Mistake, Frustration, and the Windfall Principle of Contract Remedies

The familiar contract doctrines of discharge for mutual mistake (as epitomized by a case like Sherwood v. Walker) and frustration (including impossibility and impracticability ) should be understood as variations of a single problem. Both doctrines provide discharge upon the occurrence of a disparity between anticipation and realization in the terms of contractual exchange, the risk of which has not been allocated by the parties. In this Article, Professor Kull offers a hypothesis about what courts actually do when confronted with such an unallocated disparity. Courts applying the traditional windfall rule of the common law will neither relieve the disadvantaged party, nor assign the loss to the superior risk-bearer, but leave matters alone. An executory transaction will not be pushed forward; an executed transaction will not be recalled. Where a contract is frustrated after part performance, parties will be permitted to walk away from their bargain, without damages for reliance or restitution for benefits conferred. A rule of law to this effect, while never acknowledged, finds substantial support in the American and English cases. Recognition of this theme in the case law prompts a reconsideration of the standard premise of modem, economics-oriented commentary on this subject, which sees the mistaken or frustrated contract as incomplete, to be remedied by a process of judicial gap-filling. Professor Kull criticizes the gap-filling approach in this context, arguing that the perceived gaps would not exist at all under a legal regime prohibiting judicial intervention to fill them. The standard law-and-economics goal for these cases (an attempt to promote efficient risk-spreading by contracting parties) is shown to be unattainable; leaving the more familiar goal of fairness as the principal justification for judicial intervention. The contrast between the available approaches to losses from frustrated contracts exemplifies the choice between mutually exclusive objectives: on the one hand, the benefits derived from freedom of contract; on the other, the advantages obtained by judicial intervention to improve on privately negotiated bargains