Lloyd v. Murphy – (Justification for Non-Performance)
- In 1939 Murphy and others leased property to Lloyd in Downtown Los Angeles.
- The lease stated that Murphy was leasing the property to Lloyd for: selling, servicing and repairing new automobiles and for selling gasoline.
- The lease stipulated that the Lessee could not assign his rights in the contract to another nor could he sublease without consent from the Lessor.
- In 1942 the U.S. Government restricted the sale of new automobiles to military personnel due to WWII.
- Murphy informed his landlord Lloyd that he was not going to be able to operate his business on the property.
- Lloyd then orally lifted the restriction on the lease prohibiting subleasing.
- Lloyd also offered to reduce rent if Murphy could not make enough profit.
- Murphy vacated the property and repudiated the lease.
- Lloyd then rented to a new renter so as to mitigate damages.
- Lloyd then sued Murphy in Superior Court for unpaid rent.
- The Trial Court ruled that the war conditions had not terminated Murphy’s obligations under the rental contract.
- Murphy was ordered to pay the unpaid rents plus interest minus the rents received from the new rents from the new tenants.
- Murphy appealed to the California Supreme Court.
- The California Supreme Court took the case up.
Issue: Whether or not a party to a lease can be excused from performance due to frustration of purpose when the frustrating event was foreseeable and the value of the agreement was not completely destroyed? Do the equities of the case require placing the risk of disruption or destruction of the value of the agreement on the defendant or the plaintiff?
Conclusion: Justice Traynor delivered the opinion. No, the doctrine of frustration of purpose only applies when the frustrating event is not reasonably foreseeable by the parties involved and the value of the agreement is completely destroyed. The Doctrine of Frustration depends on the total or nearly total destruction of the purpose for which the contract was entered into. The burden of the unexpected change in circumstance which has made the performance of the contract vitally different for the promisor to perform cannot be reasonably placed on the promisor. If parties contracted while there was an expectation of war, they cannot however escape their duties and obligations. The national defense act had been law for more than a year prior to the formation of the contract. It can be reasonably inferred that Murphy assumed the risk. The sale of automobiles was not impossible nor was it illegal, simply difficult. The Court concluded that Murphy failed to prove the doctrine of frustration in his case. It is not desirable to apply the doctrine of frustration to a lease where the property value was not totally destroyed. It would encourage lessee’s to litigate too often after their businesses became unprofitable. Court Affirmed the Superior Court Decision.
Rule: Frustration is not a defense to a contract if the frustrating event is reasonably foreseeable by the parties. The doctrine of frustration is limited to cases of extreme or substantial hardship. It is this way so that people can rely on contracts with certainty.
Application to these Facts: The National Defense Act wan enacted a year before the contract was formed and this made the hardship foreseeable. The Lessor therefore should be able to rely on the receipt of rents and also acted in a proper manner by mitigating their damages. The Lessor had reasonably relied on rent being paid.