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Changed Circumstances in Contracts: Possibility, Practicality & Effects

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  • 0:05 Changed Circumstances…
  • 1:53 Impossibility and…
  • 5:04 Frustration of Purpose
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Instructor: Kat Kadian-Baumeyer

Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

Sometimes, promises made in a contract cannot be performed because of unforeseeable circumstances that cannot be defined in a clause. In these cases, the law allows changes for reasons of impracticality, impossibility and frustration of purpose.

Changed Circumstances in Contracts

There are times when no matter how carefully a contract is drafted, issues arise that are simply unforeseeable. For this, the law allows for changes to be made to the contract to accommodate the parties. Sometimes, even a breach of contract can occur.

Changed circumstances in contracts is a fancy term that means the terms of the contract changed because one or both of the parties was no longer able to keep the promises made in the original agreement due to circumstances that were either beyond his control or unforeseeable.

That is not to say that the contract clauses were poorly written or elements were missing. It means that the contract did not contain every possibility for voidability.

An example may help. In times of economic hardship, many people found themselves unable to pay their mortgages. Hardships, like rising interest rates and high unemployment, led to many people just walking away from their homes.

Rather than bailing on the responsibility of paying the mortgage, banks offered programs that allowed homeowners to stay in their homes and pay either a lower monthly payment or, in some cases, principle, or loan amount not including interest, taxes or insurance.

In the original mortgage, the bank and the homeowner made promises. Generally, the bank promised to lend the money at a certain interest rate and for a certain period of time. The homeowner promised to pay the bank a set amount of money each month for the mortgage period.

When this obligation could no longer be satisfied due to the loss of a job or some other catastrophe, the bank made changes to the original contract to allow for a different set of promises.

There are several specific instances that the court considers reasonable for a change in circumstances in contract law.

Impossibility and Impracticality

Objective impossibility in contract law says a party can remove himself from the obligations in a contract if the terms of the contract become impossible to perform due to no fault of the breaching party.

In October 2012, Super Storm Sandy made landfall, and in her path, she destroyed much of the New Jersey shore area as well as parts of New York City and its suburbs. Prior to the storm, people went about their daily business. The day after Sandy barreled through the region, all commerce and industry stopped. Businesses and homes were leveled. Nothing was left.

Suppose a bride had her wedding booked at a Jersey Shore-area catering hall that no longer stands? It is obvious that the wedding reception can no longer take place in the venue. The court would look at whether there was a possibility of the caterer performing the promises of the original contract. If no catering hall stands, the parties are able to breach the contract because the wedding reception simply cannot happen through no fault of either party.

Sometimes, the events that led up to the breach of contract are of subjective impossibility. This means that one of the parties to the contract believes that a circumstance or event makes the promises impossible to perform. The law looks at these situations differently. Simply stating, 'I cannot perform,' is not enough. It is too subjective, meaning open to opinion rather than fact.

Let's say that the catering hall was left unscathed in the aftermath of Sandy, but the bride chooses not to continue with the wedding reception because her family is unable to travel to the area due to airline cancellations.

The court may find this reason for breach too subjective. The catering hall is able to perform their promise by providing food and beverage. So, regardless of whether the bride cares to move on with the reception or not, she would probably have to make good on her promise to pay for the event.

That is, unless the bride claims impracticality, meaning a circumstance occurred that made keeping the contract promises impractical, not impossible.

When a party claims the contract terms are impractical, the courts look for three things:

  • An unexpected event happened after the contract had been signed
  • An assumption on the part of both parties that the unexpected event would not happen
  • The unexpected event made it impractical to move forward with the contractual obligations

When Sandy roared through the Northeast region, the winds and rain lasted for several hours. In the hours and days to follow, major airports remained closed to incoming flights. Highways and roads were impassible due to serious flooding. Many people returned to find their homes had washed into the ocean.

Even though the catering hall remained intact and operable, the surrounding areas were devastated. Traveling to the region was impossible by air and impractical by automobile. In this case, the courts may look at the contract as impractical under the circumstances. An act of God, like a major Category 3 hurricane, qualifies as such.

Frustration of Purpose

Similar to impossibility, there are circumstances that make contract promises impossible to perform, making it possible for the frustrated party to walk away without any obligation to the original contract.

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