When does the law excuse complete performance of a contract?

Adam Keilen Construction Law

Generally, a contract is a promise, and a basic principle of contract law states that “promises ought to be kept.” For example, Al executes a contract with Bill, thereby Bill promises to paint Al’s house on Monday. Thus, Al pays Bill to paint the house on Monday. Neither party may break their promise or ignore their responsibilities. However, there are circumstances where the law deems it unfair to strictly hold a party to its word. Under Michigan law, there are two broad categories that will justify a party’s failure to perform completely. Unlike substantial performance rules, these two categories will generally release a party from its contractual duties.

Category 1 – Impossibility. The doctrine of impossibility means that some event occurred after contract formation, or there were some unknown circumstances at the time of formation, that renders strict performance of the contract impossible (there are various types of legal impossibility). Bissell v LW Edison Co, 9 Mich App 276, 284, 156 NW2d 623 (1967). For example, Bill contracted to paint Al’s house on Monday, and, unforeseeably to either party, on Monday morning, an exterior water line broke near the house, spraying water on the exterior of Al’s house for several hours. Bill will likely be excused from failing to partially perform the contract, meaning, he may be released from strict compliance with “painting Al’s house on Monday,” accordingly, without giving Al a valid cause of action for breaching his contract.

Category 2 – Frustration of Purpose. The doctrine of frustration of purposes refers to cases in which the underlying reason for performance has disappeared. See, e.g., Ihlenfeldt v Guastella, 42 Mich App 384, 202 NW2d 327 (1972); Chemetron Corp v McLouth Steel Corp, 381 F Supp 245 (ND Ill 1974), aff’d, 522 F2d 469 (7th Cir 1975). For example, Al and Bill execute a purchase agreement, thereby Al promises to sell his house to Bill. Thereafter, Bill and Al discover that Al does not have marketable title to the house. The key to such cases are that (i.) Al and Bill knew the purpose of the agreement at formation, the purpose was to sell the home, and that (ii.) the purpose was frustrated by an event not reasonably foreseeable at the time of formation, Al’s defect in title. Thus, Bill may be released from strict performance in accordance with the purchase agreement.

The take away. Plainly, both theories overlap; however, when unforeseeable circumstances affect performance of the contract, there may be reasonable grounds to release or modify strict performance in accordance with the same.