A New Theory of Impossibility, Impracticability, and Frustration

Abstract

Contract law offers three closely related excuse doctrines: impossibility, commercial impracticability, and frustration of purpose. These doctrines, which allow courts to release parties from their contractual obligations under extreme and unforeseeable circumstances, were central to contract disputes in the aftermath of the COVID-19 pandemic. Yet despite their importance, and despite decades of scholarly attention, these doctrines remain a puzzle, widely considered difficult to explain and justify. Existing economic theory sees contractual excuse doctrines as a risk-allocation mechanism; although highly influential, this standard theory leaves many questions unanswered. We offer a simple economic model explaining contractual excuse doctrines by focusing on avoidance investments, that is, investments by contractual parties designed to escape their obligations and wiggle their way out of the contract. We show that the proposed model offers a straightforward explanation to contractual excuse doctrines, illustrating their underlying logic, and accounting for the key patterns observed in court decisions.

Keywords: Contract Law, Impossibility, Impracticability, Frustration, Excuse

JEL Classification: K12