Impossibility and related doctrines in contract law: an economic analysis

Abstract

O RDINARILY the failure of one party to a contract to fulfill the performance required of him constitutes a breach of contract for which he is liable in damages to the other party. But sometimes the failure to perform is excused and the contract is said to be discharged rather than breached. This study uses economic theory to investigate three closely related doctrines in the law of contracts that operate to discharge a contract: impossibility, impracticability, and frustration. These are not the only excuses for nonperformance of a contract. Among other excuses, not discussed in this study, is the closely related doctrine of mutual mistake (sometimes called antecedent impossibility). Also related, and only incidentally discussed herein, is the doctrine of Hadley v. Baxendale1 limiting the liability of the breaching party to the foreseeable damages of the breach. There is an extensive legal literature on the set of doctrines that, for want of a more inclusive term, we shall sometimes lump together under the name impossibility. The main conclusions of this literature are summarized in Part IA, next, while Part IB analyzes the subject from the standpoint of economics.2 Part II applies the economic analysis to the leading cases and

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