Also known as: frustrated contract · frustrating the contract · contract frustration · doctrine of frustration · frustration
Written by attorneys — see sources below.
A doctrine discharging a party's contractual duties when an unforeseen supervening event destroys the shared principal purpose of the contract without rendering performance impossible. Temporary frustration suspends the duty during the event but does not discharge it unless later performance would be materially more burdensome.
Fulton Shipping leased a warehouse from Franklin Foundry for a three-month event series. A city order closed the building for two weeks due to a structural inspection. Fulton resumed the series after reopening without added cost. The temporary frustration suspended Fulton's payment duty during the closure but did not discharge the contract.
Flagship Logistics agreed to ship goods for Freeman Engineering by a fixed date. Freeman repudiated before the date. A later hurricane destroyed the port and would have frustrated the shipment. Freeman's duty to pay damages for repudiation was discharged because the duty would have been excused by frustration.
Felix Franco contracted with Fulton Shipping to refine aluminum at a fixed price tied to a cost index. New environmental rules raised costs far beyond the index. The shared assumption about cost stability failed. The doctrine excused performance because the purpose of the pricing formula was frustrated.
In 1966 Essex Group, Inc., a manufacturer of electrical wire products, decided to expand its aluminum wire production and began negotiations with Aluminum Company of America (ALCOA) for a long-term supply of aluminum. By December 26, 1967, the parties entered into the Molten Metal Agreement under which Essex would supply alumina to ALCOA, which would smelt it into molten aluminum at its Warrick, Indiana facility for Essex to pick up. The agreement was to run until the end of 1983, with Essex having an option to extend it to 1988. Essex also entered into a separate Alumina Purchase Agreement with Alcoa of Australia Proprietary Ltd. for the supply of alumina. The price under the Molten Metal Agreement was calculated using a formula with three components. A demand charge was indexed to the Engineering News Record Construction Cost Index. A non-labor production cost component was indexed to the Wholesale Price Index-Industrial Commodities (WPI-IC). A labor production cost component was indexed to ALCOA's average hourly labor costs at Warrick. The initial price was fifteen cents per pound, subject to an overall cap at sixty-five percent of a specified market price for aluminum. ALCOA consulted economist Alan Greenspan in developing the indexing system, and both parties examined the historical performance of the indices before agreeing to them. The parties also executed a Side Letter Agreement addressing concerns under the Robinson-Patman Act, providing that if the agreement were construed as a sale of goods, either party could terminate it. From 1968 through the early 1970s, the price formula produced returns to ALCOA within the expected range of one to seven cents per pound net. Beginning in 1973, following actions by OPEC to increase oil prices and unanticipated pollution control costs, ALCOA's electricity costs at Warrick rose much more rapidly than the WPI-IC. As a result, ALCOA began incurring substantial out-of-pocket losses on the contract, projected to exceed sixty million dollars over the remaining term if unchanged. In June 1979, ALCOA notified Essex that it would reduce deliveries by fifteen percent, and Essex disputed ALCOA's authority to do so under the contract terms. On July 21, 1975, representatives of ALCOA and Essex, including Krome George and Paul O'Malley, met and discussed possible revision of the pricing formula, but the parties dispute whether an oral agreement to modify the contract was reached. In 1977 and 1978, electrical generating plant failures and a coal strike caused interruptions in ALCOA's smelting operations, leading to reduced deliveries to Essex that ALCOA attributed to causes beyond its control. ALCOA filed this action in the United States District Court for the Western District of Pennsylvania seeking reformation of the contract, a declaratory judgment regarding an alleged oral modification and termination rights, while Essex counterclaimed for damages and specific enforcement of the original delivery obligations. The case proceeded to a non-jury trial on liability issues, during which evidence was presented including tables showing the divergence between the WPI-IC and ALCOA's actual non-labor costs, testimony from company officials, and records of contract negotiations and performance. Jurisdiction is based on diversity of citizenship with the amount in controversy exceeding the jurisdictional threshold, and the parties agreed that Indiana law governs the contract.
View caseFreya Freeman chartered a vessel from Flagship Logistics to carry wheat via the Suez Canal. The canal closed after hostilities began. The longer route made the voyage commercially impracticable. The doctrine applied because the specific route was a basic assumption of the charter.
Transatlantic Financing Corporation, the operator of the SS CHRISTOS, entered into a voyage charter with the United States on October 2, 1956, for the carriage of a full cargo of wheat from a United States Gulf port to a safe port in Iran. The charter specified the points of origin and destination but did not indicate the route to be taken. On July 26, 1956, the Government of Egypt nationalized the Suez Canal Company. During the ensuing international crisis, on October 27, 1956, the SS CHRISTOS sailed from Galveston on a course that would have taken her through the Suez Canal. Israel invaded Egypt on October 29, 1956, followed by invasions of the Suez Canal Zone by Great Britain and France on October 31, 1956. On November 2, 1956, the Egyptian Government closed the Suez Canal to traffic by obstructing it with sunken vessels. After the closure, Transatlantic's representative contacted an employee of the United States Department of Agriculture on or about November 7, 1956, to request instructions on the cargo and to seek additional compensation for a voyage around the Cape of Good Hope. The ship changed course and arrived in Bandar Shapur, Iran, on December 30, 1956. Transatlantic later filed a libel against the United States in the District Court seeking recovery of the costs attributable to the diversion around the Cape of Good Hope. The District Court dismissed the libel, and Transatlantic appealed to the United States Court of Appeals for the District of Columbia Circuit.
View caseEastern Air Lines contracted with Gulf Oil for jet fuel at a fixed price. An OPEC embargo drove market prices far above the contract rate. The airline faced massive losses over the contract term. The doctrine did not excuse performance because the purpose of buying fuel remained achievable despite higher cost.
Eastern Air Lines, Inc. and Gulf Oil Corporation maintained a business relationship spanning several decades involving the sale and purchase of aviation fuel. On June 27, 1972, following months of arm's length negotiation, the parties executed a contract under which Gulf agreed to supply Eastern's requirements of jet fuel at specified cities in the Eastern system through January 31, 1977. The agreement was Gulf's standard form aviation fuel contract and incorporated a price escalation clause tied to the average of the posted prices for West Texas sour crude oil 30.0-30.9 gravity as listed for Gulf, Shell, and Pan American in Platt's Oilgram Crude Oil Supplement. The contract price mechanism operated against the backdrop of U.S. government price controls in effect from 1972 through the fall of 1973. In late 1973 the Arab oil embargo occurred. OPEC unilaterally increased the price of their crude to the world market some 400% between September, 1973, and January 15, 1974. This triggered implementation of two-tier price controls under which old oil remained frozen at controlled levels while new and released oil prices rose from approximately $5 to $11 per barrel. Platt's continued publishing only the controlled old oil postings for West Texas Sour, and Eastern paid contract prices that rose from 11 cents to 15 cents per gallon. On March 8, 1974, Gulf demanded that Eastern accept a price increase or face cutoff of jet fuel supplies within fifteen days. Eastern filed its complaint in the United States District Court for the Southern District of Florida alleging breach and seeking preliminary and permanent mandatory injunctions. By agreement of the parties a preliminary injunction preserving the status quo was entered on March 20, 1974, requiring Gulf to continue performance and Eastern to pay according to contract terms pending final disposition. Gulf answered and asserted that the contract lacked mutuality, was not a binding requirements contract, and was commercially impracticable. At trial the parties presented evidence concerning Eastern's fuel liftings at Gulf stations, which varied daily, weekly, and monthly due to weather, schedules, aircraft loads, and fuel freighting practices that Gulf had accepted without objection over thirty years of dealing. Gulf introduced evidence of its increased crude oil costs, including intra-company transfer prices that incorporated profits from its overseas and domestic production subsidiaries, while the record showed Gulf recorded net profits after taxes of approximately $800 million in 1973 and more than $1.065 billion in 1974.
View caseHome Building & Loan Association held a mortgage on property owned by Blaisdell. A state law extended the redemption period during an economic emergency. The extension altered the contract timeline. The doctrine did not apply because the law addressed a public emergency rather than destroying a shared contractual purpose.
The Blaisdells executed a mortgage on their property in Minneapolis to the Home Building & Loan Association on August 1, 1928. The mortgage contained a valid power of sale by advertisement. After default, the mortgage was foreclosed and the property sold to the Association on May 2, 1932, for $3700.98. The period of redemption under the law then in effect was set to expire on May 2, 1933. On April 18, 1933, Minnesota enacted Chapter 339 of the Laws of 1933, known as the Mortgage Moratorium Law. The statute authorized district courts to extend the period of redemption from foreclosure sales for such additional time as the court deemed just and equitable, not beyond May 1, 1935, upon condition that the mortgagor pay a reasonable part of the income or rental value toward taxes, insurance, interest, and principal. The Blaisdells applied to the District Court of Hennepin County for an extension of the redemption period. The district court found that the reasonable rental value of the property was $40 per month and the present market value was $6000. It extended the redemption period to May 1, 1935, requiring the Blaisdells to pay $40 per month to the Association. The Supreme Court of Minnesota affirmed the order. The Home Building & Loan Association appealed to the United States Supreme Court, which reviewed the judgment sustaining the statute as applied to the preexisting mortgage.
View caseNo. Temporary frustration suspends the duty only while the event lasts. The duty resumes afterward unless later performance would be materially more burdensome than originally contemplated.
Frustration discharges duties when an event destroys the shared purpose even though literal performance remains possible. Impossibility requires that performance itself become objectively impossible.
No. Mere reduction in profitability from market changes does not frustrate the contract. The principal purpose of the agreement must be destroyed, not merely made less advantageous.
The duty to pay damages is discharged if the repudiated performance would have been excused by frustration before any nonperformance.
Yes. A party whose duty is discharged by frustration may recover restitution for any benefit conferred by part performance or reliance.