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Changed Circumstances

We said previously that any non-performance by one of the parties amounts to a breach of the contract. While this is of course true in most cases, there are certain exceptions to the general rule. Namely, it is possible that non-performance is not the fault of a party but rather based on a change in circumstances.

This refers to three specific grounds which, if present, may excuse a party’s failure to perform:

  • Impossibility
  • Impracticability
  • Frustration of purpose

Let’s look at these in turn.

Impossibility

In the case of impossibility, contract performance becomes objectively impossible to perform for one or both parties. As a consequence, both parties are discharged from their obligation to perform.

Common examples of incapacity include death or incapacity of a party who is to perform personal services, such as a teacher, actor, or artist.

Another example of impossibility is when the purpose of the contract becomes illegal, for instance because of a change in the law banning certain types of transactions.

Yet another scenario of impossibility would include the destruction of infrastructure that a party needs for performing a contract. However, the performance has to be entirely impossible, it’s not sufficient for the performance to have become more difficult.

As an example, let’s assume Tech Company signs a contract to sell Gadget Company a special type of computer chip, manufactured only in Tech Company’s factory. Before the chips can be manufactured, however, the factory burns down.

This is a changed circumstance that neither party contemplated and would make it impossible for Tech Company to perform the contract. Gadget Company is not entitled to damages because Tech Company is discharged from performing under the contract.

Keep in mind, however, that there would be no impossibility if the chips could be manufactured in another factory. If that would be possible, Tech Company would be obliged to have the chips manufactured there, even if it would cost them more money.

Impracticability

Closely related to impossibility is the concept of impracticability. In the case of impracticability, the parties to a contract can be discharged from their obligation to perform if contract performance becomes extremely difficult or much more expensive than originally anticipated.

Impracticability requires that the change in circumstances be unforeseeable when the contract was created.

Impracticability is generally difficult to prove as courts are reluctant to accept circumstances that would excuse a party from performing solely on the basis that it has become commercially impractical. Thus, courts do not normally recognize ordinary and foreseeable business risks, such as price fluctuations, inflation, product shortages, and other market changes. Performing a contract that leads to losses is not by itself grounds for discharge due to impracticability. 

An example of impracticability could be the following:

A contractor agrees to build a new road for the government. Two weeks into the project, the contractor finds solid rock material in the ground that had not been discoverable before the works began. The rock material would necessitate costly blasting that the builder did not originally anticipate when pricing the project.

Based on these facts, the contractor’s performance will likely be excused based on impracticability.

Frustration

A final concept pertaining to changed circumstances is frustration of purpose.

Frustration applies when the main purpose of the contract has been frustrated.

If that’s the case, the legal consequence is that all parties to a contract may be discharged from their obligation to perform.

Frustration can be usefully illustrated using the old English case, Krell v. Henry, decided in 1903:

In this case, a party rented rooms in a house in central London, with the specific purpose of being able to get a good view of the coronation of King Edward VII. The rental price agreed was £75 for two days and the prospective tenant paid a £25 deposit.

However, due to illness of the King the coronation was cancelled and postponed, and the rooms were not used. The landlord sought to claim the outstanding £50, but the tenant refused and demanded to be returned his deposit. The court sided with the tenant and declared that the contract had been frustrated. Neither party had to perform under the contract, which also meant that the tenant was not obliged to pay for the rooms.