivery otherwise becomes commercially impracticable but a commercially reasonable substitute is available, such substitute performance must be tendered and accepted.
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Copyright, The American Law Institute
UCC § 2-615
Excuse by Failure of Presupposed Conditions.
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Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance:
- Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.
- Where the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, he must allocate production and deliveries among his customers but may at his option include regular customers not then under contract as well as his own requirements for further manufacture. He may so allocate in any manner which is fair and reasonable.
- The seller must notify the buyer seasonably that there will be delay or non-delivery and, when allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.
Official Comments:
. . .
- Increased cost alone does not excuse performance unless the rise in cost is due to some unforeseen contingency which alters the essential nature of the performance. Neither is a rise or a collapse in the market in itself a justification, for that is exactly the type of business risk which business contracts made at fixed prices are intended to cover. But a severe shortage of raw materials or of supplies due to a contingency such as war, embargo, local crop failure, unforeseen shutdown of major sources of supply or the like, which either causes a marked increase in cost or altogether prevents the seller from securing supplies necessary to his performance, is within the contemplation of this section.
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Copyright, The American Law Institute
UCC § 2-616
Procedure on Notice Claiming Excuse.
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- Where the buyer receives notification of a material or indefinite delay or an allocation justified under the preceding section he may by written notification to the seller as to any delivery concerned, and where the prospective deficiency substantially impairs the value of the whole contract under the provisions of this Article relating to breach of installment contracts ([UCC § 2-612]), then also as to the whole,
- If after receipt of such notification from the seller the buyer fails so to modify the contract within a reasonable time not exceeding thirty days the contract lapses with respect to any deliveries affected.
- The provisions of this section may not be negated by agreement except in so far as the seller has assumed a greater obligation under the preceding section.
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Copyright, The American Law Institute
UCC § 2-509
Risk of Loss in the Absence of Breach.
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- Where the contract requires or authorizes the seller to ship the goods by carrier
- if it does not require him to deliver them at a particular destination, the risk of loss passes to the buyer when the goods are duly delivered to the carrier even though the shipment is under reservation ([UCC § 2-505]); but
- if it does require him to deliver them at a particular destination and the goods are there duly tendered while in the possession of the carrier, the risk of loss passes to the buyer when the goods are there duly so tendered as to enable the buyer to take delivery.
- Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer
- on his receipt of possession or control of a negotiable document of title covering the goods; or
- on acknowledgment by the bailee of the buyer's right to possession of the goods; or
- after his receipt of possession or control of a non-negotiable document of title or other direction to deliver in a record, as provided in [UCC § 2-503(4)(b)].
- In any case not within subsection (1) or (2), the risk of loss passes to the buyer on his receipt of the goods if the seller is a merchant; otherwise the risk passes to the buyer on tender of delivery.
- The provisions of this section are subject to contrary agreement of the parties and to the provisions of this Article on sale on approval ([UCC § 2-327]) and on effect of breach on risk of loss ([UCC § 2-510]).
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Copyright, The American Law Institute
UCC § 2-510
Effect of Breach on Risk of Loss.
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- Where a tender or delivery of goods so fails to conform to the contract as to give a right of rejection the risk of their loss remains on the seller until cure or acceptance.
- Where the buyer rightfully revokes acceptance he may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as having rested on the seller from the beginning.
- Where the buyer as to conforming goods already identified to the contract for sale repudiates or is otherwise in breach before risk of their loss has passed to him, the seller may to the extent of any deficiency in his effective insurance coverage treat the risk of loss as resting on the buyer for a commercially reasonable time.
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Copyright, The American Law Institute
A partial failure of a seller's source of supply has generally been treated as a foreseeable contingency, and the assumed risk thereof has been allocated to the seller accordingly.
Frustration of Purpose
Common Law
Restatement Second of Contracts § 265
Restatement Second of Contracts § 265Discharge by Supervening Frustration
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 the circumstances indicate the contrary.
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Restatement Second of Contracts § 266
Restatement Second of Contracts § 266Existing Impracticability or Frustration
- Where, at the time a contract is made, a party's performance under it is impracticable without his fault because of a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty to render that performance arises, unless the language or circumstances indicate the contrary.
- Where, at the time a contract is made, a party's principal purpose is substantially frustrated without his fault by a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty of that party to render performance arises, unless the language or circumstances indicate the contrary.
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Restatement Second of Contracts § 257
Restatement Second of Contracts § 257Effect of Urging Performance in Spite of Repudiation
The injured party does not change the effect of a repudiation by urging the repudiator to perform in spite of his repudiation or to retract his repudiation.
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Restatement Second of Contracts § 268
Restatement Second of Contracts § 268Effect on Other Party's Duties of a Prospective Failure Justified by Impracticability or Frustration
- A party's prospective failure of performance may, except as stated in Subsection (2), discharge the other party's duties or allow him to suspend performance under the rules stated in [R2C § 251(1)] and [R2C § 253(2)] even though the failure would be justified under the rules stated in this Chapter.
- The rule stated in Subsection (1) does not apply if the other party assumed the risk that he would have to perform in spite of such a failure.
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Restatement Second of Contracts § 269
Restatement Second of Contracts § 269Temporary Impracticability or Frustration
Impracticability of performance or frustration of purpose that is only temporary suspends the obligor's duty to perform while the impracticability or frustration exists but does not discharge his duty or prevent it from arising unless his performance after the cessation of the impracticability or frustration would be materially more burdensome than had there been no impracticability or frustration.
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- If impracticability ends and it is not materially more difficult to perform, performance must be rendered.
- If it is materially breached, it should be analyzed whether there was a constructive condition of exchange.
Restatement Second of Contracts § 272
Restatement Second of Contracts § 272Relief Including Restitution
- In any case governed by the rules stated in this Chapter, either party may have a claim for relief including restitution under the rules stated in [R2C § 240] and [R2C § 377].
- In any case governed by the rules stated in this Chapter, if those rules together with the rules stated in Chapter 16 will not avoid injustice, the court may grant relief on such terms as justice requires including protection of the parties' reliance interests.
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Sales of Goods under the UCC
Frustration of purpose is not mentioned in the UCC. However UCC § 2-615 is interpreted as the defense.