Frustration of purpose

In the law of contracts, frustration of purpose is a defense to enforcement of the contract. Frustration of purpose occurs when an unforeseen event undermines a party's principal purpose for entering into a contract such that the performance of the contract is radically different from performance of the contract that was originally contemplated by both parties, and both parties knew of the principal purpose at the time the contract was made. Despite frequently arising as a result of government action, any third party or even nature can frustrate a contracting party's primary purpose for entering into the contract. The concept is also called commercial frustration.

For example, if Joe gets a mortgage for a new home, and after three years, the house is destroyed, for whatever reason, at no fault of Joe's. Without a hell or high water clause, Joe might be exempt from the remainder of the mortgage, as the principal purpose of the contract (to have a house to live in) has been compromised. However, he might still have a foreclosure on his credit rating.

Frustration of purpose is often confused with the closely related doctrine of impossibility. The distinction between the two is that impossibility concerns the duties specified in the contract, but frustration of purpose concerns the reason a party entered into the contract. An example is if entrepreneur Emily leases space from landlord Larry so that she can open a restaurant that serves only Tibetan Speckled Lizard meat. If the city rezones the property to forbid commercial uses or if the property is destroyed by a tornado, both Larry and Emily are excused from performing the contract by impossibility.

However, if the Tibetan Speckled Lizard suddenly goes extinct, Emily may be excused from performing the contract because Larry knew her primary purpose for entering into the lease was to serve Tibetan Speckled Lizard, and the purpose has been frustrated. In the second scenario, the parties could still carry out their obligations under the lease, but one of them no longer has a reason to.

The Restatement of Contracts, Second § 265 defines frustration of purpose:

A circumstance is not deemed to be a "basic assumption on which the contract is made" unless the change in circumstances could not have been reasonably foreseen at the time the contract was made. As a result, it is rarely invoked successfully. Successful invocations usually come in waves during times of substantial tumult, such as after the passage of Prohibition, when bars and taverns no longer had a reason for their leases, or during major wars, when demand for many consumer goods and services drops far below normal.

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