In 1941, Lloyd leased some
land to Murphy for five years solely to sell cars and gas unless Lloyd
gave Murphy written permission to use it for other activities.
After the US entered the
WWII, the government ordered most new car sales discontinued so Murphy's
business dropped. Murphy got an oral waiver of the contract's conditions
from Lloyd. However, Murphy gave up his business and sent Lloyd written
notice that he was repudiating the contract.
Lloyd first gave written
notice to Murphy reaffirming their oral waiver that Murphy could sell
other things, but when he didn't hear back, he gave up and started
renting the property to others.
Lloyd sued Murphy for unpaid
Lloyd argued that Murphy had
signed a contract to rent the land and was therefore required to pay,
regardless of external conditions that might affect his business.
Using the logic of Krell
v. Henry (2. K.B. 740 (CA 1903)),
Murphy argued that it didn't matter that you could use the property to
sell other things, he rented it for a specific purpose (to sell cars),
and that purpose had been frustrated. Therefore the
contract was void.
The Trial Court found for
Lloyd and ordered Murphy to pay the back rent. Murphy appealed.
The Trial Court found that
war conditions hadn't relieved Murphy of his duty under the contract.
The Court noted that the
land could be used to sell all sorts of things, and there were lots
of other car dealerships in the area that did not go out of business.
The Appellate Court affirmed.
The Appellate Court found
that both parties knew that war was coming and that the government's
action of stopping all car sales was not unforeseeable. Furthermore, the possibility for Murphy to
sell new cars was not completely eliminated but merely restricted.
In order to use the doctrine
of frustration, you have to prove
that performance is extremely difficult, that what caused that difficulty is both unforeseen and the fault of neither party, and it has to
be something that wasn't considered in the contract.
In this case, since the war
wasn't all that surprising, and it wasn't extremely difficult to keep
selling cars, the doctrine of frustration fails. It was not unforeseen.
The Court also
refused to apply the doctrine of frustration to this case on public policy grounds.
It would be expensive and
wasteful for tenants to repudiate leases just because their businesses
weren't as successful as they expected.
The purpose of a lease must
be totally destroyed or must become really difficult to accomplish in
order for a lessee to be excused from paying rent.
This was codified in UCC
§2-615, which says that the doctrine
of frustration arises when the expected value of performance to
the party seeking to be excused has been destroyed by an unexpected event
that causes an actual failure of consideration.
The Westinghouse Elec.
Corp. Uranium Contracts Litig. (405
F.Supp. 316) helped codify what the word impracticable
means with regards to UCC §2-615.
In this case, Westinghouse
made a deal to supply uranium to nuclear power plants. The price of
uranium skyrocketed and Westinghouse stood to lose $2B. Westinghouse
argued that the contract had become impracticable.
After reading the motions
and pleadings, the judge told Westinghouse that they would lose. Just
because a deal turns bad and you stand to lose a lot of money, doesn't
mean that you can get out of the contract.
Westinghouse settled, so
there was no official ruling (hence the weird cite).