Can our counterparty stop performing because the deal's purpose was destroyed by an outside event?
Rarely. Wisconsin defines the frustration defence, tracking Restatement (Second) of Contracts § 265, as requiring that (1) the party's principal purpose in making the contract is frustrated; (2) without that party's fault; (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made (Convenience Store Leasing, quoting Ryan v. Sheppard). The Court of Appeals recorded that the doctrine is given a narrow construction and applied sparingly, because it renders null the explicit terms of the contract and is counter to the strong impulse in the law to enforce contracts as written, and that the party asserting the defence bears the burden of proving it.
The trap
Foreseeability and allocated risk defeat the defence before the elements are reached: the court recorded that the doctrine does not apply where the risk of the supervening event was reasonably foreseeable and could and should have been anticipated by the parties and provision made for it in the agreement. The Supreme Court of Wisconsin has put the same point as a rule of contract allocation: if the parties have contracted with reference to the frustrating event or have contemplated the risks arising from it, they may not invoke the doctrine of frustration, and a cost that is merely unwanted or higher than expected is not the same as one whose non-occurrence the deal was built on. And 'frustrated' does not mean unprofitable: the Restatement illustration the court quoted has a gas-station lessee who can still operate at a substantial loss, whose principal purpose is therefore not substantially frustrated and who remains liable for rent, with the same result where the loss is caused by a government regulation or the termination of the supply franchise. The frustrating event must strike at the foundation of the contract so that performance would be virtually worthless and meaningless.
9 authorities
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
our cases define the elements of this defense as follows: “(1) the party’s principal purposes in making the contract is frustrated; (2) without that party’s fault; (3) by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.”
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
The doctrine of frustration is “given a narrow construction” and “applied sparingly.” 17A AM. JUR. 2D Contracts § 641 (2016). This is so because it renders null the explicit terms of the contract and is counter to the strong impulse in the law to enforce contracts as written.
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
“The doctrine does not apply where the risk of the event that has supervened to cause the alleged 9 No. 2017AP1505 frustration was reasonably foreseeable and could and should have been anticipated by the parties and provision made for it in the agreement.”
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
The party asserting the defense has the burden to prove frustration of purpose.
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
The Restatement affirms that frustration is not substantial merely because “the transaction has become less profitable for the affected party or even that he will sustain a loss.” Id. An example from the Restatement is helpful and especially pertinent here: A leases a gasoline station to B. A change in traffic regulations so reduces B’s business that he is unable to operate the station except at a substantial loss. B refuses to make further payments of rent. If B can still operate the station, even though at such a loss, his principal purpose of operating a gasoline station is not substantially frustrated. B’s duty to pay rent is not discharged, and B is liable to A for breach of contract. The result would be the same if substantial loss were caused instead by a government regulation rationing gasoline or a termination of the franchise under which B obtained gasoline.
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
Moreover, the frustrating event must strike at the foundation of the contract—a basic assumption on which the contract was made such that the party’s performance, due to this unexpected circumstance, would be “virtually worthless” and “meaningless.”
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
As our supreme court stated in Chicago, Milwaukee, “if the parties have contracted with reference [to the frustrating event] or have contemplated the risks arising from it, they may not invoke the doctrine of frustration.” Chicago, Milwaukee, 82 Wis. 2d at 527.
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
In short, the Defendants have not met their burden to prove that the principal purpose of the FSA was frustrated due to U.S. Oil’s demand for alterations to the bathrooms, nor that this demand was contrary to a basic assumption underlying the FSA.
- case2019 WI App 40Convenience Store Leasing and Management v. Annapurna MarketingWis. Ct. App.decided 2019read it at the source ↗
The words that state the rule
We conclude AP Marketing is not excused from performance of the FSA under the frustration of purpose doctrine. The circuit court erroneously dismissed the claim on this ground. We remand the case to the circuit court with instructions to reinstate Bulk’s claim that AP Marketing breached the FSA. Because the circuit court did not determine whether AP Marketing breached the FSA, that issue—along with any other issues of contractual interpretation and performance, including the stipulated damages provision—remains to be adjudicated. By the Court.—Judgment reversed and cause remanded with directions.
“Defective” means that reading found something to correct. What you are reading is the rule as it stands after that reading.