Howard v. Nicholson
556 S.W.2d 477, 1977 Mo. App. LEXIS 2300 (1977)
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Rule of Law:
A party's contractual duties may be discharged under the doctrine of commercial frustration if a supervening, unforeseeable event, which was not caused by either party, destroys or nearly destroys the object or purpose of the contract, thereby making the value of the required performance worthless.
Facts:
- On October 15, 1969, Terry and George Nicholson signed a 20-year lease with Honey's International, Ltd. (Honey's) for a bridal salon to be built on their property.
- On November 6, 1969, the Nicholsons entered into a contract with Robert J. Howard to construct the building, specifically designed as a bridal salon, for $199,740 with a completion date of May 1, 1970.
- The parties later signed a separate financing agreement with a lender that listed a completion date of December 14, 1970, which was the expiration date for the construction loan.
- Howard was aware that the building's sole purpose was to serve as a Honey's Bridal Salon and that the peak bridal business season began in May.
- On December 16, 1969, approximately one month after the construction contract was signed, Honey's filed for Chapter 11 bankruptcy.
- Howard spent several months obtaining the necessary building permits, which were not ready for pickup until March 6, 1970.
- On March 7, 1970, Terry Nicholson sent Howard a letter cancelling the construction contract, citing the impossibility of completing the building by the May 1, 1970 deadline.
Procedural Posture:
- Robert J. Howard sued Terry and George Nicholson in the circuit court of St. Louis County for breach of contract, seeking lost profits from the cancelled project.
- The trial court entered judgment in favor of the Nicholsons on the lost profits claim, finding that their nonperformance was excused by the doctrine of commercial frustration and Howard's own breach of contract.
- Howard, as appellant, appealed the trial court's judgment on the lost profits claim to the Missouri Court of Appeals.
- The Nicholsons are the respondents in the appeal.
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Issue:
Does the bankruptcy of a specific, essential third-party tenant, for whom a building was being specially constructed, constitute commercial frustration that excuses the property owner's performance under the construction contract?
Opinions:
Majority - McMillian, Presiding Judge.
Yes, the bankruptcy of the essential third-party tenant constitutes commercial frustration that excuses the Nicholsons' performance. The doctrine of commercial frustration applies when an unforeseen supervening event destroys the object of the contract. Performance is excused if 1) the event destroys or nearly destroys the value of the performance or the contract's purpose, and 2) the event was not reasonably foreseeable such that the parties assumed the risk of its occurrence. Here, the building was specifically designed for Honey's and was not suited for other uses; thus, Honey's bankruptcy destroyed the entire value and purpose of the construction contract. While bankruptcies in general are foreseeable, the bankruptcy of this particular company, whose existence was an implied condition of the contract, was a fortuitous event that the parties did not contemplate or assume the risk for. Therefore, the Nicholsons were excused from performance. The court also found that the May 1, 1970 completion date from the primary construction contract was controlling and that Howard's delay in securing permits justified the Nicholsons' cancellation for breach of contract.
Analysis:
This case is significant for being the first in Missouri to formally adopt and apply the doctrine of commercial frustration. It distinguishes this doctrine from the stricter, traditional defense of impossibility of performance, which requires performance to be literally impossible. By allowing a defense when performance becomes valueless due to the collapse of the contract's foundational purpose, the decision provides a more flexible and equitable approach to allocating risks from unforeseen events. This precedent expands the grounds for discharging a contract in Missouri, influencing how future contracts might be interpreted when their underlying purpose is defeated by external circumstances.
