Teaching Assistants: Dagan and Somech on Excuses from Rose 2d to COVID-19

Hanoch Dagan (left) and Ohad Somech (below, right), both of Tel Aviv University’s Buchman Faculty of Law, have posted on SSRN their Article, When Contracts Basic Assumptions Fail: From Rose 2d to COVID-19. Their core argument is that these excuses of contractual obligations are best understood if we appreciate the liberal, that is, autonomy-enhancing goals of contracts law.  The law allows us to bind ourselves to contracts conditionally so as not to encumber our future selves with legal obligations that have become onerous in ways the parties did not anticipate. 

I recommend this Article as a handy exploration of theoretical perspectives underpinning the affirmative defense of mutual mistake and the excuses of impossibility, impracticability, and frustration of purpose.  Collectively, the authors refer to these as FBA doctrines, because all require a failure of a basic assumption.  In addition to that timeless quality, the Article also possesses timeliness because of its concluding case study dedicated to the interplay of these FBA doctrines and the COVID-19 pandemic.

These doctrines are not vital because they play a pivotal role in a lot of litigation.  Rather, their existence illustrates the flexibility baked into the common law to enhance autonomy by permitting people to enlist others into their plans while also allowing them to escape obligations that can no longer be justified in light of the failure of a basic assumption.

After an introduction, the authors explain why their liberal autonomy theory bests other accounts of FBA doctrines: Charles Fried’s sharing theory; reconceptualizing FBA doctrines as majoritarian default rules; and accounts that view FBA doctrines as a species of implied-in-fact rules.  Fried’s account reaches out to external principles to explain FBA doctrines that are better understood as a product of liberal contracts theory.  The other two rival theories treat FBA doctrines them as mere applications of other doctrines and thus miss the opportunity to appreciate how these doctrines illuminate the purposes underlying contract law doctrine. 

As explained in Parts III and IV of the paper, choice theory, developed by Dagan and Michael Heller, provides a more satisfying account of FBA doctrines.  The authors contend that this account appeals both on the normative and the explanatory level.  That is, choice theory helps us to understand how contracts law enhances people’s capacity for self-determination, and it also explains the main features of FBA doctrine.

The Article concludes with a discussion of whether COVID-19 triggers FBA doctrines and what should happen if it does.  The authors consider different contractual contexts; residential rental agreements, commercial rental agreements, manufacturing of industrial equipment and machinery, loans, and car insurance.  While COVID could trigger FBA doctrines, allocation of risk will determine whether an FBA defense can be asserted.  Moreover, in determining the materiality of the FBA, one must also consider the mitigation effects of government programs, such as the Paycheck Protection Program, which is supposed to cover precisely the sorts of costs at issue in potential cases in which COVID could factor as an an FBA.  Finally, all of this must be viewed within the relational contracts, in which the goal is to achieve the parties’ general contractual goals rather than give one party a windfall.

Contracts entail an obligation to perform.  However, the authors stress, contracts do not entail a duty to perform “come what may.”  The authors provide a theoretical model that helps explain how courts determine when performance ought to be excused in light of a failure of a basic assumption, an issue that will arise with increasing frequency as we experience the fallout of this global pandemic.