George Mason School of Law
Contracts II
Mistake
This file may be downloaded only by registered students in my
class, and may not be shared by them
F.H. Buckley
fbuckley@gmu.edu
1
Mistake and Impossibility
 An regret contingency occurs: what
are the possibilities?
2
Mistake and Impossibility
 An regret contingency occurs: what
are the possibilities?
 Both parties want out and write a
termination agreement
3
Mistake and Impossibility
 An regret contingency occurs: what
are the possibilities?
 One party only wants out and argues:
 Breach by the other party
 Condition precedent, mistake, frustration
4
What are the possibilities?
 So when should the event give rise to
liability by one of the parties
 See last day on least-cost risk-bearing
5
What are the possibilities?
 So when should the event put an end to
obligations under the contract, without
any liability?
6
Catastrophic Events
 Force majeure clause

7
A party is not liable for failure to perform the party's
obligations if such failure is as a result of Acts of God
(including fire, flood, earthquake, storm, hurricane or other
natural disaster), war, invasion, act of foreign enemies,
hostilities (regardless of whether war is declared), civil war,
rebellion, revolution, insurrection, military or usurped power or
confiscation, terrorist activities, nationalization, government
sanction, blockage, embargo, labor dispute, strike, lockout or
interruption or failure of electricity or telephone service, or
change in government regulations which makes
performance of obligations under this contract impracticable.
Catastrophic Events
 Force majeure clause
 Why no least cost risk avoiders here?
8
Catastrophic Events
 Force majeure clause
 Why no least cost risk avoiders here?
 No one can efficiently reduce the risk
 No one is better able to evaluate risk
 Risk not diversifiable
9
Express and Implied Excuses
 Conditions precedent (subsequent)
 Mistake
 Impracticability, Impossibility,
Frustration
10
Mistake and Impossibility
Formation of Contract
Time
11
Mistake and Impossibility
Formation of Contract
Mistake,
Condition Precedent
Time
12
Mistake and Impossibility
Formation of Contract
Mistake,
Condition Precedent
13
Impossibility,
Impracticability
Frustration,
Condition Subsequent
Time
How to tell them apart?
Formation of Contract
Mistake,
Condition Precedent
Impossibility,
Impracticability
Frustration,
Condition Subsequent
Time
Cf. Restatement § 152, comment b
14
How to tell them apart?
 A horse is sold for breeding purposes.
Unknown to the parties, the horse is
sterile. This is only discovered later.
 Mistake or Frustration?
15
How to tell them apart?
 A supply contract bases prices on
production costs, according to a cost
index based on historical experience.
Subsequently prices rise
unexpectedly.
 Mistake or Frustration?
16
Who is mistaken?
 Mutual Mistake: Both parties
 Unilateral Mistake: one party only
17
What kind of an event voids a contract?
 Error as to identity
 Error as to substance
 Error which has a material effect on
the exchange value of the contract
18
Error as to Identity
 Raffles v. Wichelhaus at 712
Peerless I
19
Peerless II
Error as to Identity
 Raffles v. Wichelhaus
 Was there any way to enforce this?
20
Error as to Identity
 Raffles v. Wichelhaus
 Was there any way to enforce this?
 Restatement 20(1)(a), illustration 2
21
Error as to Identity
 What if both had meant the same
ship?
 Illustration 1
22
Error as to Identity
 What if objectively it was clear that
the contract referred to a particular
ship, but one party is mistaken?
23
Error as to Identity
 What if objectively it was clear that
the contract referred to a particular
ship, but one party is mistaken?
 20(1)(a): “has reason to know”
24
Error as to Identity
 What if both parties know of the
other’s mistake?
 20(1)(b), Illustration 2
25
Error as to Identity
 What if one party is mistaken and the
other party knows of his mistake?
 20(2)(a), Illustration 3
26
Error as to Identity
 Restatement §20
 Mutual mistake: 20(1)
 Unilateral mistake: 20(2)
27
Error as to Identity
 What if one party is mistaken and the
other party knows of his mistake?
 What’s the logic behind this?
28
Error as to Identity of a party
 Farmer Macdonald sells his farm to
McInerney. Macdonald thinks that
McInerney is a principal, but in reality
he is an agent for Texas Gulf Sulfur.
If TGS had revealed its identity,
Macdonald would have realized that
there were minerals under his land.
29
Error as to Identity
 Farmer Macdonald sells his farm to
McInerney. Macdonald thinks that
McInerney is a principal, but in reality
he is an agent for Texas Gulf Sulfur.
If TGS had revealed its identity,
Macdonald would have realized that
there were minerals under his land.
 Restatement § 153, comment g on
undisclosed principals
30
George Mason School of Law
Contracts II
Mistake
This file may be downloaded only by registered students in my
class, and may not be shared by them
F.H. Buckley
fbuckley@gmu.edu
31
Next week
 Finish Mistake
 Excuse (plus Scott 84-93)
 Frustration
32
Regret contingencies
 When should the event put an end to
obligations under the contract, without
any liability, at the option of one party?
33
How to tell them apart?
The traditional view
Formation of Contract
Mistake,
Condition Precedent
Impossibility,
Impracticability
Frustration,
Condition Subsequent
Time
Cf. Restatement § 152, comment b
34
Mistakes
Who is mistaken?
 Mutual Mistake: Both parties
 Unilateral Mistake: one party only
35
Mutual Mistake
 Kinds of mistakes:
 Both parties make the same mistake:
Bargaining over a ship that has sunk
 Parties at cross-purposes: I sell you
Rose 2d and you think you’ve bought
Rose 3d
36
What kind of an event voids a contract?
 Error as to identity
 Error as to substance
 Error which has a material effect on
the exchange value of the contract
37
Error as to Substance
38
Error as to Substance:
Sherwood v. Walker at 712
Rose
Hiram Walker
39
Another Hiram Walker product
Hiram
Walker
Canadian
Club
40
41
Aberlone, Rose of
By Brainerd Currie
'T is the middle of night before the exam,
And there's nothing to eat but a cold bit of ham.
A dismal specter haunts this wake-The law of mutual mistake; …
In many a hypothetical
With characters alphabetical,
In many a subtle and sly disguise
There lurks the ghost of her sad brown eyes.
That she will turn up in some set of facts is
Almost as certain as death and taxes:
For students of law must still atone
For the shame of Rose of Aberlone.
42
Sherwood v. Walker
 Was there a mistake?
43
Sherwood v. Walker
 What is a “basic assumption” in 15253?
 Substance of the thing vs. quality or
accident
 Error in substantibus
 Error going to “the root of the matter”
44
Sherwood v. Walker
 What is Rose’s essence:
 “cowness” or “barren cowness”
Barren Cow
45
Fertile Cow
Mutual Mistake
 Restatement § 152
 Has a material effect on the agreed
exchange
 Comment c: resulting imbalance is so severe that he
cannot fairly be required to carry it out
 Is that the case here?
46
Sherwood v. Walker
 Did the mistake have a material
effect on the exchange of
performances?
 [(1420-50)*0.055 =] $75.35 vs. about
$875
47
Sherwood v. Walker
 Assumption of risk: Was Walker in a
better position to know the condition
of the cow?
Barren Cow
48
Fertile Cow
Sherwood v. Walker
 Should the onus have been on the
seller to specify a condition
subsequent?
49
Qu. Backus v. MacLaury p. 729
 Why no mistake here?
50
Qu. Backus v. MacLaury p. 729
 No mistake: Buyer realized the calf
might be sterile and took the risk
51
Qu. Backus v. MacLaury p. 729
 No mistake: Buyer realized the calf
might be sterile and took the risk
 How was this different from Hiram
Walker?
 No one took the risk that Rose was fertile
52
Qu. Backus v. MacLaury p. 729
 No mistake: Buyer realized the calf
might be sterile and took the risk
 How was this different from Hiram
Walker?
 Was there more of an assumption of risk
here?
53
Unilateral Mistake
 Restatement § 153
 Mistake of both as to a basic assumption
 Has a material effect on the agreed exchange
 Parties did not agree that one would bear the
risk
 Either unconscionability or unilateral
54
Unilateral Mistake
 Distinguish two cases:
 Class A Unilateral Mistake
 A is mistaken and B is unaware of the mistake:
unconscionability needed
55
Unilateral Mistake
 Distinguish two cases:
 Class A Unilateral Mistake
 A is mistaken and B is unaware of the mistake:
unconscionability needed
 Class B Unilateral Mistake
 A is mistake and B is aware of the mistake:
unconscionability not needed
56
Anderson v. O’Meara 718
Seller sells submarine trenching equipment
57
Anderson v. O’Meara 718
Buyer
thinks he’s
buying a
Sweep
Dredge
58
Anderson v. O’Meara
 The District Court found a mutual
mistake. Why did the Circuit Court
disagree?
59
Anderson v. O’Meara
 Was there a unilateral mistake?
 And of what type, in my classification?
60
Anderson v. O’Meara
 Was there a unilateral mistake?
 And of what type, in my classification?
61
Anderson v. O’Meara
 Was there a unilateral mistake?
 And of what type, in my classification?
 Class A: unconscionability needed
62
Anderson v. O’Meara
 Would it be unconscionable to hold
buyer to the contract?
63
Anderson v. O’Meara
 So why was the contract upheld?
 Seller didn’t know what it was to be used
for
 Buyer should have communicated the
purpose
 Who was the least cost risk avoider?
64
Duty to Investigate
 Gartner p. 727
 Did one person have a special duty to
investigate?
65
Duty to Investigate
 Winkelmans v. Erwin p. 729
 How would you decide this?
 Mutual or unilateral?
66
Duty to Investigate
 Winkelmans v. Erwin p. 729
 Did one person have a special duty to
investigate?
 Was Thompson the agent of the seller?
And did the buyers reasonably rely on
her?
67
Duty to Investigate
 Winkelmans v. Erwin p. 729
 How would you decide this?
 Held: Mistake
68
Duty to Investigate
 Jeselsohn p. 729
 Held: mutual mistake
 The buyer could not have discovered the
error by consulting the registry of deeds
69
Unilateral Clerical Mistakes
 Elsinore at 728
70
Unilateral Clerical Mistakes
 Elsinore at 728
 Does it matter that the error was only
$3K on a $90K bid
 Cf. Restatement §§ 152, comment c and
153, comment d
71
Unilateral Clerical Mistakes
 Elsinore at 728
 Does it matter that the error was only
$3K on a $90K bid
 Does it matter that the bidder notified
the school board the next day?
72
“As is” clauses
 Messerly at p. 725
73
Unilateral Mistakes:
Irmen v. Wrzesinski at 724
$349 on E-Bay
74
Irmen v. Wrzesinski
 Can the doctrine of unilateral mistake
be a rule of economic inefficiency?
 How is this case like Laidlaw v.
Organ?
75
Irmen v. Wrzesinski
 How is this case like Laidlaw v.
Organ?
 Note that the seller has every incentive to
acquire the information, as he can command a
higher price if he reveals it.
 While the buyer can only profit from the info
he acquires if he is permitted to be silent.
76
Irmen v. Wrzesinski
 So when does forcing information
through the doctrine of unilateral
mistake serve efficiency goals?
77
Irmen v. Wrzesinski
 Does it matter what the buyer
believes?
 Buyer believes that the seller is ignorant of
the card’s value and is selling it for $12
 Buyer believes that the seller is aware of the
card’s value and is selling it for $1200
78
Irmen v. Wrzesinski
 Does it matter what the buyer
believes?
 Buyer believes that the seller is ignorant of
the card’s value and is selling it for $12
 Buyer believes that the seller is aware of the
card’s value and is selling it for $1200
 A Class A or Class B unilateral mistake?
79
George Mason School of Law
Contracts II
Mistake
This file may be downloaded only by registered students in my
class, and may not be shared by them
F.H. Buckley
fbuckley@gmu.edu
80
Next day
 Finish Impracticability and Frustration
81
What kind of an event voids a contract?
 Error as to identity
 Restatement § 20
 Error as to substance
 Hiram Walker, Anderson
 Error which has a material effect on
the exchange value of the contract
82
Mutual Mistake: Alcoa 730
 What was the deal?
83
Mutual Mistake: Alcoa
 What was the deal?
 Alcoa to convert alumina (aluminum
oxide) for Essex
Alumina
Essex
Alcoa
Aluminum
84
Mutual Mistake: Alcoa
 How was the pricing arrived at?
You can’t lose,
Alcoa. Believe
me!
85
Mutual Mistake: Alcoa
 How was the pricing arrived at?
And since housing
prices can only go
up, we need low
interest rates so the
improvident can buy
second homes
86
Mutual Mistake: Alcoa
 How was the pricing formula arrived
at?
87
Mutual Mistake: Alcoa
 How was the pricing arrived at?
Non-labor production
cost = 0.03/lb. +/- 0.03
88
Of course, we all know that
the future will resemble
the past
Mutual Mistake: Alcoa
 What happened to non-labor costs?
89
So what happened
to oil prices in 1977?
90
Mutual Mistake: Alcoa
 Why did Essex want the supply of
aluminum?
91
Mutual Mistake: Alcoa
 Why did Essex want the supply of
aluminum
 And what did it end up doing with the
aluminum it bought?
92
Mutual Mistake: Alcoa
 Why did Essex want the supply of
aluminum
 And what did it end up doing with the
aluminum it bought?
 Was this prohibited by the contract?
 What if this had been seen as a
requirements contract under 2-306?
93
Mutual Mistake: Alcoa
 Why did Essex want the supply of
aluminum
 And what did it end up doing with the
aluminum it bought?
 Was this prohibited by the contract?
 Cf. quantities on p. 732
94
Mutual Mistake: Alcoa
 What was the mutual mistake, if any?
 Basic assumption or material effect or
both?
95
Mutual Mistake: Alcoa
 What was the mutual mistake, if any?
 A “present actuarial error or a mistake as
to the future? Restatement § 151
 How would you state this as a present
“fact”
 Should it matter which it is?
96
Mutual Mistake: Alcoa
 What was the mutual mistake, if any?
 A “present actuarial error or a mistake as
to the future?
 Is Leasco different?
97
Mutual Mistake: Alcoa
 Did Alcoa assume the risk?
98
Mutual Mistake: Alcoa
 Did Alcoa assume the risk?




99
Express language
Trade custom
Implied term: 739
“conscious ignorance of the facts”: a
calculated gamble
Mutual Mistake: Alcoa
 Did Alcoa assume the risk?
 How would you have drafted the
contract on Alcoa’s behalf?
100
Mutual Mistake: Alcoa
 Did Alcoa assume the risk?
 How would you have drafted the
contract on Alcoa’s behalf?
 Essex put in a price cap, so why didn’t
Alcoa put in a cost cap?
101
Mutual Mistake: Alcoa
 Did Alcoa assume the risk?
 How would you have drafted the
contract on Alcoa’s behalf?
 A Gross Inequity clause: Beaver Creek at
775 infra
102
Mutual Mistake: Alcoa
 Did Alcoa assume the risk?
 How would you have drafted the
contract on Alcoa’s behalf?
 Recitals: Whereas Essex seeks a supply
of aluminum for its own use; and
whereas both parties seek to be
protected against price and cost
fluctuations…
103
How do you think the parties would
bargain to allocate such risks?
 What about the inclusio unius canon?
 Or the contra proferentem canon?:
740-41
104
Mutual Mistake: Alcoa
 What kind of a remedy?
 Why wasn’t rescission ordered?
105
Mutual Mistake: Alcoa
 What kind of a remedy?
 Reformation: how was the new price
arrived at?
106
Mutual Mistake: Alcoa
 What kind of a remedy?
 The practice of foreign countries p. 744
 Split the difference?
 How does “fairness” cut?
107
How many contracts do you think
were affected by the oil crisis
108
How do you think the parties would
bargain to allocate such risks?
 What about the case where no one
could have foreseen the problem?
109
When is a mistake a mistake: Atlas 745
Atlas Corp. uranium “tailings” pile
110
When is a mistake a mistake
 What was the “mistake”?
111
When is a mistake a mistake
 What was the “mistake”?
 That the health hazard was much greater
than had been thought
 And why wasn’t that a mistake at law?
112
When is a mistake a mistake
 What was the “mistake”?
 That the health hazard was much greater
than had been thought
 And why wasn’t that a mistake at law?
 A mistake is a mistaken belief about an
existing fact: Alcoa, Restatement § 151
 But there is no mistaken belief about a fact
whose existence was not known.
113
When is a mistake a mistake
 What was the “mistake”?
 That the health hazard was much greater
than had been thought
 And why wasn’t that a mistake at law?
 Is this a sensible distinction, in terms of
risk allocation?
114
When is a mistake a mistake
 What was the “mistake”?
 That the health hazard was much greater
than had been thought
 And why wasn’t that a mistake at law?
 Is this a sensible distinction, in terms of
risk allocation?
 Which looks more like a mistake as to a basic
assumption?
115
When is a mistake a mistake
 What was the “mistake”?
 Did the court get it right, in any event?
116
Mistake vs. Impracticability and
Frustration
117
The traditional understanding
Formation of Contract
Mistake
Impossibility,
Impracticability
Frustration
Time
Cf. Restatement § 152, comment b
118
The evolution
 From strict liability to impossibility
and frustration
 From impossibility to impracticability
 Blurring the timing question
119
Blurring the timing question
 After the contract is made





120
Restatement
Restatement
Restatement
Restatement
Restatement
§
§
§
§
§
261
262:
263:
264:
265:
death
destruction
Govt reg.
Frustration
Blurring the timing question
 Before the contract is made
 Restatement § 266(1): Impracticability
 Restatement § 266(2): Frustration
 Restatement § 152-53: Mistake
121
The Restatement understanding
Formation of Contract
Mistake
Impracticability
Frustration
Impracticability
Frustration
Time
Cf. Restatement § 152, comment b
122
So what is the difference?
 Mistake 152-53: Basic Assumption,
material effect on exchange
 Impracticability 261, 266: Impracticable,
Basic assumption
 Frustration 265, 266: Principal purpose
substantially frustrated, basic assumption
123
From Strict Liability to
Impossibility
124
From Strict Liability to
Impossibility
 Just what is impossibility?
 Paradine
 Stees
125
An Impossibility Defense Succeeds
Taylor v. Caldwell p. 84
126
Surrey Gardens Music Hall
Taylor v. Caldwell
 On the program:





127
35-40 piece military band
fireworks
a wizard
tight rope performances
Parisian games (?!?)
Taylor v. Caldwell
 In what sense was performance
impossible (as compared to
Paradine?)
128
Taylor v. Caldwell
 The birth of the frustration doctrine
129
Taylor v. Caldwell
 Of the fire:
 Blackburn: men would say, if it were
brought to their minds, that there should
be such a condition
 And why is that?
Lord Blackburn
130
Taylor v. Caldwell
 What contractual gains were lost
because of the fire?
131
Taylor v. Caldwell
 What contractual gains were lost
because of the fire?
 Licensor loses license fee of £400
 Licensee loses gross profits less rent
132
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
133
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Licensee takes risk and owes Licensor
£400 for the license fee: Paradine
134
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Licensee takes risk and owes Licensor
£400 for the license fee: Paradine
 Licensor takes risk and owes lessee
damages for foregone net profits
135
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Licensee takes risk and owes Licensor
£400 for the license fee: Paradine
 Licensor takes risk and owes lessee
damages for foregone net profits
 Frustration: neither recovers anything
136
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Frustration: neither recovers anything
 Why might this be the efficient result?
137
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Frustration: neither recovers anything
 Why might this be the efficient result?
 Who is in the best position to value the cost
of the lost rental?
138
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Frustration: neither recovers anything
 Why might this be the efficient result?
 Who is in the best position to value the lost
profits from the performance?
 P*L
139
Taylor v. Caldwell
 What possible allocation of risks can
you imagine?
 Frustration: neither recovers anything
 Why might this be the efficient result?
 Licensor is the best person to measure risk of
fire and licensee is the best person to
determine lost profits
140
Four kinds of Least-Cost Risk Avoiders
1. Where one party is better able to
reduce the risk or the harm
2. Where one party is better able to
value the loss
3. Assuming risk aversion, where one
party is wealthier than the other
4. Assuming risk aversion, where one
party is a better insurer because he
can diversify the risk
141
The expansion of excuses
 A person who promises to do
something which turns out to be
impossible can always be held liable
in damages, if he takes the risk
 But not if the contract is frustrated
142
The expansion of excuses
 And the modern rule is based on a
more generous standard of
impracticability, not impossibility
143
Carroll v. Bowerstock p. 756
 Is this consistent with either Stees or
Taylor?
144
Carroll v. Bowerstock p. 756
 Is this consistent with either Stees or
Taylor?
 Cf. the “work before pay” rule of Stewart
v. Newbury at 626 and Restatement §
234(2)
145
Carroll v. Bowerstock p. 756
 Is this consistent with either Stees or
Taylor?
 Is the test on 757 consistent with the
doctrine of unjust enrichment?
146
Carroll v. Bowerstock p. 756
 Is this consistent with either Stees or
Taylor?
 If liability lay in unjust enrichment,
where was the enrichment?
147
RNJ Interstate p. 88
 Why a different result?
148
RNJ Interstate p. 88
 Why a different result?
 The contractor shall be responsible …
until completion and acceptance of the
entire work…
149
RNJ Interstate p. 88
 Why a different result?
 The contractor shall be responsible …
until completion and acceptance of the
entire work…
 Who should insure against fire?
150
RNJ Interstate p. 88
 Why a different result?
 The contractor shall be responsible …
until completion and acceptance of the
entire work…
 Who should insure against fire?
 But what about the Contractor’s loss?
151
George Mason School of Law
Contracts II
Mistake
This file may be downloaded only by registered students in my
class, and may not be shared by them
F.H. Buckley
fbuckley@gmu.edu
152
Next week (after the break)
 Frustration
 Breach (Anticipatory Breach)
153
The evolution
 From strict liability to impossibility
and frustration
 Taylor v. Caldwell
 From impossibility to impracticability
 Restatement
 Blurring the timing question
154
The Restatement understanding
Formation of Contract
Mistake
Impracticability
Frustration
Impracticability
Frustration
Time
Cf. Restatement § 152, comment b
155
How does one keep them apart?
 Mistake’s origin is in differences in the
nature of the bargain (“cowness”)
 But need it be restricted to that?
 Alcoa
156
Mistake in the Restatement
 Mistake 152-53: Basic Assumption, material
effect on exchange
157
So what is the difference?
 Mistake 152-53: Basic Assumption, material
effect on exchange
 Impracticability 261, 266: Impracticable, Basic
assumption
158
So what is the difference?
 Mistake 152-53: Basic Assumption, material
effect on exchange
 Impracticability 261, 266: Impracticable, Basic
assumption
 Frustration 265, 266: Principal purpose
substantially frustrated, basic assumption
159
The casebook doesn’t help
 Taylor and Howell as frustration
cases
160
Howell v. Coupland 750
 What was the contract?
Lord Coleridge, C.J.
161
Howell v. Coupland
 What was the frustrating event?
162
Howell v. Coupland
 Could the seller have substituted
other potatoes?
163
Howell v. Coupland
 Could the seller have substituted
other potatoes?
 And why do you think he didn’t?
164
Howell v. Coupland
 Was this a sale of goods?
165
Howell v. Coupland
 Was this a sale of goods?
 UCC § 2-105(1), 2-107(2)
166
Howell v. Coupland
 How would UCC § 2-615 handle this?
167
Howell v. Coupland
 What about UCC § 2-613?
168
Howell v. Coupland
 What about UCC § 2-613?
 When are goods “identified”?
169
Howell v. Coupland
 What about UCC § 2-613?
 When are goods “identified”?
 UCC § 2-501(1)(c)
170
Howell v. Coupland
 The Jack Sherman hypothetical on p.
756
 Are the are goods “identified” under UCC
§§ 2-613 and 2-501(1)(c)
171
Seitz v. Mark-O-Lite 752
172
Seitz v. Mark-O-Lite 752
 Why didn’t the force majeur
clause apply?
 What about the
inclusio unius canon?
173
Seitz v. Mark-O-Lite
 Why not Restatement § 262?
 What gloss is added?
174
Seitz v. Mark-O-Lite
 Why not Restatement § 262?
 What gloss is added?
 If the existence of a
particular person is
understood to necessary
by both parties
175
Seitz v. Mark-O-Lite
 Why not Restatement § 262?
 What gloss is added?
 See comment b and § 318
176
Canadian Industrial Alcohol 758
 Why did an industrial alcohol
company need molasses?
177
Canadian Industrial Alcohol
 Why did an industrial alcohol
company need molasses?
+
178
=
Canadian Industrial Alcohol
 Suppose that Dunbar had supplied
the molasses from another refiner.
Would that have been a breach?
179
Canadian Industrial Alcohol
 Why did Cardozo hold as he did?
180
Canadian Industrial Alcohol
 Why might this be an efficient
allocation of risk?
181
The Modern Doctrine
 Transatlantic
 Eastern
 Alcoa
182
Transatlantic 760
 What happened in 1956
183
Transatlantic 760
 July 26: Egypt nationalizes Suez canal
 July 30: PM Eden informs Nasser that Britain
will prevent the takeover
184
Transatlantic
 July 26: Egypt nationalizes Sues canal
 July 30: PM Eden informs Nasser that Britain
will prevent the takeover
 Aug. 2: Britain mobilizes
 Sept 12: US, Britain, France announce
intention to impose a solution
185
Transatlantic
 July 26: Egypt nationalizes Sues canal
 July 30: PM Eden informs Nasser that Britain
will prevent the takeover
 Aug. 2: Britain mobilizes
 Sept 12: US, Britain, France announce
intention to impose a solution
 Oct. 2: Charterparty executed
186
Transatlantic
 July 26: Egypt nationalizes Sues canal
 July 30: PM Eden informs Nasser that Britain
will prevent the takeover
 Aug. 2: Britain mobilizes
 Sept 12: US, Britain, France announce
intention to impose a solution
 Oct. 2: Charterparty executed
 Oct 29: Israel invades Egypt, Anglo-French
forces land, Nasser blocks canal
187
The blocked canal
188
Transatlantic
 What is the “doctrine of deviation”
189
Transatlantic
 What is the “doctrine of deviation”
 What was the added burden on the
carrier?
190
Transatlantic
 What is the standard for
commercial impracticability?
191
Transatlantic
 What is the standard for
commercial impracticabilty?
 Unexpected regret contingency
 Risk not allocated
 Commercial impracticability
192
Transatlantic
 Did it make sense to assume that
the carrier assumed the risk?
193
Transatlantic
 Why did it make sense to assume
that the carrier assumed the risk?
 “They are in the best position to calculate
the cost of performance by alternate routes”
194
Transatlantic
 Why did it make sense to assume
that the carrier assumed the risk?
 “They are in the best position to calculate
the cost of performance by alternate routes”
 Risk of closure a matter of public notice
195
Transatlantic
 Why did it make sense to assume
that the carrier assumed the risk?
 “They are in the best position to calculate
the cost of performance by alternate routes”
 Risk of closure a matter of public notice
 In which case the risk might have been
factored into the price
196
Transatlantic
 How would the case have been
decided under UCC 2-614?
197
Transatlantic
 Was the carrier put to its election
on damages vs quantum meruit?
198
Aluminum v. Essex 770
 Cf. p. 730: The choice of Greenspan’s
non-labor production cost factor
constituted a mistake
199
Aluminum v. Essex 770
 Cf. p. 730: The choice of Greenspan’s
non-labor production cost factor
constituted a mistake
 Now we’re looking at the same issues
under the rubric of impracticability
and frustration.
200
Aluminum v. Essex 770
 Cf. p. 730: The choice of Greenspan’s
non-labor production cost factor
constituted a mistake
 Now we’re looking at the same issues
under the rubric of impracticability
and frustration.
 Can it be all three at the same time?
 Cf. Restatement 266
201
Aluminum v. Essex 770
 What’s the difference between them?
202
Impracticability and Frustration
 Impracticability: “focus on greatly
increased costs”
 Restatement § 261
 Death or Incapacity of a person: 262
 Res extincta etc.: 263
 Govt reg: 264
203
Impracticability and Frustration
 Frustration: “focuses on a party’s
severe disappointment caused by
circumstances that frustrate his
purpose in entering into the contract”
 Restatement § 265
204
Impracticability and Frustration
 Frustration: “focuses on a party’s
severe disappointment caused by
circumstances that frustrate his
purpose in entering into the contract”
 Restatement § 265
 Illustration 3: Hotel destroyed
 Qu. 263?
 Illustration 4: Govt reg
 Qu. 264?
205
When does a party assume the
risk of the event?
 Williamette 765
206
When does a party assume the
risk of the event?
 Wegematic 766
207
When does a party assume the
risk of the event?
 Wegematic 766
 “We see no basis for thinking that when an
electronics system is promoted by its
manufacturer as a revolutionary
breakthrough, the risk of the revolution's
occurrence falls on the purchaser” per
Friendly J.
208
When does a party assume the
risk of the event?
 Mishara 766
209
When does a party assume the
risk of the event?
 Mishara 766
 “A picket line might constitute a mere
inconvenience and hardly make
performance "impracticable." Likewise, in
certain industries with a long record of labor
difficulties, the nonoccurrence of strikes and
picket lines could not fairly be said to be a
basic assumption of the agreement.”
210
Four kinds of Least-Cost Risk Avoiders
1. Where one party is better able to
reduce the risk or the harm
2. Where one party is better able to
value the loss
3. Assuming risk aversion, where one
party is wealthier than the other
4. Assuming risk aversion, where one
party is a better insurer because he
can diversify the risk
211
Eastern Air Lines 767
Requirements contract upheld at 314
212
Eastern Air Lines
 Now: Impracticability under UCC 2615
213
Eastern Air Lines
 How had Gulf protected itself against
price increases (and why didn’t this
work?)
214
Eastern Air Lines
 Now: Impracticability under UCC 2615?
215
Eastern Air Lines
 Now: Impracticability under UCC 2615?
 The Suez cases “offer little
encouragement…”
216
Eastern Air Lines
 Now: Impracticability under UCC 2615?
 “Those cases offer little
encouragement…”
 “We will not allow a party to escape a
bad bargain because it is burdensome”
217
Eastern Air Lines
 Now: Impracticability under UCC 2615?
 “Those cases offer little
encouragement…”
 “We will not allow a party to escape a
bad bargain because it is burdensome”
 Even great hardship not enough since
the events were foreseeable
218
Eastern Air Lines
 Now: Impracticability under UCC 2615?
 Is this case inconsistent with Alcoa?
219
Beaver Creek p. 775
 Did the parties seek to bargain for a
broader doctrine of impracticability in
their “gross inequity clause”?
 Is this what the parties in Alcoa wanted?
220
Beaver Creek p. 775
 Did the parties seek to bargain out of
the conservative trend in their
“inequity clause”?
 What about the price adjustment clause?
221