Chap. 9. mistake, impracticability, frustration
Sec. 1. mutual mistake
In Kastorff p.139, rescission of contract for (unilateral) mistake in a bid ;;; in excavating all materials case , p.422, defense of mutual mistake not available , coz of pacta sunt servanda , consideration, voluntary concession ;;; in peerless case , (i) court strive to find a reasonable interpretation, (ii) no sensible way to determine which ship was intended by the parties, (iii) no meeting of minds as to which ship, no consensus, (iv) no binding contract (at contract formation level)
Stees v. Leonard, <building on quicksand , mutual mistake> p.808,
- D contacted to do everything necessary to complete a building for P ; building repeatedly fell down, coz of soil –quicksand- incapable of sustaining the building ; D refused to perform the contract ; no provision as to the character of the foundation
- Held, D was bound by his express contract to do everything necessary to complete the building ; contract was to do everything, rather than complying with specifications
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Renner,
- Contract for sale of land for commercial jojoba cultivation ; before contract formation, purchaser made it clear to the seller that the purpose of the purchase is to cultivate jojoba and that adequate water supply was required ; proved no water enough for jojoba cultivation ; sue for rescission of contract
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Restatement (Second) of Contracts § 152 (1981)
§ 152. When Mistake of Both Parties Makes A Contract Voidable
- (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 § 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.
Sec. impracticability
UCC - impracticable
- (i) a failure of a pre-supposed condition, which was (ii) an basic assumption of the contract, which failure was (iii) unforeseeable, and (iv) the risk not allocated .
DO - “impracticable”
- (i) a failure of a pre-supposed condition, which was (ii) an basic assumption of the contract, which failure was (iii) unforeseeable, (iv) without fault of either party, (iv) the risk not allocated,,, then, parties discharge themselves from further performance
Mineral Park Land Co. <land in ravine case>
- P owner of the land in ravine ; P granted D a right to haul gravel and earth ; D agreed to take all gravel and earth from the ravine necessary for the construction ; (P granted a right to haul gravel, in exchange for D’s duty to take all gravel therefrom) ; D took gravel which was above the water level, remaining gravel which was below the water level could have been taken only at a prohibitive cost ;
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Taylor v. Caldwell, music hall, which was burned, before rent started > , p.825
- D agreed to rent a music hall to P ; before rent started, music hall burned ; P sued D for breach of contract ; no clause in the contract as to allocation of risk
- Continued existence of the music hall was an “implied condition”, for the fulfillment of the contract ; destruction of the music hall, without fault on either party, rendered the performance impossible ;
- Where a thing is essential to a contract, implied condition to fulfillment of the contract, and the thing is destroyed by no fault of either party, the parties are freed from obligation
- Thus, both parties here are excused from their obligation under the contract
Transatlantic Financing Corp. v. <Suez canal was closed, delivering wheat around it, foreseeability of risk > p.830
- Contract to deliver wheat via the Suez Canal ; when the Suez was closed, P delivered wheat by going around it ; P sought for a benefit D received in quantum meruit ;
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- <quantum meruit> even assuming commercially impracticable, the ship operator either (i) recover in quantum meruit for entire performance OR (ii) collect contract price, cannot both contract price + quantum meruit for additional expense
- DO, (1) commercially not impracticable ; (2) foreseeability was a factor probative of assumption o frisk of impracticability
US v. Wegematic Corp.,
- contract for a sale of computer system, which D seller described as "truly revolutionary" and promised delivery within nine months ; D twice postponed delivery and finally announced delivery became impracticable due to engineering difficulties ; P buyer filed suit against D seller
- Held, D promoted the computer system as a "revolutionary" breakthrough ; the risk of the revolution's occurrence falls on D, not P
- DO- impracticable – change of circumstance after contract formation, here? ; law gives promisee what he was promised ; pacta sunt servanda ; risk allocation was impliedly made by the provision “truly revolutionary”
Pontiac-GMC, v. <contract for a sale of school bus body, manufacturer’s failure, seller’s failure, impracticable> ,p. 839
- Contract for a sale of school bus body ; under the contract, school bus body was to be manufactured by a specific manufacturer ; no escape clause excusing the seller if the supply fails ; the manufacturer went into receivership and never manufactured ; buyer sued seller for breach of contract
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- Seller's failure to deliver school bus bodies was not breach of contract, where manufacturer had been specified in contract, such that manufacture by the manufacturer was basic assumption on which contract was made ; the manufacturer had ceased manufacture … , and seller promptly informed buyer of problem
- DO- (i) change in circumstance after contract formation, (not mutual mistake, but impracticable), (ii) specific supplier, (iii) without fault on either party , (iv) basic assumption of the contract , (v) prompt notification
- Do- music hall, implied condition, here ? DO - the contract for a sale is impliedly conditioned on manufacturer’s manufacture of school bus body
Canadian Industrial Alcohol Co. v. Dunbar Molasses Co., <seller’s duty was Not conditioned on supplier – refinery> , p.844
- Contract for a sale of a specific and identified product ; the contract provided that if the product failed to come into existence, the obligations of both parties would be terminated ; upon D’s failure to deliver the product, P sued D for breach of contract
- D’s arg. - his duty to deliver was conditioned upon its supplier's willingness to supply the product ; (DO- same rationale as in contract for a sale of school bus body, )
- Held, for P, (i) if D seller had contracted with refinery (supplier, manufacturer) in a timely manner, the seller could have secured the product ; (ii) when P gave order, D did not give notification of contract with refinery = D seller D did not notify buyer P of the status of contract with refinery (manufacturer)
- DO – unlike contract for a sale of school bus body, (i) manufacturer (supplier) was not specific, specific supplier, (ii) fault on the part of seller, (iii) not prompt notification, timely notification ;
Eastern Air Lines, Inc. v. Gulf Oil Corp., 415 F. Supp. 429 , p.848
Eastern Air Lines, Inc. v. Gulf Oil Corp., 1975 (oil shock), FL, p..77, p.526
- Eastern and Gulf have enjoyed a mutually advantageous biz relationship involving the sale and purchase of aviation fuel. Gulf demanded price increase. Eastern filed a complaint, alleging that Gulf had breached its contact and requesting injunctions requiring Gulf to perform the contract.
- Gulf argued that (i) the contract is not a binding requirement contract in that it lacks definiteness and mutuality, (ii) Eastern violated the contract by manipulating its requirements through “fuel freighting”, (iv) the contact is commercially impracticable,
Whether requirements contract
- A requirements contract is a contract in which one party agrees to supply as much of a good or service as is required by the other party, and in exchange the other party expressly or implicitly promises that it will obtain its goods or services exclusively from the first party (wiki)
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- (DO- in Mattei, If one of the promises leaves a party free to perform or to withdraw from the agreement at his own unrestricted pleasure, the promise is deemed illusory and thus no consideration)
- Under the UCC, requirements contracts are enforceable
- Where airline and its fuel supplier had consistently over the years relied upon each other to act in good faith in the purchase and sale of required quantities of aviation fuel, …, contract which called for oil company to supply the airline with its requirements for aviation fuel was enforceable.
Whether violated the requirements contract
- “Between merchants, "good faith" means "honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade"”
- the airline was not violating contract for sale of aviation fuel by manipulating its requirements through “fuel freighting.”
Whether commercially impracticable
- In UCC, there must be (i) a failure of a pre-supposed condition, which was (ii) an basic assumption of the contract, which failure was (iii) unforeseeable, and (iv) the risk not allocated .
- insufficient … , because of increase in market price of foreign crude oil …, requirements contract covering sale of aviation fuel had become commercially impracticable.
- Since … the so-called energy crisis were reasonably foreseeable at the time that requirements contract for sale of aviation fuel was executed, seller could not avoid obligations under the contract on grounds of commercial impracticability
Remedy
- Airline which had entered into contract with oil company to purchase the airline's requirements of aviation fuel at certain cities for a five-year period … was entitled to specific performance of the contract
Sec. frustration of purpose p.854
Krell v Henry, < cancellation of coronation ceremony, implied condition, frustration of purpose > , p.854
- whether watching coronation ceremony was implied condition, at the time of contract formation,
- = whether both parties knew that the reason to rent the flat was to watch coronation ceremony
- = whether watching coronation ceremony was basic assumption of the contract such that in case of non-occurrence, both parties would discharge themselves from further performance (DO- come downs to intent of the parties)
- (parol evidence rule not applicable here) affidavit shows that the flat was rented for the purposed of watching the ceremony
- The ceremony is special qualification of the contract ; cancellation of the ceremony was not foreseeable ; (DO-without fault on either party)
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Swift Canadian Co. v.
- P, Canadian seller, D, buyer of goods in US, .
- two clause in contract relevant to the present case - (i) neither party is to be liable for acts of any government, (ii) when goods are sold F.O.B. seller’s plant title and risk of loss shall pass to buyer when product is loaded on cars at seller’s plant.
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- DO- Risk allocation by F.O.B. clause ; Chase Precase Corp. – by custom in government work
Chase Precast Corp. v. ,
- Contractor contracted with government to improve public highway ; for the contract, contractor (D) contracted with supplier (P) to purchase concrete barrier ; after project began, government cancelled barrier part ; P supplier sued contractor for anticipated profit ; D’s arg. frustration of purpose
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- DO- frustration of purpose is like impracticable, See “impracticable” (i) a failure of a pre-supposed condition, which was (ii) an basic assumption of the contract, which failure was (iii) unforeseeable, (iv) without fault of either party, (iv) the risk not allocated,,, then, parties discharge themselves from further performance .-->. Here, all elements met except for risk allocation
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- <risk allocation implicitly by contract provision> (i) standard provision contained in government contract allows government to cancel item when found unnecessary (risk allocation standard provision contained in government contract) ; (ii) P supplier knows both (a) the barrier was supplied for government contract, and (b) the standard provision coz P contracted with government before ;
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- DO- frustration of purpose,
NIPSCO v.
- long term contract for a sale and purchase of coal at a fixed price ; as coal price goes down, price of electricity proves high, coz purchased coal at a relatively high fixed price ; government issued an order “economy purchase order” which directed NIPSCO (utility company) to find a way to reduce the ; the NIPSCO stopped buying coal, arguing (i) force majeure, (ii) frustration of purpose, or (iii) impossibility
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- a fixed-price contract is an explicit assignment of the risk of market price increases to the seller and the risk of market price decreases to the buyer ; . If the buyer incorrectly forecasts the market, he is to blame and cannot shift the risk back to the seller by invoking impossibility or related doctrines
- DO- exam, impracticable comes up, invoke force majeure, impracticable, frustration of purpose
Sec. 4 half measure
Young v. Chicopee,
- contract to repair wooden bridge, requiring at least half the lumber be on the job, paid based on the amount of lumber incorporated into repair work ; while the work in progress, the bridge was totally destroyed by fire without fault of either party
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ALCOA
- long term contract, by tenth year ALCOA was incurring losses that threatened to mount to more than 75M dollars, due to increase in electricity rate
- unforeseeable rise in electricity rate, which resulted in mistake in prediction of range of price, and which caused seller to lose more than 60M dollars, constitutes a mutual mistake of fact and a risk which contract did not allocate (DO- mutual mistake, usually, at the time of contract formation, whereas impracticable kicks in when change in circumstances after contract formation, here ,,, weird)
- under IN law, custom in trade may lead a court to impose a risk on a party where contract is silent ; however, where neither express contract term nor custom in trade usage dictate a risk allocation, court must allocate risk in some reasonable way ,
- under IN law , doctrines of impracticability, frustration of purpose and mistake discharge an obligor from his duty to perform a contract where a failure of basic assumption of the parties produces a grave failure of the equivalence of value of the exchange to the party ; in impracticable, frustration of purpose, mistake,,, mistake of fact or non-occurrence must be basic assumption of the contract
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Chap. 10 Third party beneficiary contract p.880
- e.g. third party beneficiary ; when delegate a duty to a third party, the other contracting party is usually a third party beneficiary of the delegation ; the beneficiary of a life insurance policy may enforce a right to the death benefits even though the beneficiary did not apply for it, pay for it, or have any other connection with it – the contract
Rest § 302 Intended and Incidental Beneficiaries ,
- (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and either (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary; or (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised performance.
- (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
Lawrence v. Fox , p.883
- Person A (Holly) (debtor) loaned B (Fox, defendant) ; A owed the same amount to C (Lawrence, plaintiff). B then promised A to pay the $300 to C . When B did not pay A, C sued B
- B (D) argued that that (i) … (ii) that his agreement with A to pay C was void for lack of consideration, and (iii) that there was no privity between B and C
Held
- (ii) D’s (B) promise to repay P(C) for A , in return for the loan from A, was sufficient consideration to make the contract enforceable (DO- consideration between A and B is sufficient for promise to pay to C )
- (iii) since D (B) promised the A, he would repay plaintiff in return for consideration advanced by the debtor, it was unnecessary for defendant to make a promise to plaintiff because upon proof of the promise made to the debtor to pay plaintiff, a promise to plaintiff was implied. (B’s promise to A to pay to C implies the promise to C)
- Where one person makes a promise to another for the benefit of a third person, that third person may maintain an action upon it.
- ** exam ** third beneficiary ; two arguments (i) lack of consideration b/w promisor and TP, (ii) no privity between promisor and TP,
Seaver v. Ransom,
- late aunt passed away earlier than late uncle ; late uncle promised late aunt to deliver a property to plaintiff niece
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Rathke v.
- state prisoner sued (i) state's corrections contractor, (ii) contractor's employees, and (iii) corrections contractor's drug testing contractor, alleging that he had served 30 days in disciplinary segregation because of false positive on prison drug test.
- Held, (1) P prisoner was intended third-party beneficiary of contract between state and corrections contractor; (2) corrections contractor's employees could not be liable to P for contractor's alleged breach of contract; and (3) P was not intended third-party beneficiary of corrections contractor's separate contract with drug testing firm.
- motives of the parties in executing a contract, especially the promisee, are determinative, as to whether a third party is an intended beneficiary ;
- as a general rule, if the promised performance is rendered directly to the beneficiary, parties intended the beneficiary to be a intended third party beneficiary
- prisoners were not mentioned in contract between correction contractor and drug testing contractor ‘ (thus, the parties did not intend prisoner to be a intended third party beneficiary
Verni v. Cleveland Chiropractic College, third party beneficiary , fraudulent misrepresentation , p.905
- the student was dismissed from the college after he committed misconduct by selling copies of forthcoming examinations ; the student’s claim that instructor breached the contract by failing to treat students fairly, as stated in the faculty handbook ;
- Held, Only parties to a contract and any third-party beneficiaries of a contract have standing to enforce that contract ;
- the student was not entitled to third-party beneficiary status under the contract between the college and instructor,, coz the terms of the contract did not directly and clearly express the intent to benefit the student
- the student voluntarily waived his right to have a full committee
- no evidence that he relied on the college's representations that it would follow the due process procedures at his hearing.
- <fraudulent misrepresentation> the evidence must establish the following elements: (1) the claim is a false, material representation; (2) the speaker knows of its falsity; (3) the speaker intended to induce the hearer to act upon the statement, ; (4) the hearer's ignorance of the falsity of the statement; (5) the hearer's reliance on its truth, and the right to rely thereon; and (6) proximate cause.
Grigerik v. Sharpe, < a third party beneficiary, foreseeability > p.908
- P (landowner, vendee) , D (contractor) who was hired by vendor tp test soil and design septic system ;
- Held, (1) intent of both parties, not just one party, to contract determines whether third party is entitled to third-party beneficiary status (DO- Cf. particularly, promisee) ; (2) vendee was not third-party beneficiary of contract between vendor and defendants; (3) foreseeability is not sufficient to confer third-party beneficiary status.
Septembertide Pub., B.V. v. Stein & Day, Inc., p.912
- author - hardcover publisher - paperback publisher ; competition between author and hardcover publisher’s creditor for proceeds from paperback publisher ;
- Held, (1) hardcover publisher's failure to pay the final installment of the author's advance did not warrant rescission ; (2) author was an intended third-party beneficiary of the sublicense agreement ; (3) author's right to two thirds of the proceeds of the sublicense agreement was superior to the hardcover publisher's creditor's security interest
- author was intended third-party beneficiary of agreement under which publisher sublicensed paperback publication rights; (i) hardcover and paperback publication agreements were entered virtually simultaneously, (ii) author and his work had been mentioned by name in paperback agreement, (iii) hardcover publisher had used its receipts from paperback publisher to pay author's advance, (nexus), (iv) same paperback proceeds were to be paid to author, and (v) paperback publisher had knowledge of hardcover publisher's agreement with author.
- when publisher assigned its contract rights and accounts pursuant to security agreement, two thirds of contractual proceeds had already been transferred to author.
- The delegation of a contract obligation does not of itself absolve the obligor of its duty. For absolution, the assent of the obligee is required.
Sally Beauty Co. v. Nexxus <delegation of duty under exclusive distributorship contract not allowed to competitor> , p.919
- D company cancelled exclusive distribution agreement because competitor succeeded to contract party’s rights and interests in all of the agreement.
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- exclusive distribution contract – based upon a relationship of personal trust and confidence
- in the agreement – a term “best efforts” in promoting the sale of D’s product ; Cf. beer Falstaff p.532
- the delegation was not bargained for, at the time of contract formation
Herzog v. Irace, <assignment of right, future right, p.926
- Attorney’s (D) client was injured and sued for damages. P (physician) performed surgery on the client. In lieu of payment, P physician agreed to accept from the client an "assignment of benefits" of any settlement the client might receive. P notified Ds of the assignment, as the client indicated he would pay P directly, P physician sued Ds attorney seeking to enforce the “assignment of benefit.” (DO- interesting, not sue Jones, but attorneys)
- Held, (1) the assignment of a future right to litigation proceeds was valid, ; (2) Ds were obligated to pay to P when Ds received notice of the assignment ; (3) Ds would not have violated any ethical rules by disregarding their client's later instructions, as the client had already validly assigned his right to the funds. (DO- to the physician)
validity of assignment (assignor – assignee – obligor)
- An assignment is an act or manifestation by the owner of a right (the assignor), indicating his intent to transfer that right to another person (the assignee).
- For an assignment to be valid and enforceable against the assignor's creditor (DO- debtor?) (the obligor), the assignor must make clear his intent to relinquish the right to the assignee and must not retain any control over the right assigned or any power of revocation.
- The assignment takes effect through the actions of the assignor and assignee and the obligor need not accept the assignment
- Once the obligor has notice of the assignment, the fund is … a trust; it is … in the [obligor's] hands, … not for the assignor, but for the assignee."
- After receiving notice of the assignment, the obligor cannot pay to the assignor and if so, he does so at his peril
- Ordinary rights, including future rights, are freely assignable unless the assignment would materially change the duty of the obligor, …, and unless the law restricts the assignability of the specific right involved.
Bel-Ray Co.
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- Held, corporation was bound to arbitrate ; directors and officers were not bound to arbitrate
- Directors and officers did not sign ; contract only between the predecessor and the corporation
- Under NJ law, contractual provisions limiting or prohibiting assignments operate only to limit parties' right to assign contract, but not their power to do so, unless parties' manifest intent ;
- When party’s right to assign contract is limited or prohibited,, breach of such covenant may render assignor liable to non-assigning party in damage , but assignment itself remains valid and enforceable against assignor and assignee
Delacy Invs., Inc. v. Thurman,
- Assignee of real estate agent's commissions (company) brought action to recover commissions after account debtor (firm) retained commissions to set off overhead expenses that agent owed.
- Held, assignee’s right is subject to all terms of the agreement between the obligor and the assignor
- Here, because the company's rights (assignee’s right) were subject to all terms of the agreement between the firm (obligor) and the agent (assignor),,, the company was unable to collect,, because the commissions earned by the firm as a result of the agent's sales did not exceed his past-due obligations to the firm.
Chemical Bank v. Rinden Professional Ass'n, <obligor’s waiver of right against assignor> p.949
- D (law firm) purchased telephone system under lease-purchase agreement from third party. The third party then assigned right to receive payments to P (bank). The notice of assignment, which was signed by D (law firm), has waiver clause that obligor D law firm waived any defenses D might have had against assignor. After system malfunctioned, D law firm refused to make payments and P bank sued. Assignor went bankrupt.
- Held, (i) law firm (obligor) agreed to waiver of defenses against assignee; (ii) bank took assignment for value, in good faith, and without notice of claim or defense ; (iii) no consideration was required for waiver of defenses; (4) waiver clause was not unconscionable
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