The Comparative Law and Economics of Frustration in Contracts

Abstract

In this article we study the related doctrines of frustration of purpose and practical and economic impossibility. Frustration of purpose is a defense to the enforcement of a contractual obligation that becomes available when an unforeseen event undermines the purpose for entering into a contract. The rules governing frustration of purpose share a common logic with the related doctrines of practical impossibility and economic impossibility. In this paper we consider the solutions adopted by European legal systems in a comparative law and economics perspective. From an economic point of view the issues that acquire relevance in the face of impossibility of performance can be grouped in three main categories, namely: (a) risk-allocation function, (b) information harvesting function, (c) incentive function. We examine the ability of alternative legal rules to fulfill one or more of these economic functions. We further observe that the choice of rules in this area of the law should be particularly attentive to the impact of transaction costs. Frustration and impossibility in contracts are rare occurrences. It is inefficient and often impractical to allocate the risk of unexpected contingency at the time the contract is made, and the remedy of discharge seems to be a desirable default allocation of the risk between the parties, where renegotiation of the contract remains a viable ex post option to capture the benefits of the original contract.

Keywords: frustration of purpose, practical impossibility, economic impossibility, risk-allocation

JEL Classification: K12, K41