Impossibility Contracts April 21 2016 Stees v Leonard

Impossibility Contracts April 21, 2016

Stees v. Leonard • “Pacta sunt servanda” • The K must be served (or honored) • Risk of “latent defects” must fall on the contractor

§ 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.

[M]arket conditions and the financial situation of the parties are ordinarily not such assumptions, and, generally, just as shifts in market conditions or financial ability do not effect discharge under the rules governing impracticability, mistakes as to market conditions or financial ability do not justify avoidance under the rules governing mistake.

Illustration 1 A contracts to sell and B to buy a tract of land, the value of which has depended mainly on the timber on it. Both A and B believe that the timber is still there, but in fact it has been destroyed by fire. The contract is voidable by B.

Why doesn’t financial situation of the parties count as “basic”?

§ 154. When A Party Bears The Risk Of A Mistake A party bears the risk of a mistake when (a) the risk is allocated to him by agreement of the parties, or (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, or (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

The seller of farm land generally cannot avoid the contract of sale upon later discovery by both parties that the land contains valuable mineral deposits, even though the price was negotiated on the basic assumption that the land was suitable only for farming and the effect on the agreed exchange of performances is material. In such a case a court will ordinarily allocate the risk of the mistake to the seller, so that he is under a duty to perform regardless of the mistake.

Least cost avoider: expertise 5. A contracts with B to build a house on B's land. A and B believe that subsoil conditions are normal, but in fact some of the land must be drained at an expense that will leave A no profit under the contract. The contract is not voidable by A, because the court will allocate to A the risk of the mistake.

Quitclaim deed example R 2 154, ill. 1. A contracts to sell and B to buy a tract of land. A and B both believe that A has good title, but neither has made a title search. The contract provides that A will convey only such title as he has, and A makes no representation with respect to title. In fact, A's title is defective. The contract is not voidable by B, because the risk of the mistake is allocated to B by agreement of the parties.

Watkins & Son v. Carrig • Expertise of cellar excavator means that party bears the risk of problems

2 Fabled Cases • Wood v. Boynton, “the diamond in the rough” • Sherwood v. Walker, “the pregnant cow case”

Wood v Boynton • Not a mistake in the thing delivered – it was the stone the parties had contracted for • No rescission of the K based on mutual mistake

Wood • Notice: this particular jeweler credibly testified that he did not know the value of the stone • Both parties understood that the transaction involved the same stone: no mistake about the existence or identity of the stone

I was a mistake!

Sherwood v. Walker • Both parties assumed the cow was sterile; both were mistaken • “Different cow” or “same cow, just a disagreement about qualities or features”

Reconciling Wood and Sherwood • Price/value ratios very different in the 2 cases • Cow in Sherwood priced so as to show basic assumption (sterile) • Not so in Wood: fair price for value of unknown type of stone

Impossibility - themes • History – Taylor • Drafting • UCC Impracticability

History • Paradyne v. Jane, 1647 • Cromwell’s army and pacta sunt servanda Absolute rule. . .

Taylor v. Caldwell

Charles Spurgeon, 1834 -1892

June, 1857: the big fire

Taylor v. Caldwell • Facts • History

What damages did Taylor seek?

What damages did Taylor seek? • Reliance, it looks like • Why not expectation? Fera, “new business rule”

Taylor v. Caldwell • Not a lease – relevance?

Taylor v. Caldwell • Not a lease – relevance? Paradyne and property principles

“without fault of either party” • What if head of Surrey Gardens had championed a successful law to prevent musical performances on Sundays?

Did the parties contemplate the event that occurred?

“The parties when framing the agreement evidently had not present to their minds the possibility of such a disaster, and have made no express stiplation with reference to it. . . ”

Did the parties contemplate the event that occurred? • Apparently not • How would it be relevant if they had?

“Positive K to do a thing” K “to do a thing” is “positive and absolute”

“Positive K to do a thing” K “to do a thing” is “positive and absolute” E. g. , K to build a dance hall; no excuse if it burns down or proves impossible to build on that site

“Duty” vs. “condition” • Did party agree to do something, or was that something an assumed condition of what party actually agreed to do?

Did the parties contemplate the event that occurred? • Apparently not • How would it be relevant if they had? Could be a basic assumption then; a contingency “asked answered”; allocation of risk idea -- ?

Roman sources • The “romance” of the Latin civilians • Justinian’s code, and the Digests

Watson (ed. ), The Digest of Justinian [revised Englishlanguage edition] (Philadelphia, PA: University of Pennsylvania Press, 1998), 2 vols. ISBN 0 -8122 -1636 -9. Emperor 527 -565

The Digest was assembled by a team of sixteen academic lawyers commissioned by Justinian in 533 to cull everything of value from earlier Roman law. It was for centuries the focal point of legal education in the West and remains today an unprecedented collection of the commentaries of Roman jurists on the civil law.

Bailments • “implied condition” analysis • Risk of loss in lent, borrowed, stored, and pledged assets • Continued existence of asset is an assumption of the parties

§ 261. Discharge By Supervening Impracticability Where, after a contract is made, a party's 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.

Illustration 1 On June 1, A agrees to sell and B to buy goods to be delivered in October at a designated port. The port is subsequently closed by quarantine regulations during the entire month of October, no commercially reasonable substitute performance is available (see Uniform Commercial Code § 2 - 614(1)), and A fails to deliver the goods. A's duty to deliver the goods is discharged, and A is not liable to B for breach of contract.

2. A contracts to produce a movie for B. As B knows, A's only source of funds is a $100, 000 deposit in C bank fails, and A does not produce the movie. A's duty to produce the movie is not discharged, and A is liable to B for breach of contract. 3. A and B make a contract under which B is to work for A for two years at a salary of $50, 000 a year. At the end of one year, A discontinues his business because governmental regulations have made it unprofitable and fires B. A's duty to employ B is not discharged, and A is liable to B for breach of contract. 4. A contracts to sell and B to buy a specific machine owned by A to be delivered on July 30. On July 29, as a result of a creditor's suit against A, a receiver is appointed and takes charge of all of A's assets, and A does not deliver the goods on July 30. A's duty to deliver the goods is not discharged, and A is liable to B for breach of contract.

Eastern Airlines v. Gulf

Eastern Airlines v. Gulf • Facts • History

§ 2 -614. Substituted Performance (1) If without fault of either party the agreed berthing, loading, or unloading facilities fail or an agreed type of carrier becomes unavailable or the agreed manner of performance otherwise becomes commercially impracticable but a commercially reasonable substitute is available, the substitute performance must be tendered and accepted. (2) If the agreed means or manner of payment fails because of domestic or foreign governmental regulation, the seller may withhold or stop delivery unless the buyer provides a means or manner of payment which is commercially a substantial equivalent. If delivery has already been taken, payment by the means or in the manner provided by the regulation discharges the buyer's obligation unless the regulation is discriminatory, oppressive, or predatory.

§ 2 -615. Excuse By Failure Of Presupposed Conditions Except to the extent that a seller may have assumed a greater obligation and subject to Section 2614: (a) Delay in performance or nonperformance in whole or in part by a seller that complies with paragraphs (b) and (c) is not a breach of the seller's duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the nonoccurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid.

(b) If the causes mentioned in paragraph (a) affect only a part of the seller's capacity to perform, the seller must allocate production and deliveries among its customers but may at its option include regular customers not then under contract as well as its own requirements for further manufacture. The seller may so allocate in any manner that is fair and reasonable. (c) The seller must notify the buyer seasonably that there will be delay or nonperformance and, if allocation is required under paragraph (b), of the estimated quota thus made available for the buyer.