Supply Chain Survival Series: Impracticability, Impossibility and Frustration of Purpose (Article #10)
In our previous article, we discussed the concept of force majeure, which can excuse parties from performing their contractual obligations in certain circumstances. As explained in that article, force majeure is a contractual term that only applies if it is included in the governing contract. This article discusses three related concepts that may excuse parties’ obligations if a contract is silent on force majeure: impracticality, impossibility, and frustration of purpose.
What is Commercial Impracticability? UCC § 2-615(a)
If a contract does not include a force majeure provision, a party may nonetheless be excused from performance under the concept of commercial impracticality. The doctrine of impracticability may be applicable when a party is unable to fulfill its obligations due to unforeseen circumstances that render performance impracticable.
UCC § 2-615(a) sets forth the doctrine of impracticality. Section 2-615(a) excuses non-performance of a contract when performance is “made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made.” To prevail on a claim under UCC § 2-615(a), a party must generally show:
- An unforeseen event occurred (the “contingency”);
- The contingency made performance impracticable; and
- The nonoccurrence of that contingency was not foreseeable at the time of contracting.
For example, if ABC Corp. agrees to deliver goods to a buyer on a specific date, but a natural disaster such as a hurricane destroys its factory, ABC Corp. would likely be excused from performance due to impracticability. In this case, the hurricane was unforeseeable and beyond the supplier’s control, rendering performance of the contract impracticable.
Businesspersons faced with significant financial losses on long-term contracts may be tempted to argue that the very volatility of market prices represents an unforeseeable “contingency” justifying some relief under § 2-615. The majority of courts, however, have rejected this argument and have held that a change in market price of the subject goods from the price that existed at the time the parties entered into their sales contract does not generally render performance impracticable within the meaning of UCC § 2-615.1
Under this general rule, impracticability of performance has not been found when the price of the subject goods rose, even when combined with additional production-cost increases,2 or when the price of the subject goods fell.3
What is Commercial Impossibility?
Like impracticability, the doctrine of impossibility generally applies where a party’s performance under a contract is impossible due to unforeseen circumstances. Unlike the doctrine of impracticality, however, the doctrine of impossibility is not explicitly codified in the UCC, but rather is a creature of common-law. These doctrines are typically treated similarly by courts, but the doctrine of impossibility varies more by jurisdiction, given its provenance.
To prevail on a defense under the doctrine of impossibility, the defaulting party must show that an unanticipated circumstance has made performance of the promise vitally different from what should reasonably have been within the contemplation of the parties.4 Like impracticability, price increases alone will not make a contract “impossible” to perform.5
Although the Uniform Commercial Code (UCC) generally requires parties to a contract to perform their obligations in good faith, the doctrines of impracticability and impossibility may excuse a party from performance under the contract. When drafting any contract, parties should consider what events, if any, may arise that would impact performance and consider whether to make the contract contingent on those events.
What is Frustration of Purpose?
Unlike force majeure and impracticability/impossibility, the frustration of purpose doctrine relates to the underlying purpose of a contract, as opposed to a party’s actual inability to perform. The Restatement (Second) of Contracts § 265 provides that frustration of purpose may excuse a party’s performance when: (1) a party’s principal purpose is substantially frustrated; (2) such party is not at fault; and (3) the contract was made on the basic assumption that the cause of the frustration would not occur.
A party’s contractual obligations may only be discharged under the frustration of purpose doctrine if the purported frustrated purpose was such a fundamental basis of the contract that “without it the transaction would make little sense.”6
A Drafting Note on Impracticability, Impossibility and Frustration of Purpose.
Although UCC § 2-615 and the common law doctrine of impossibility and frustration of purpose may be interpreted as eliminating the need for a force majeure provision, the parties to the contract often will want to define, enlarge, or restrict what constitutes a “contingency” justifying excuse from performance or what rights and obligations, exactly, the parties have upon the occurrence of a contingency. So while parties that suffer an unexpected disruption to production may have defenses under the UCC or common law, a well-drafted force majeure clause remains a contracting best practice.
If you have any specific questions on this article, please contact your Quarles attorney:
- Patrick Taylor: (414) 277-5523 / email@example.com
- Brandon Krajewski: (414) 277-5783 / firstname.lastname@example.org
- Hannah Schwartz: (414) 277-5551 / email@example.com
Quarles attorneys Michael Chargo, Lauren Zenk and Rachael Brodd also contributed to this article.
1 Northern Illinois Gas Co. v Energy Co-op., Inc., 122 Ill App 3d 940, 78 Ill Dec 215, 461 NE2d 1049, 38 UCC Rep Serv (CBC) 1222 (3d Dist. 1984).
2 Exelon Generation Co., LLC v. General Atomics Technologies Corp., 559 F. Supp. 2d 892 (N.D. Ill. 2008)
3 Hancock Paper Co. v. Champion Intern. Corp., 424 F. Supp. 285 (E.D. Pa. 1976), aff'd, 565 F2d 151 (3d Cir 1977)
4 Bd. of Supervisors v. McMahon, 219 Cal. App. 3d 286, 300, 268 Cal. Rptr. 219, 226 (Ct. App. 1990).
5 Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1294 (Fed. Cir. 2002).
6 Restatement (Second) of Contracts § 265, Cmt (a) (1981)
Supply Chain Survival Series: Force Majeure (Article #9)
Supply Chain Survival Series: Anticipatory Repudiation and Demand for Adequate Assurances (Article #8)
Supply Chain Survival Series: Contract Modification (Article #7)
Supply Chain Survival Series: Additional Statutory Default (Article #6)
Supply Chain Survival Series: Key Statutory Default Terms (Article #5)
Supply Chain Survival Series: Battle of The Forms (Article #4)
Supply Chain Survival Series: What Contract Terms Apply? (Article #3)
Supply Chain Survival Series: Is There a Contract? (Article #2)
Supply Chain Survival Series: Introduction (Article #1)