Opinion ID: 2194614
Heading Depth: 1
Heading Rank: 5

Heading: The Doctrines of Frustration of Purpose and Impossibility

Text: The trial court held that the Watershed decisions and the passage of the NCI Act frustrated the purpose of the lease and made it impossible to perform. It is well settled that when, due to circumstances beyond the control of the parties the performance of a contract is rendered impossible, the party failing to perform is exonerated. Whelan, 170 A.2d at 230. We have also recognized the related, but distinct, doctrine of frustration of purpose. Id. Both doctrines operate to nullify a contract, but for different reasons.
In American courts, frustration of purpose is distinguished from impossibility or impracticability of performance, though the doctrines are closely related. Frustration of one party's purpose is not usually caused by an impossibility or even difficulty in performance. In the typical scenario, the party is perfectly capable of performing . . ., but the party's reason for doing so [no] longer exists. Nevertheless, courts are not always careful to distinguish between frustration, impossibility, and impracticability. The confusion is understandable because the governing rules are quite similar. 14 JAMES P. NEHF, CORBIN ON CONTRACTS: IMPOSSIBILITY § 77.1, at 243 (Joseph M. Perillo ed., 2001) (footnotes omitted). The RESTATEMENT (SECOND) OF CONTRACTS discusses these governing rules, defining the doctrine of frustration in section 265: Where, after a contract is made, a party's principal purpose is substantially frustrated 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 remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary. RESTATEMENT (SECOND) OF CONTRACTS: DISCHARGE BY SUPERVENING FRUSTRATION § 265 (1981). The description of impossibility or impracticability is almost the same: 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. RESTATEMENT (SECOND) OF CONTRACTS: DISCHARGE BY SUPERVENING IMPRACTICABILITY § 261 (1981). The RESTATEMENT uses the word impracticability rather than the common-law term impossibility, see id., § 261 cmt. d (the rule stated in this Section is sometimes phrased in terms of `impossibility'), but the two concepts are sufficiently similar that we need not distinguish between them for purposes of resolving this case. Although frustration and commercial impracticability are related, they deal with two different effects that unforeseen circumstances may have on performance. Under the frustration defense, the promisor's performance is excused because changed conditions have rendered the performance bargained from the promisee worthless, not because the promissor's performance has become different or impracticable. On the other hand, commercial impracticability excuses a promissor from performance because a supervening event changes the nature of the promissor's performance so that it has become commercially impracticable. Under frustration analysis the court is concerned with the impact of the event upon the failure of consideration, while under impracticability, the concern is more with the nature of the event and its effect upon performance. Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1296 (Fed.Cir.2002) (citation omitted). See also United States v. Bunner, 134 F.3d 1000, 1004 (10th Cir. 1998) (Although the supervening event does not render performance impossible, one party's performance becomes virtually worthless to the other.); Fredette v. Allied Van Lines, Inc., 66 F.3d 369, 373 (1st Cir.1995) (although performance remains possible[,] the expected value of performance to the party seeking to be excused has been destroyed by the fortuitous event) (internal quotation marks, editing, and citation omitted). The courts of this jurisdiction have not often applied the doctrine of frustration, but comment a to RESTATEMENT section 265 explains its elements: First, the purpose that is frustrated must have been a principal purpose of that party in making the contract. . . . The object must be so completely the basis of the contract that, as both parties understand, without it the transaction would make little sense. Second, the frustration must be substantial. . . . The frustration must be so severe that it is not fairly to be regarded as within the risks that he assumed under the contract. Third, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. A party must show all three of these elements in order to excuse performance of the contract under the doctrine of frustration. Mueller v. Cedar Shore Resort, Inc., 643 N.W.2d 56, 69 (S.D.2002); Mel Frank Tool & Supply, Inc. v. Di-Chem Co., 580 N.W.2d 802, 806 (Iowa 1998). A similar analysis determines whether an event caused performance of a contract to become impossible. First, a contingencysomething unexpected must have occurred. Second, the risk of the unexpected occurrence must not have been allocated either by agreement or by custom. Finally, occurrence of the contingency must have rendered performance commercially impracticable. Unless the court finds these three requirements satisfied, the plea of impossibility must fail. Transatlantic Financing Corp. v. United States, 124 U.S.App. D.C. 183, 186-87, 363 F.2d 312, 315-16 (1966) (footnote omitted). See National Association of Postmasters of the United States v. Hyatt Regency Washington, 894 A.2d 471, 477 n. 5 (D.C. 2006) (citing Transatlantic ); Duffy v. Duffy, 881 A.2d 630, 639 (D.C.2005) (recognizing the doctrine of commercial impracticability). The doctrines of frustration of purpose and impossibility will relieve a party of his obligations under a contract only in extreme circumstances. In Bergman v. Parker, we explained: It is true that when the performance of an agreement is rendered impossible due to circumstances beyond the control of the parties, the party failing to perform is exonerated. Such impossibility is not limited to absolute or legal impossibility and includes impracticability due to extreme or unreasonable difficulty. However, it must be a real impossibility and not a mere inconvenience or unexpected difficulty. 216 A.2d 581, 583 (D.C.1966) (footnotes omitted; refusing to hold that performance under contract was impossible due to inability to obtain building permits when [t]here [was] no question that building permits could have been issued after modification of existing plans. . . .); accord, Transatlantic Financing Corp., 124 U.S.App. D.C. at 190, 363 F.2d at 319 (holding that the closure of the Suez Canal due to international conflict did not render a shipping contract impossible when an alternative route around the Cape of Good Hope was available); see RESTATEMENT § 261, cmt. d ([A] party is expected to use reasonable efforts to surmount obstacles to performance . . ., and a performance is impracticable only if it is so in spite of such efforts.).
The District of Columbia has not explained how the Watershed requirement that the National Park Service comply with NEPA rendered IDC's performance under the contract worthless. So far as the record discloses, the requirements of the Watershed decision could have been met, and the Project could have been completed, conferring the desired benefit on the District. Indeed, the District did not behave as if the hurdles erected by Watershed I had made development of National Children's Island worthless. It worked for passage of the NCI Act (which, for all practical purposes, made the Watershed decisions irrelevant), it negotiated the 1997 lease, and it urged the Control Board to approve the revised lease, stressing the importance of the Project. The District's priorities may have changed in later years, but the purpose served by signing the Lease was not frustrated by the Watershed decisions. The Superior Court held that the District Court decisions made performance under the Lease impossible because it is clear that upon the issuance of the Watershed decision, [IDC] could not exercise [its] rights [under the Lease]. Watershed rendered the rights of all parties to the lease ineffective by precluding any development activities on the island properties until the National Park Service complied with NEPA. As we have demonstrated, however, the Watershed decisions did not preclude completion of the Project; rather, they added another step to the process  complying with NEPA. This additional step certainly was an inconvenience or unexpected difficulty, see Bergman, 216 A.2d at 583, and the Watershed decisions probably delayed the Project, but they did not make it impossible (or even impracticable) to complete it. [6]
The District of Columbia argues that by nullifying the Transfer of Jurisdiction, the NCI Act eliminated essential terms of the Lease. Section 5(a)(1) of the National Children's Island Act provides, Upon the transfer of the Islands to the District pursuant to this Act: (1) The Transfer of Jurisdiction concerning the Islands from the National Park Service to the District dated February 1993 . . . shall become null and void and of no further force and effect. . . . Pub.L. No. 104-163, § 5(a)(1), 110 Stat. 1416, 1419 (July 19, 1996). The transfer of title to the Islands to the District occurred when the quitclaim deed was executed January 16, 1997. On that date, the District contends, the predicate and foundation of the 1993 Lease was gone. . . . [S]upervening events had outrun the 1993 Lease. The trial court agreed, listing the following provisions in the Lease which referred to the Transfer of Jurisdiction: section 1(b) states that the Lease is subject and subordinate to the Transfer of Jurisdiction; section 3(a) references the performance obligations the Transfer of Jurisdiction imposes on the District and IDC; and section 8 refers to the timetables set by the Transfer of Jurisdiction for the completion of those obligations. Also, sections 8 and 11 (a, b) of the Lease cross-reference the reversion provisions listed in section 9 of the Transfer of Jurisdiction. According to the trial court, [t]he parties clearly did not contemplate a lease agreement with critical obligations being rendered meaningless and unenforceable. It concluded that voiding these portions of the agreement frustrated the purpose of the lease and made performance impossible. We disagree. The fact that the parties did not foresee supervening events does not mean that their purpose has been frustrated or that performance is impossible. A party demonstrates that an event substantially frustrated the purpose of a contract by showing that changed conditions have rendered the performance bargained from the promissee worthless, not because the promissor's performance has become different or impracticable. Seaboard Lumber Co., 308 F.3d at 1296; accord, La Gloria Oil & Gas Co. v. United States, 72 Fed.Cl. 544, 573 (2006) (Frustration of purpose is a defense to excuse performance on the basis of changed conditions that have rendered the performance worthless to one of the parties. (internal quotation marks, editing, and citation omitted)). The purpose of the Lease was to construct, develop, use and operate the [Islands] as [] a cultural, educational and family-oriented recreational park. . . . The NCI Act's purpose was to facilitate the construction, development, and operation of a cultural, educational, and family-oriented recreation park. . . . Pub.L. No. 104-163, § 3(a), § 2(4), 110 Stat. 1416, 1416 (1996). The District has not supported its illogical argument that this law, enacted to facilitate performance of the contract, instead substantially frustrated its purpose. [8] The trial court held that by voiding the Transfer of Jurisdiction, the NCI Act rendered critical terms of the 1993 Lease meaningless. While the Lease did reference the Transfer of Jurisdiction many times, these terms were not simply erased when the Transfer of Jurisdiction was voided. The instrument that voided the Transfer replaced those critical terms with its own substantially equivalent provisions. The NCI Act contained provisions regarding all of the terms mentioned by the trial court that were previously contained in the Transfer, namely IDC's performance obligations and the circumstances in which the Islands would revert back to the federal government. Thus, the parties had ample guidance for performing under the Lease. [9] The parties certainly encountered unforeseen difficulties while trying to develop National Children's Island, and various adjustments were required. However, passage of the NCI Act did not frustrate the purpose of the Lease.
As we have discussed, in order for a plea of impossibility to succeed, the occurrence of the [supervening event] must have rendered performance commercially impracticable. Transatlantic Financing Corp., 124 U.S.App. D.C. at 186-87, 363 F.2d at 315-16 (footnote omitted). A change in law can sometimes have this effect on a contract. See, e.g., Wm. P. Lipscomb Co. v. Kaldenbach & Wysong, Inc., 187 A.2d 124, 126 (D.C.1962) (footnote omitted) (When a contract cannot be fully performed because prevented or prohibited by an intervening governmental act, or municipal regulation, or an administrative order, the promissor's duty may be discharged.). However, impossibility of performance is a defense that must be proved. Id. A supervening event that discharges a contract due to impossibility must be a real impossibility and not a mere inconvenience or unexpected difficulty. Bergman, 216 A.2d at 583 (refusing to hold that contract was impossible due to inability to obtain building permits, when [t]here [was] no question that building permits could have been issued after modification of existing plans. . . . (footnote omitted)). As explained above, the NCI Act did not render the Lease meaningless, and its provisions mimicked the provisions it replaced in the Transfer of Jurisdiction. The parties were as able to perform their obligations under the Lease after the NCI Act as before. Performance certainly had not become impossible or impracticable. [10]