Commercial Impossibility and Frustration of Purpose: A Critical Analysis

Abstract

A critical analysis of theories of commercial impossibility and frustration of purpose is best undertaken in conjunction with a theoretical analysis of contract in general. Contracts function as a means of transferring social benefit, which can be subcategorised into subjective and objective benefit. Contracts also regulate the transfer or risk, which is inherent in property and hence any contractual relationship. In the light of the transfer of subjective and objective benefit and risk, contracts can be shown to be by definition ex ante Pareto superior for both parties. Frustration of purpose or commercial impossibility is pleaded where the ex post overall benefit differs greatly from the ex ante expected value. This difference results from the manifestation of a risk which one party bears under the terms of the original contractual risk/benefit equilibrium. Considering the various subjective and objective risks and benefits involved in the contract, it is possible to classify frustrating eventualities under eight heads. In at least six cases the importance of the principle of security of exchange clearly precludes the operation of frustration. One of the remaining cases corresponds with the controversial Krell v Henry; there appears to be a temptation to regard frustration as the most socially utilitarian solution. Given however the dynamics of contractual risk and benefit, allowing frustration there would be unworkable because it would entail placing a subjective risk burden on the party which is in a worse position to evaluate it. There should be no place in the law for a doctrine of frustration of contract on the grounds of commercial impossibility orchanged circumstances.