Frustration, Impossibility and Mistake

In its recently issued opinion in Riewe v. Baron, 2015 Mich App LEXIS 1907 (October 20, 2015), the Michigan Court of Appeals dealt with some recurrent contract defenses that are frequently litigated in the Business Court. The defenses at issue were mutual mistake of fact, frustration of purpose and impossibility of performance, which, if successfully asserted, can be used to void, rescind or reform a contract.

Riewe arose out of an art auction that yielded significantly less than anticipated sales proceeds from the sale of the defendant’s art collection. The contract between the defendant and the plaintiff auctioneer provided that the latter would be paid a minimum $200,000 commission regardless of the sales proceeds, which both parties anticipated would be high. Unfortunately for the defendant, a substantial part of the artwork had to be withheld from the auction because of a treaty between the United States and Mexico relating to the recovery of stolen archaeological and cultural properties. Neither party knew about the treaty or its possible effect on the auction before they entered into their contract. When the auction yielded proceeds that were approximately 25% of the minimum commission, the defendant balked at paying the fee.

The case went to court, where the defendant argued that he should be afforded the remedies of rescission, reformation or avoidance of the contract because the parties had contracted under the mistaken belief that all of the defendant’s art collection could be sold and were also unaware of the impact of the United States-Mexico treaty. The defendant also argued that the purpose of the contract had been frustrated and that it was impossible to perform the contract due to the treaty. After conducting a bench trial, the trial court rejected the defendant’s arguments and ordered him to pay the balance due on the minimum commission

The Court of Appeals affirmed the trial court’s rulings. With regard to mutual mistake, the Court acknowledged there was a mutual mistake regarding how many pieces of art could be sold at the auction, given that neither party was aware of the treaty that substantially reduced the number of pieces to be sold. However, the Court ruled that the mutual mistake defense was unavailable to the defendant because he orally agreed to go forward with the auction after learning about the treaty and its impact on the number of pieces of art to be sold.

With regard to the defendant’s frustration of purpose defense, the Court found the defendant satisfied the first two elements of the defense (i.e., that the contract must be at least partially executory and the frustrated party’s purpose in making the contract must have been known to both parties when the contract was made). Specifically, the Court determined that the contract had not been fully performed as a result of the treaty and that, arguably, the purpose of the contract was to sell defendant’s entire art collection for a profit. However, the Court found the third element had not been met. As the Court noted, the third requirement of the defense is that the “purpose must have been basically frustrated by an event not reasonably foreseeable at the time the contract was made, the occurrence of which has not been due to the fault of the frustrated party and the risk of which was not assumed by him” (citing Molnar v. Molnar, 110 Mich App 622, 626 (1981)). In essence imposing a duty of investigation on contracting parties, the Court held that the “frustration of purpose doctrine is inapplicable to this case because there is no basis to find that there was an unforeseen event. While neither party to the contract knew of the treaty at the time the contract was made, the treaty preceded the contract and therefore was discoverable upon reasonable investigation. Failure to investigate a fact does not render it unforeseeable, just unforeseen.”

With regard to the final defense of impossibility of performance, the Court first noted that there are two types of contractual impossibility. The first is “original impossibility”, which exists when the contract is entered into, so that the contract is to do something that is impossible from the outset. The second, on which the defendant relied, is “supervening impossibility”, which arises after the contract’s inception. The Court rejected this defense because the plaintiff had fully performed his obligations under the contract, including publicizing the auction, cataloguing the art pieces, advancing money to produce the auction, conducting the auction and submitting the settlement sheet to the defendant after the auction. The Court further found that as the defendant excused performance of the original contract after learning about the treaty, the defense was unavailable.

In sum, Riewe provides the bench and the bar with a comprehensive review of the contract defenses of mistake, frustration of purpose and impossibility and is well worth reviewing in greater detail.

For more information, please contact Jennifer Grieco at jgrieco@nagmlaw.com