Opinion ID: 1901284
Heading Depth: 1
Heading Rank: 5

Heading: Frustration of Purpose

Text: ¶ 30. The doctrine of frustration of purpose excuses performance by a party where the value of the performance to at least one of the parties, and the basic rationale recognized by both parties entering into the contract, has been destroyed by a supervening and unforeseen event. 18 WILLISTON ON CONTRACTS § 1935 (3d ed.1978). The Restatement of Contracts § 265, Discharge by Supervening Frustration, provides, Where, after a contract is made, a party's principal purpose is substantially frustrated without his fault by the occurrence of an event and the nonoccurrence 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. Section 265 requires that three criteria must be met before courts will find frustration of purpose. 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. It is not enough that the transaction has become less profitable for the affected party or even that he will sustain a loss. 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. Restatement (Second) of Contracts § 265 cmt. a (1981). ¶ 31. What distinguishes frustration of purpose from the defense of impracticability is that in a true case of frustration, it is not that either party's performance has become impossible or significantly more difficult than originally contemplated. Rather, the party seeking discharge on frustration grounds can still perform under the contract, but no longer has the motivation to do so which originally induced its participation in the bargain. Nicholas R. Weiskop, Frustration of Contractual PurposeDoctrine or Myth?, 70 St. John's L.Rev. 239, 240 (1996). ¶ 32. This Court has not recognized frustration of purpose as a defense to a breach of contract action. In United States v. Moulder, 141 F.3d 568 (5th Cir. 1998), the Fifth Circuit Court of Appeals considered the frustration doctrine within the context of a criminal plea agreement. Lonnie Moulder and Steven Heiden pled guilty to a firearm offense in exchange for the government's promise not [to] pursue any other charges ... arising directly out of the facts and circumstances surrounding this offense or any other offense of which the United States is currently aware. Id. at 570. Moulder and Heiden successfully challenged their convictions based on an intervening change in the law under which their conduct was no longer considered criminal. The district court vacated the convictions but, that same day, Moulder and Heiden were indicted on the drug charges that, under the plea agreement, had not been pursued earlier. Id. ¶ 33. Relying upon Section 265 of the Restatement, the court held that the government's contractual obligations under the agreement were discharged under the frustration of purpose doctrine. Id. at 572. The court explained, [t]he comments to this section provide that 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. Id. (quoting Restatement (Second) of Contracts § 265 cmt. a (1981)). Finding that the underlying purpose of the plea agreement was to avoid the uncertainty of a jury verdict and to ensure that the defendants served time for the firearms offenses, the court noted that [a] basic assumption underlying the parties' purposes was their belief that the conduct ... amounted to a violation of § 924(c). Id. Because the parties' assumptions and obligations were altered by a subsequent United States Supreme Court decision and successful challenges to the statute under which the defendants were convicted, the court held the underlying purpose of the [plea] agreement [was] frustrated and the basis of the government's bargain [was] destroyed. Thus, under the frustration of purpose doctrine, the government's plea agreement obligations became dischargeable. ¶ 34. In the instant case, 4-County contends that it has satisfied the three criteria for finding frustration of purpose. First, the purpose that is frustrated must have been a principal purpose of 4-County in making the contract. 4-County claims that its purpose in entering into the Service Area Agreement was to avoid the costs associated with a protracted eminent domain proceeding when the City's acquisition of its service rights and distribution facilities was unavoidable. After all, the time and expense of such a proceeding would surely be substantial. The City, however, refers to the agreement itself, arguing that the parties' purpose in entering into the agreement was [t]o avoid wasteful duplication of facilities and uneconomic service to ultimate consumers; and... to prevent wasteful investments and uneconomic service arrangements in the operation and extension of their respective distribution systems. ¶ 35. Second, the frustration must be substantial. Is it so severe that it is not fairly to be regarded as within the risks that 4-County assumed under the contract? This likely goes to the foreseeability of the 1987 amendments. As with the impossibility defense, if a contingency may be guarded against by the parties in the contract, i.e., it is foreseeable or within the control of one of the parties, its occurrence will not discharge the parties' obligations under the contract. Green, 618 So.2d at 78. ¶ 36. Finally, the non-occurrence of the frustrating event must have been a basic assumption on which the contract was made. Again, 4-County maintains that it would not have entered into the contract if it had known of the 1987 amendments. The City's possessing an absolute right to take 4-County's service rights and distribution facilities was something 4-County contends it assumed would not change. Clearly, however, 4-County knew that it was within the power of the legislature to change the law. It could have but failed to condition the continued effectiveness of the contract upon the availability of eminent domain.