Week 8 (20) March 17 Transcript for video notes

Frustration of Purpose and Related Concepts (Video Notes) Related Concepts : Impossibility of Performance or Impracticability of Performance - The way to think about all these concepts (Frustration of purpose, impossibility of performance, and impracticability of performance) is similar to the way we think about mistake. - The difference between mistake doctrines (mutual mistake are unilateral mistake) and frustration of purpose and its related concepts is that: o Mistake doctrines have to do with mistakes at the time of contracting about what is currently true. o Frustration of purpose and impossibility or impracticability have to do with wrong guesses about what the future holds. o Frustration and its related concepts are about mistakes as to the future. o Mistake in the sense of mutual mistake or unilateral mistake were mistakes about presently existing facts Taylor v. Caldwell - Mistakes as to future events - In this case, the concert hall got destroyed by fire after the contract was entered into. - It's important to understand how the court comes to the conclusion that the contract has been discharged. - It's often referred to as a case of impossibility performance because the concert hall doesn't exist so the lessor can't let the concert hall to anyone because it no longer exists. - The way the court analyzes this situation is to start off with the general rule. - What is the general rule? o The general rule is when you agree to do something, you either do it or you pay damages for breach of your promise to do it (Either perform or you get ready to pay damages) - Role of “condition”? o The court has a discussion about conditions which come back into all of this.  Conditions are two types: either express or implied.  The court says there is an implied condition that the subject matter of the contract will continue to exist (the concert hall will continue to exist).  When the concert hall is destroyed by fire, the condition of both parties performance has not occurred and therefore both parties are discharged from any obligation to perform the contract.  It's a condition to landlord’s obligation to let the concert hall and its condition of the lessee’s obligation to pay the fee.  The conceptual vehicle for discharging the contract in this case is an implied condition. - Role of “warranty”? o The court also talks about the existence of a warranty.  What role does the warranty or lack thereof play?  The existence of a warranty effectively operates as a risk allocation device so that if the landlord had given a warranty that there would be a concert hall to let, and the concert hall gets destroyed by fire, then the landlord has essentially assumed the risk of the concert hall being destroyed and so the risk of the event has been allocated to the landlord and therefore the landlord is not discharged. The landlord’s going to be subject to the general rule again of performer pay damages and because the landlord can't perform, the landlord would be obligated to pay damages for failing to let the concert hall.  Here, there wasn't a warranty and therefore the risk was not allocated and therefore the result is simply that both parties are discharged from any obligations under the contract. Krell v. Henry - Sometimes in the United States, Krell v. Henry is generally taken as a frustration of purpose case. - In Canada and elsewhere, it's generally taken as simply an extension of Taylor and Caldwell's impossibility a performance.

- But whichever category put it into the net effect is the same. - This is the case that involved the contract to let a certain suite of rooms for purposes of watching the coronation of Edward 7th which didn't take place when it was originally scheduled. So, as far as the person renting the rooms was concerned, there is no point in going forward with the contract because the purpose of the contract had been frustrated. - The whole purpose was to take advantage of the particular situation of these rooms so that they have a good view the coronation procession on certain days. - When the coronation wasn’t going to happen on those days, there's no point in just going to the rooms to watch regular street traffic. - The question is: Is there a way out of this contract? - The court ultimately says yes and it's by extending the reasoning of Taylor v. Caldwell . - Taylor v. Caldwell is about the concert hall burns down and in that case it was literally impossible for the landlord to perform because there was no concert hall anymore. - Here, it's still possible for both parties to perform; the apartments were still there, the rooms are still available. It's just that the point of the whole thing the point of the whole contract is gone away because it changed circumstances since the formation of the contract. - The way Vaughan Williams in the leading opinion analyzes the situation it's by analogy to Taylor v. Caldwell and says that Taylor v. Caldwell was concerned with the continued existence of things or persons in that case the continued existence of the concert hall. In Krell v. Henry , the apartments have not been destroyed but the state of affairs/state of things/the assumed existence of the event changed. So, there's an extension of the underlying reasoning in Taylor v. Caldwell . - Test o Ultimately, Vaughan Williams formulates a test that basically goes something like this: what having regard to all the circumstances was the foundation of the contract; secondly, was the performance of the contract prevented; and thirdly was the event which prevented the performance of the contract of such a character that it cannot reasonably said to have been in the contemplation of the parties at the date of the contract.  If all those things are true, then there's generally a discharge of the contractual obligations of both parties.  One of the key questions is: what is the foundation of the contract?  The court again goes back to this idea of: o what's the substance of the contract? o What was the subject matter substantively as opposed to the accidents of the contract? o This aristotelian metaphysical dichotomy between substance and accidents and it's still there in Krell v. Henry . It's important to see how Krell v. Henry uses both the notion of the impossibility of performance that was articulated in Taylor v. Caldwell, extends it in a particular direction, comes up with a new test talk about frustration of the purpose of the contract by the destruction of the substance of the the state of affairs that the contract pre supposed, and to be looking at the language round warranties and conditions because they all come back again in Krell v. Henry and you want to see how the court continues to use these concepts of implied condition and warranty etc. Claude Neon General Advertising Ltd v. Sing - World War 2 era case in which as a result of government blackout regulations. - In this case, the outdoor signage contract was arguably frustrated or rendered impossible within the meaning of Krell v. Henry and Taylor v. Caldwell. - What was the relevant “event”? o The first thing to do is to identify exactly what the event is that changes things. What was the thing that happened that the parties didn't anticipate when they entered into the contract? o Here, the government blackout regulations and the lessee of the sign says: I agreed to pay for these neon signs and whole point of having a neon sign so that you can see it at night and now the purpose of my contract’s been frustrated and I should be let out of the contract. - “Impossibility” or “frustration”?

o There's been an event that has fundamentally altered what the deal looks like for the parties. In this case, the event was changed to the planning act that essentially prohibited the vendor in this case from conveying all of these lots at once rather had to seek the agreement of the committee of adjustment in order to convey individual lots and that was not the concept at all of the original contract. o The original concept was that the buyer was going to buy these 26 individual lots to build houses and have a development. o The change in the planning act made that a substantially different proposition because of the necessity of getting the agreement of committee of adjustment. - What was the “foundation” of the contract? o The court looks at this and says: if you apply the analysis from Taylor v. Caldwell and Krell v. Henry and you look at what the foundation of the contract is or what the real substance was that of this particular contract, it was to convey all of these individual lots so that builder could go develop the property and that's not really a practical option. o It's not that it's technically impossible but it's much different because of the necessity of getting the consent of the committee of adjustment. It wasn't true when the contract was originally entered into. - The end of the “implied condition”? o One of the things that you want to notice in this case is that you see the court starting to get away from the idea of an implied condition as the link between the frustrating event and the result which is discharged at the parties and the court says on page 811 essentially that that the courts are moving away from thinking about this link has an implied condition reading condition into the contract that the nonoccurrence which discharges both the parties to a more realistic view that the court imposes upon the party the just and reasonable solution that the new situation demands.  That's the conceptual change in the law. Restatement (Second) of Contracts Section 265 (“Discharge by Supervening Frustration”) - Section 265 of the restatement is the black letter law in the US on subject of 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.” - Notion of a basic assumption on which the contract was made o We saw that earlier in the context of mutual mistake and unilateral mistake and it comes up here again and means the same thing. o In all those contexts it's just that mistake has to do with mistakes about currently existing facts at the time of the contract was made whereas frustration and impossibility or impracticability relate to assumptions about what the facts will be in the future Restatement (Second) of Contracts Section 261, cmt. b (“Discharge by Supervening Impracticability”) - “b. Basic assumption. In order for a supervening event to discharge a duty under this Section, the non- occurrence of that event must have been a “basic assumption” on which both parties made the contract … its application is simple enough in the cases of the death of a person or destruction of a specific thing necessary for performance. The continued existence of the person or thing (the non-occurrence of the death of destruction) is ordinarily a basic assumption on which the contract was made, so that death or destruction effects a discharge.” o If we look at comment B to section 261 which is a different section but this is where you get the definition or at least some guidance around the idea of what a basic assumption is that's equally applicable whether talking about mistake or frustration or impracticability o The concept here is that it has to be something that's so basic it didn't even need to be said in the contract. o As the comment points out, the application of that concept is simple enough in the cases of the death of a person or destruction of a specific thing necessary for performance. o Like Taylor v. Caldwell, the continued existence of the person or thing is ordinarily a basic assumption which the contract’s made so that death or destruction effects a discharge.

o A basic assumption is the continued existence of the thing or the person, state of affairs - “b. Basic assumption … its application is also simple enough in the cases of market shifts or the financial inability of one of the parties. The continuation of existing market conditions and of the financial situation of the parties are ordinarily not such assumptions, so that mere market shifts or financial inability do not usually effect discharge under the rule stated in this Section…” o What doesn't count as a basic assumption on which the contract was made?  market shifts or changes in the financial ability of one of the parties. In the view of the restatement, these are basically business risks. These are the kinds of changes in events, things that happen in the future that parties are expected to sort of factor into their thinking when they’re entering into the contract. They're not so basic such as the continued existence of the subject matter of the contract or the thing that's being bargained over. Transatlantic Financing Corp. v. United States - This case addresses the idea of commercial impracticability - “Impossibility” morphine into “Impracticability” o This is essentially a morphing of the old doctrine of impossibility that we saw in Taylor v. Caldwell into a new theory o The idea is that even though performance may not be literally impossible, as was in Taylor v. Caldwell because the concert hall in there longer existed, performance has become so much more onerous that it's made performance effectively impracticable. o These claims of commercial impracticability are very difficult to make, and in fact it doesn't succeed here. o There are some situations where it has worked, but for the most part this is an extremely difficult theory to prove because the idea is that most risks that come to pass are risks that parties, particularly commercial entities, should anticipate and plan for in their contracts on the front end rather than saying oh we had no idea that something was going to happen because everything is foreseeable on some level. - Abandonment of “implied condition” analysis o Another point that you want to get from transatlantic financing is pretty explicit abandonment of the whole “implied conditio”n approach to these kinds of problems and instead looking at a risk allocation analysis and be able to identify the new test that comes out of transatlantic financing where the court identifies the steps in the process analyzing these situations.  1) A contingency is something unexpected must've occurred  2) The risk of the unexpected occurrence must not have been allocated either by agreement or by custom  3) The occurrence of the contingency must have rendered performance commercially impracticable. o It is to show impracticability o There's a new test in town when it comes to establishing impracticability Restatement (Second) of Contracts Section 261 (“Discharge by Supervening Impracticability”) - Section 261 is the Restatement section that essentially codifies the rule around commercial impracticability in the United States - It's very similar to what you see in Transatlantic Financing - It's also very similar to what we saw in the section dealing with frustration of purpose o “Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the noon-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.” o Here, unlike frustration, it's not that the purpose of the contract has been frustrated by some supervening event, it's that the performance is made “impracticable” by the occurrence of this event. Restatement (Second) of Contracts Section 261, cmt. d (“Discharge by Supervening Impracticability”) - What counts is impracticable?