Lloyd v. Murphy
25 Cal.2d 48, 153 P.2d 47 (Cal. 1944)

  • 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 rent.
    • 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).