Sometimes, performance may be excused because the circumstances regarding the performance has changed. For instance, it may no longer be possible, or rather, it is impossible to perform. As such, there are three categories of changed circumstances: impossibility, impracticality, and frustration of purpose.
Impossibility means that it is objectively impossible to perform. That is, no one would be able to perform, not just the parties involved. Sometimes the impossibility may be present at the formation of the contract. Traditionally, impossibility was not an excuse because contracts are to be construed as strict liability. However, through time, the justification was permitted. A good example of an objective impossibility would be the renting of the building to use as a theater, but the building burns down before the promised use can be fulfilled.
Impracticality is different from impossibility because the promised performance is not impossible. However, it would not make any sense to perform because of the burden of the cost, the visioned intent of the parties at the time of signing, etc.
Frustration of purpose is where performance could have occurred but the parties choose not to because the purpose is no longer relevant. For instance, a party chooses to pay for a room in a hotel to see a presidential drive by. However, the President reschedules the drive-by for another day in another city. Although both parties could perform (the room can be provided and the licensee could stay the night) the purpose of the stay has changed.
Hemlock Semiconductor Operations, LLC v. Solarworld Industries Sachsen GmbH
867 F.3d 692 (6th Cir. 2017).
Hemlock is the plaintiff who was successful in obtaining summary judgment against Sachsen for the full damages of the breach. Sachsen appealed.
Question
Can the lack of performance be justified because of impracticability or frustration of purpose? As such, did the trial court error?
Rule
Both impracticability and frustration of purpose are defenses that rely on proof that an unforeseen circumstance altered a basic assumption at the time the contract was made.
Impracticability can be proved with a showing of “extreme and unreasonable difficulty, expense, injury or loss involved.” The defense should only be used if the changed circumstances are vitally different than what the parties believed performance would require when they entered the contract.
Frustration of purpose requires the contract to be changed in such a degree that one party’s performance becomes worthless to the other.
Holding
Impracticability and frustration of purpose are not justified here. The trial court did not error in granting summary judgment and awarding full damages. Affirmed.
Facts
Hemlock and Sachsen entered into several long-term supply agreements (LSAs) for polysilicon from 2006 to 2019. The agreements said that Sachsen was required to purchase a certain amount of the polysilicon at a fixed price during this time.
When the parties first entered the contract, the market price of polysilicon was high. This means that under the contract, Sachsen was getting a deal by purchasing below the market price. However, in 2012, China subsidized and distributed polysilicon, drastically lowering the cost. Now, Sachsen was stuck paying a higher price under the contract while the product was being sold at a much lower price.
The parties worked together to temporarily amend the contract so the price would not be so hard on Sachsen. However, when the temporary agreement expired a year later, Hemlock demanded the price of the original LSAs be paid. Sachsen refused and Hemlock sued.
Analysis
Sachsen first argues that the dropping of market prices made it impractical to pay for the polysilicon under the LSA price. However, the market price is not a basic assumption (one cannot assume that the price will remain stable during the life of a contract). As such, changes in market are expected to be variable. Sachsen could have and should have protected themselves against a variable market price. Not doing so meant that they would assume the risk of any variation.
This reasoning is further supported by precedent which says that instability of the market is not sufficient to trigger an impracticality defense. Additionally, the claims that a third party action caused the change is insufficient because the effect of the action was the same (the change in the market). Note also that losing millions a day due to market changes is not drastic enough to trigger impracticability.
For the same reasons, Sachsen’s second argument of frustration of purpose fails. In addition to the above arguments, “mutual profitability” purpose is not a viable argument because both parties knew that the profitability could suffer depending on market conditions.
Additional Notes
Polycrystalline silicon is material used in computer chips.
The claim here is that the impracticability and frustration of purpose was based on China’s actions which depressed the market for the price of the polysilicon.
Here, impracticability and impossibility is treated as the same (most courts do). Impracticability does not require impossibility, only that it is “impracticable for the party to perform because of extreme and unreasonable difficulty, expense, injury or loss involved.”
Only if “unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of both parties.”
The courts also consider if an unforeseen event occurs what would have been the basic assumption if the event did not occur.
To note the difference between impracticability and impossibility, consider a person contracted to paint a ship. If the ship sinks, the ship could still be raised and then painted. Impractical but still possible.
Sachsen could have protected themselves by creating a provision which said if the market place decreases to a certain percentage then the agreement price would decrease by a certain percentage.
Restatements 261, 266
” . . . A parties 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.”
Note, that some things are so out of place that it cannot be a basic assumption. People need to contemplate the circumstance but not so contemplated that there are provisions about the circumstance in the contract.
262 Death or Incapacity of Person Necessary for Performance
If the contract is dependent into the contract for performance to occur, then if that person dies the contract could be impracticable.
Protect against this reliance by writing into a contract.
263 Destruction, Deterioration or Failure to Come in Existence of Thing Necessary for Performance
Same thing as above but with a “thing”
264 Prevention by Governmental Regulation or Order
Similar as above but regarding a governmental order. The difference is that parties do not need to contemplate the regulation for the contract to be impracticable.
265 Discharge 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 nonoccurrence 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.”
Do not rely on these, because they do not make the best arguments.
Mel Frank Tool & Supply, Inc. v. Di-Chem Co.
580 N.W.2d 802 (Iowa 1998).
Frank is the plaintiff, suing for breach of contract and lost rent. Summary judgment was granted in their favor which Di-Chem appeals.
Question
“Whether the defendant may voluntarily terminate the lease agreement based on the defendant’s position that the warehouse could not be used for storing hazardous materials [resulting from] the inspection of various departments of the City . . . .”
Rule
Restatement 265: Discharge 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 nonoccurrence 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.”
In other words, the contract needs to be frustrated. To determine that the frustration can be used as a defense, the frustration must meet the following three elements:
- Principal purpose must be frustrated.
- Frustration must be substantial (loss of profit is not enough, must be severe).
- The non-occurrence of the event must be on a basic assumption.
Holding
- A governmental regulation can alter the use of the premises.
- If so, then the purpose is substantially frustrated.
- However, there is no relief if the purpose can still be used for a leased purpose.
- Loss of value has minimal consideration.
There was no substantial frustration. Affirmed.
Facts
Frank was a landlord who leased out a warehouse to Di-Chem. All the negotiations were conducted between the agents of the parties, but they did meet once before the lease was executed. The purpose of the warehouse was to distribute “chemicals.”
Shortly into the execution of the lease, the City Fire came to inspect the premises. They determined that Di-Chem was not allowed to store certain hazardous chemicals and that the building was also not up to code. Frank and Di-Chem talked about it and determined that there could be a remedy, but it would be costly. Not wanting to incur the cost, Di-Chem moved out of the building saying that the City Regulations made it impossible to use the warehouse for the intended purpose.
Frank sued for the remainder of the rent under the lease because of the breach.
Analysis
Here, Di-Chem would have suffered a loss for continued use, but they have not proved that they were substantially frustrated from the intended purpose. From the communication between parties, it is evident that Di-Chem was planning on using the warehouse for more than storing hazardous chemicals. They were also storing only chemicals, not classified as hazardous. Because Di-Chem did not provide a percentage of how many chemicals would be affected, or how much profits would be lost from losing that intended purpose. Therefore, the affirmative defense of impossibility through frustration of purpose is not applicable.
Additionally the lease language is not applicable because it focuses on temporary loss or partial destruction, not the case here.
Finally, the fact that a third party represented Di-Chem does not matter because the language in the lease signed was not ambiguous.
Additional Notes
The defendant argues that the contract is not enforceable because of mistake, illegal contract, failure to mitigate damages, fraud in the inducement, and impossibility. Impossibility is the only option here (really meaning impracticability, really meaning frustration).
Here, impracticability does not work because the defendant did not show that the primary purpose was to store hazardous chemicals.
Disclaimer
The content contained in this article may contain inaccuracies and is not intended to reflect the opinions, views, beliefs, or practices of any academic professor or publication. Instead, this content is a reflection on the author’s understanding of the law and legal practices.
