LAW 506-002 – Contracts II

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

Mistake Defined

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A mistake is a belief that is not in accord with the facts.

Restatement Second of Contracts § 152

When Mistake of Both Parties Makes a Contract Voidable

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  1. 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].
  2. 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.

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

When Mistake of One Party Makes a Contract Voidable

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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

  1. the effect of the mistake is such that enforcement of the contract would be unconscionable, or
  2. the other party had reason to know of the mistake or his fault caused the mistake.

Restatement Second of Contracts § 154

When a Party Bears the Risk of a Mistake

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A party bears the risk of a mistake when

  1. the risk is allocated to him by agreement of the parties, or
  2. 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
  3. the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Restatement Second of Contracts § 157

Effect of Fault of Party Seeking Relief

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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.

To find the performance of a contract impracticable, three steps must have occurred:

  1. Unforeseeable Contingency
  2. Unallocated Risk
  3. Impracticability

(From Transatlantic)

Common Law
Restatement Second of Contracts § 261

Discharge by Supervening Impracticability

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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.

Restatement Second of Contracts § 262

Death or Incapacity of Person Necessary for Performance

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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.

Restatement Second of Contracts § 263

Destruction, Deterioration or Failure to Come Into Existence of Thing Necessary for Performance

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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.

Restatement Second of Contracts § 264

Prevention by Governmental Regulation or Order

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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.

Restatement Second of Contracts § 266

Existing Impracticability or Frustration

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  1. 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.
  2. 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.
Restatement Second of Contracts § 269

Temporary Impracticability or Frustration

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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.

Restatement Second of Contracts § 270

Partial Impracticability

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Where only part of an obligor's performance is impracticable, his duty to render the remaining part is unaffected if

  1. 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
  2. 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.

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

  1. if the loss is total the contract is avoided; and
  2. 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.
UCC § 2-614(1)

Substituted Performance.

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  1. 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.
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:

  1. 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.
  2. 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.
  3. 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:

. . .

  1. 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.
UCC § 2-616

Procedure on Notice Claiming Excuse.

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  1. 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,
    1. terminate and thereby discharge any unexecuted portion of the contract; or
    2. modify the contract by agreeing to take his available quota in substitution.
  2. 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.
  3. 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.
UCC § 2-509

Risk of Loss in the Absence of Breach.

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  1. Where the contract requires or authorizes the seller to ship the goods by carrier
    1. 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
    2. 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.
  2. Where the goods are held by a bailee to be delivered without being moved, the risk of loss passes to the buyer
    1. on his receipt of possession or control of a negotiable document of title covering the goods; or
    2. on acknowledgment by the bailee of the buyer's right to possession of the goods; or
    3. 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)].
  3. 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.
  4. 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]).
UCC § 2-510

Effect of Breach on Risk of Loss.

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  1. 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.
  2. 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.
  3. 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.

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.