Circumstances change. Business ventures can often miss the mark. When a commercial enterprise meets a surprising turn in the market, the commitments businesses make with one another often come under stress. Many business owners struggle with delivering on the terms of a contract after a business deal goes bust, clients disappear, or demand dries up overnight. For those business owners, they may try to get out of a contract because it is no longer profitable or possible to deliver under the originally contemplated terms. In these cases, one may claim “Frustration of Purpose.”
Frustration of Purpose—the General Rule
Where a valid claim of frustration of purpose is established, the claimant is legally excused from performing its obligations and all other seeking relief for that nonperformance will be unable to collect damages or relief. That means one party doesn’t need to ship the products he or she contracted to manufacture, or a party doesn’t need to pay for or occupy a property after signing a lease. To establish frustration of purpose, a party must show that:
- without his or her own fault
- an event has occurred,
- the non-occurrence of which was a basic assumption on which the contract was made, and
- the language of the contract did not contemplate the event or assign the risk of loss.
When a party claims he or she is not responsible under a contract because of frustration of purpose, a judge generally considers “the foreseeability of the supervening event, allocation of the risk of occurrence of the event, and the degree of hardship to the promisor.” Chase Precast Corp. v. John J. Paonessa Co., 409 Mass. 371, 375, 566 N.E.2d 603 (1991). As these matters are highly contextual—based on the facts and the reliability of the commercial agents arguing for or against frustration of purpose—the jury is typically the party to make findings about whether the necessary elements are in evidence. Id.
Foreseeability, or the lack thereof, is essential in a claim of frustration of purpose. The party claiming his or her purpose was frustrated must describe an event that was not reasonably foreseeable. The fact that the claimant did not expect it is not enough. Some events can be reasonably anticipated, such as a downturn in demand for a good or service, a change in price, new legislation, or severe weather. Those kind of events are not really unforeseeable and thus, not a valid grounds for frustration of purpose.1 An event such as war breaking out, a powerful earthquake, the sudden cancellation of a massive sporting event, the negation of a large government contract, or a political coup may comprise an “unforeseeable event” that could negate one’s obligations under frustration of purpose.
Many parties undertake risks when they engage in a commercial relationship. The fact that a risk turns out poorly for one party, or that an unlikely event occurs, does not mean that the event was unforeseeable, merely that the party had a poor stroke of luck.2 For example, a tenant of a residential apartment was not able to avoid the obligations of a lease she had signed after her student visa application was denied and she could not enter the country to study. The denial of a student visa application is reasonably foreseeable, thus her frustration of purpose claim failed.
Allocation of Risk
A critical element in evaluating a defense of frustration of purpose is whether the event or circumstance that made performance impossible or impracticable was allocated by the contract. Did the parties anticipate this event happening? Did they account for such things in their contract? If so, there can be no valid claim for frustration of purpose.3
Standard contractual clauses such as indemnity provisions, warranties and representations, risk of loss, and other related provisions will often actively acknowledge and anticipate certain events that otherwise may be grounds for a defense of frustration of performance. For example, if one party indemnifies the other for any loss or harm caused in the transportation of goods, then the indemnitor cannot claim frustration of purpose if a tornado wipes out the trucks or ships used to transport the goods. Without such a clause, a tornado destroying the seller’s trucks would be an unforeseen event that would excuse performance in a contract for delivering goods to a buyer.
The best way to prevent these sort of legal challenges in your business is to efficiently allocate risk in your contracts. Having good legal counsel prepare your contracts or review a contract another party asked you to sign will go a long way to prevent trouble in the future.
1 Gurwitz v. Mercantile/Image Press, Inc., 2006 WL 1646144, *2 (Mass.Super.2006) (“If the normal ebb and flow of consumer demand in a market-based economy were adequate grounds for excusing contractual performance, scarcely any contract could be enforced at all”).
2 Baetjer v. New England Alcohol Co., 319 Mass. 592, 602, 66 N.E.2d 798 (1946) (“[A] contracting party cannot be excused where the only ‘frustration’ consists in the fact that known risks assumed by him have turned out to his disadvantage”).
3 Mishara Constr. Co. v. Transit–Mixed Concrete Corp., 365 Mass. 122, 310 N.E.2d 363 (1974) (“given the commercial circumstances in which the parties dealt: Was the contingency which developed one which the parties could reasonably be thought to have foreseen as a real possibility which could affect performance? Was it one of that variety of risks which the parties were tacitly assigning to the promisor by their failure to provide for it explicitly? If it was, performance will be required. If it could not be so considered, performance is excused.”).