ContractsProf Blog

Editor: Jeremy Telman
Oklahoma City University
School of Law

Tuesday, February 21, 2023

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part II: Douglas Baird

Unscrambling Excuse
Douglas Baird

The domain of classical contract law has discrete boundaries and hard edges. Legally enforceable promises are limited to bargained-for exchanges. There must be an offer and an acceptance. A contract exists, or it does not. You receive expectation damages or nothing. Such rigid traditionalism, however, no longer captures what contract law is about, if it ever did. Mel Eisenberg’s corpus, in particular his exemplary work on excuse, makes this manifest.  See Melvin A. Eisenberg, Impossibility, Impracticability, and Frustration, 1 J. Legal Analysis 207 (2009).

Baird  Douglas 2013Boundedly rational parties do not always precisely spell out their contracts to account for the unexpected, and hence promises that appear unqualified on their face should not be understood literally. If a bargain rests upon assumptions about future states of the world, the deal is sensibly called off if those assumptions for unexpected reasons do not hold. You agree to rent my theater for an evening and, through no fault of mine, it burns down. In this event, we each should go our separate ways. Similarly, if I have an apartment that overlooks the King’s coronation, and you are eager to see it, it is too bad for both of us if the event is called off. I lose the handsome sum from letting out my apartment for a day, and you lose the chance to entertain your friends with a spectacular view of the pageant.

Frustration and excuse are heavily fact dependent. The doctrine in the first instance is merely a default term. Dickered contracts contain elaborate force majeure clauses. We can spill ink over what counts as excuse or frustration, but Mel Eisenberg shows that this is not what is conceptually hard. The problem comes from what happens next. Money may have changed hands, and both parties might have spent money in reliance on the contract. Unexpected events typically bring with them a loss, and someone must bear it. This makes it fruitless to reduce excuse and frustration to a simple yes/no, on/off affair. Any coherent account of excuse and frustration must couple the finding of excuse or frustration with the appropriate relief. The egg must be unscrambled.

It is well accepted that restitution operates in this environment. If one party pays the other in advance, that party should be able to get its money back. But beyond this, much hard thinking needs to be done. It might seem that reliance damages should have no role to play. Both parties to a contract spend money in anticipation of the performance, and it makes little sense for each party to hold the other liable for her expenses. But the two parties do not necessarily stand in symmetrical positions. Often it is too simple to say that no one was responsible. The theater owner, while not at fault, controlled the theater and had some capacity to reduce the chance of fire. Even when excuse applies, some parties may be more at fault or better positioned than another.

Mel Eisenberg 2Mel Eisenberg (right) draws on a series of old Massachusetts cases to shed light on the problem. A general contractor’s contract to build a hospital was cancelled and awarded to another bidder instead. The general contractor then faced its own subcontractors, and the doctrine of excuse applied. The general contractor could not be sued for expectation damages. The cancelation of the main contract called off the contract between the general contractor and the subcontractor. ­At the same time, however, the general contractor was, at least to some extent, responsible for the contract being voided. The subcontractor should be able to recover some of its reliance expenditures. See Albre Marble and Tile Co., Inc. v. John Bowen Co., 338 Mass 394 (1959).

What remains a mystery is how far this idea extends. The testing excuse case is one in which the unexpected event keeps both parties from performing and money passes from one to the other. Consider two singers. They agree to perform together at a specific time and specific venue and then split the gate. One singer faces $100 in expenses that the other does not. To ensure that they come out even in the end, the second singer gives $50 to the first. An unforeseeable act of God renders the venue unusable and the joint performance is cancelled. What happens now? If the first singer had been spent none of the $100 she received from the second, the second singer should have a restitution action for $50. But what if the $100 has been spent? Does the second singer still get her $50 back? It might seem that the two singers invested in a joint enterprise and should share the losses equally.

Assume that your intuition suggests that the losses should be shared in this case, and the second singer is not entitled to recover the $50 she gave to the first. How much does one have to change the facts to alter your intuition and for you to find that one party can recover what she has given the other notwithstanding the expenses the other has incurred? Consider, instead of two singers, there is a couple that engages a restaurant for their wedding reception and pays in advance. Power is lost halfway through the event. It is not the fault of either party, and the contract explicitly lists a power failure as an event of excuse. The unhappy wedding couple can obtain restitution of the money they gave to the venue less any benefit they received before the power failed. Facto v. Pantagis, 915 A.2d 59 (N.J. App. 2007). But does it make sense that the venue bears the entire loss for the food that is uneaten and has to be thrown out?

I suspect that many share my intuition that the couple should have an easier time recovering the money they have paid notwithstanding the substantial loss the restaurant faces, but how is the restaurant different from the first singer? English law allows some account to be taken for the out-of-pocket reliance costs as an offset against restitution in excuse cases. See Gamerco SA v. ICM/Fair Warning (Agency) Ltd., [1995] E.M.L.R. 263 (High Court, Queen’s Bench). But when exactly should this happen?

The genius of Mel Eisenberg’s work here, as elsewhere, shows how best to cope with such questions. He does not confront this problem in particular, but his work does suggest, perhaps, that regardless of where one draws the line, the wedding couple has a better chance of recovery than the first singer. To be sure, the restaurant is not at fault for the power failure. If it were, there would be no excuse. Nevertheless, it is possible to lay some responsibility at its doorstep, and it is not something that rigid formalism should require us to ignore. Again, the law of excuse, like the law of contract, need not be a rigid, yes/no, on/off affair.

Related posts from the Mel Eisenberg Symposium:

Virtual Symposium: Mel Eisenberg and Contracts Law Scholarship

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part I: Shawn Bayern

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part III: Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IV: Nancy Kim

Posts from the second week:

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part V: Introducing the Second Week

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VI: Mark Gergen

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VII: Jennifer Martin

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part VIII: Harris Hartz

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part IX: Hila Keren

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(A): Response to Ethan Leib

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(B): Response to Nancy Kim

Virtual Symposium on the Contracts Scholarship of Mel Eisenberg, Part X(C): Response to Sid DeLong

Commentary, Conferences, Contract Profs, Famous Cases | Permalink


In one version of the “formalism” of economic analysis, risks of frustrated contracts that are not expressly allocated by agreement are assigned by the court to the party who was better able to prevent the occurrence or the party who is better able to insure against it, in each case “better” meaning “at lowest cost.” Both these reasons would give the restaurant the risk for the uneaten food. It had the only opportunity to lower the risk of power outages and it probably can insure against such losses more cheaply, if only by spreading them over many contracts.
But this method runs aground when applied to even slightly complex problems. In the sale of a dangerous consumer good, for example, both parties can take precautions that the other could not take and that would reduce the expected cost of personal injury and both parties have advantages over the other in insuring against it, one because it has better knowledge of the probability of loss and the other because it has better knowledge of the magnitude.
But perhaps for all its flaws, formalistic reasoning of this sort is still superior in the long run to a case-by-case intuitive judgment a judge.

Posted by: Sidney DeLong | Feb 24, 2023 9:25:49 AM

All common law rules should be based on moral, policy, and experiential propositions. Formalism, which originated in the Nineteenth Century, rejected taking any account of those propositions. Accordingly, it was an untenable method of legal reasoning, and died in the Twentieth. As Stephen Perry wrote, “In a series of important and provocative articles, Professor Ernest Weinreb has argued in favor of formalism, a position in legal theory that conventional wisdom has for some time has been pronounced dead. In his present paper, Weinreb tells us that his defense of formalism is a voice from the empty sepulcher. While there is certainly no doubting the ingenuity and inherent interest of Weinreb’s attempt to raise the dead, in the final analysis his attempt at revivification must be judged a failure. He may have induced the corpse to twitch a little, but despite all his skillful arguments formalism remains . . . as dead as it ever was.”

Posted by: Mel Eisenberg | Mar 13, 2023 4:25:07 AM