Excuse of Performance
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Objectives
Chapter Objectives:
• Use vocabulary regarding excuse of performance
properly
• Discuss the theory behind excusing performance
rather than declaring it a breach
• Identify the objective standards used to
determine whether an excuse for performance
exists
• Differentiate between impossibility of
performance and impracticality of performance
11-2
Objectives
Chapter Objectives:
• Determine if the contract’s purpose has become
frustrated
• Explain the difference between performance
prevented and voluntary disablement
• Evaluate whether a party’s performance is
excused due to insolvency
11-3
Objectives
• This chapter will examine WHEN performance
on a contract is “excused”—a party’s
nonperformance is not considered a breach—
and
• WHAT those excuses for nonperformance are
11-4
Impracticality
• Impracticality as an excuse means that the
obligations could only be fulfilled at excessive
and unreasonable cost
• This excessiveness and unreasonableness
must be beyond what either party could have
anticipated and therefore could not have
considered as part of their bargain
11-5
Impracticality
• Objective impracticality
– A party’s performance is excused only
when the circumstances surrounding the
contract become so burdensome that any
reasonable person in the same situation
would excuse performance
11-6
Impossibility
•
There are three instances where the capacity
to perform rises beyond impracticality to
impossibility:
1. Death or incapacity of a party (or other
person needed to complete the
performance)
2. Destruction of the subject matter (or of
a specific thing necessary for
performance)
3. Supervening illegality
11-7
Impossibility
•
Death or incapacity of a party (or other
person needed to complete the performance)
– The first excuse may seem to be selfevident. However, language of the contract
or the type of contract may dictate
otherwise
– While most people do not like to consider
their mortality while drawing up a
contract, clauses indicating that the
agreement will survive, even though the
parties do not, are valid
11-8
Impossibility
•
Death or incapacity of a party
– If it is determined that the contract is not
“personal” in nature, meaning that only
that person is capable or desirable to
perform, then the contract can be carried
out by the deceased’s estate or personal
representatives
11-9
Impossibility
•
Death or incapacity of a party
– The typical example in this scenario is a
contract for the sale of real estate. It does
not matter to the buyer that the seller is
no longer alive. The estate is perfectly
capable of transferring the real estate
interest
11-10
Impossibility
• Destruction of the subject matter
– Excuse of performance is based on the
unforeseeable and unavoidable loss of the
subject matter
– What this excuse assumes is that the loss
of the subject matter was not due to a
foreseeable event that could have been
avoided and/or the risk of loss could have
been allocated in the contract
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Impossibility
• Destruction of the subject matter
– Even more important for the excuse
element is that the loss was not due to the
voluntary action of one of the parties
– If a party has caused the loss that makes
performance impossible, then she cannot
rely on impossibility as a defense. That
would be a case of voluntary disablement
11-12
Impossibility
• Destruction of the subject matter
– force majeure:
• An event that is neither foreseeable nor
preventable by either party that has a
devastating effect on the performance
obligations of the parties
– “Acts of God”
11-13
Impossibility
•
Supervening illegality
– A change in the law governing the subject
matter of the contract that renders a
previously legal and enforceable contract
void and therefore excusable
– The change in the law made what was
previously acceptable under the contract
illegal
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Frustration Of Purpose
• Where both parties are able to perform on
their contractual obligations, but due to
changed circumstances it becomes useless for
them to do so, a contract’s purpose has been
frustrated
11-15
Frustration Of Purpose
• There are stringent requirements for applying
the doctrine of frustration of purpose
− The reason why the agreement was made
in the first place must no longer exist;
therefore, the value of the contract has
become a nullity
− The changed circumstance cannot be one
that was foreseeable or for which the risk
of its occurrence was allocated to one party
or the other
11-16
Performance Prevented
• Performance prevented
− If a party takes steps to preclude the other
party’s performance, then the performance
is excused due to that interference
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Voluntary Disablement
If a party takes steps to preclude his
own performance, then the
performance due from the other
party is excused due to that
refusal/inability to perform
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Voluntary Destruction
• Voluntary destruction of the subject matter
also constitutes voluntary disablement
– The party will be held in breach of
contract for his fault
– The “innocent” party will be excused from
performance obligations
11-19
Insolvency
• A party’s inability to pay his debts, which
may result in a declaration of bankruptcy
and put all contractual obligations on hold or
terminate them
• The declaration of bankruptcy stops all
transactions in their tracks in order to
maintain the status quo until the resolution
of the bankruptcy
11-20
Insolvency
• It must be determined whether the
bankruptcy amounts to forfeiture — the
party’s unequivocal inability to perform
• Courts do not favor a declaration of forfeiture
and this determination must be made on a
case-by-case basis
11-21
Summary
•
An aggrieved party may be released from the
obligation to perform according to the terms
of the contract if :
1. The required performance is impractical.
If, from an objective standpoint, the
performance would require
unforeseeable, excessive and
unreasonable cost or a burden on a party,
the performance may be excused
11-22
Summary
•
An aggrieved party may be released from the
obligation to perform according to the terms
of the contract if :
2. The required performance is impossible
and the performance may be excused
• If a party has died or become
otherwise incapable of performance,
• if the subject matter has been
destroyed, or,
• if the required performance, since
the making of the contract, has
become illegal
11-23
Summary
•
An aggrieved party may be released from the
obligation to perform according to the terms
of the contract if :
3. The contract’s purpose is frustrated. If
the very reason for entering into the
contract no longer exists, the
performance may be excused
11-24
Summary
•
An aggrieved party may be released from the
obligation to perform according to the terms
of the contract if :
4. Performance is prevented or there has
been voluntary disablement. If a party
either does something that makes his
own or the other party’s performance
impossible, the “innocent” party’s
performance may be excused
11-25
Summary
•
An aggrieved party may be released from the
obligation to perform according to the terms
of the contract if :
5. A party has become insolvent. If a party
declares bankruptcy, the other party’s
performance may be excused
11-26