8 - Exemption from performance

Summary

INTRODUCTION: LEGAL CONSEQUENCES OF CHANGED CIRCUMSTANCES

Virtually all legal systems provide some basis for allowing parties to deviate from contractual performance with impunity when circumstances substantially change between the time the contract was concluded and the time that it is to be performed. The relevant changes usually implicate a significant unanticipated increase in one party's costs of performance or the occurrence of some unanticipated physical or regulatory obstacle that destroys the subject matter of the contract or the rationale for performing it. Legal doctrine recognizes that commercial parties enter into contracts that each believes will be personally profitable to perform, and that those beliefs are based on assumptions made at the time of the conclusion of the contract about the conditions that will exist at the time performance is due. Sellers, for instance, assume that they can procure the goods necessary for performance at a price lower than the contract price, while buyers assume that they can profitably use the goods for which they have contracted. Both parties assume that they will be physically able to perform the contract. Less certain, at least where the contract is silent, is how parties intend to allocate the risk that those assumptions prove incorrect. Different legal systems apply very different default rules that allocate that risk by defining the range of conditions under which nonperformance does not constitute a breach. Some legal systems permit adjustments when the equilibrium of the contract has been disturbed or when performance is possible but unexpectedly burdensome, while others essentially prohibit deviations from the contract unless performance is virtually impossible. These doctrines reflect the attitudes that different legal systems have towards the propriety of enforcing the literal terms of a contract, attitudes that are often summarized as embracing one of two Latin maxims. Doctrines that restrict the adjustment of contractual obligations are often associated with the principle of pacta sunt servanda, or “promises ought to be kept,” while doctrines that permit more liberal adjustment are associated with the principle of rebus sic stantibus, roughly translated to condition performance on circumstances remaining the same over the contractual term. American lawyers will think in terms of Uniform Commercial Code (“UCC”) § 2–615, which excuses the seller from a contract when performance has been rendered “impracticable” by the occurrence of a contingency that the parties assumed would not materialize and the risk of which was not assumed by the seller.