Shirley R. Brener, Outgrowing Impossibility: Examining the Impossibility Doctrine in the Wake of Hurricane Katrina

• Citation: Vol. 56 No. 2
• Publication year: 2006

COMMENTS

OUTGROWING IMPOSSIBILITY: EXAMINING THE IMPOSSIBILITY DOCTRINE IN THE WAKE OF HURRICANE KATRINA

INTRODUCTION .............................................................................................. 463

I. THE HISTORY OF THE IMPOSSIBILITY DOCTRINE ................................ 464

A. Roman Civil Law and the Doctrine of Impossibility .................. 465

B. Impossibility in British and Early American Common Law ....... 465

C. Modern Iterations of the Impossibility Doctrine ........................ 467

II. MODERN THEORIES OF IMPOSSIBILITY: THE U.C.C. AND SUPERIOR

RISK BEARER TESTS ........................................................................... 468

A. The U.C.C. Section 2-615 Commercial Impracticability

Model .......................................................................................... 469

B. The Superior Risk Bearer Model ................................................ 471

C. The Information Problem ........................................................... 473

III. CAN MODERN THEORIES BE APPLIED TO MODERN CATASTROPHIC

EVENTS? .............................................................................................. 474

A. The U.C.C. Approach to Impossibility and Cajun Corp. ............ 475

1. Nonoccurrence of the Condition Was an Underlying

Assumption of the Contract .................................................. 476

2. Occurrence of the Condition Was Not Foreseeable When the Contract Was Executed ................................................... 477

3. Risk of Failure of Condition Was Not Allocated by

Contract ................................................................................ 481

4. Occurrence of Condition Has Made Performance

Impracticable ....................................................................... 483

5. Summary and Criticism of the U.C.C. Approach ................. 484

B. The Superior Risk Bearer Approach to Impossibility ................. 486

1. Determining the Party in the Best Position to Prevent the

Risk ....................................................................................... 487

2. Determining the Party Best Able to Insure Against Risk ...... 487

3. Determining the Superior Risk Bearer ................................. 491

4. Summary and Criticism of the Superior Risk Bearer Test .... 493

IV. PROPOSAL: GULF COAST-WIDE INSURANCE AND REINSURANCE ...... 495

A. The Basics of Insurance .............................................................. 496

1. Why Do People Buy Insurance? ........................................... 496

2. Forms of Insurance .............................................................. 496

3. The Dynamics of the Insurance and Reinsurance

Industries .............................................................................. 498

B. Florida's Reinsurance Program: Hurricane Andrew's

Impact ......................................................................................... 499

C. Insurance and Reinsurance for Gulf Coast Businesses .............. 501

1. Making Insurance Available ................................................. 501

2. Strengthening Reinsurance Markets ..................................... 503

CONCLUSION .................................................................................................. 504

[E]ach party to a contract has notice that the other will understand his words according to the usage of the normal speaker of English under the circumstances, and therefore cannot complain if his words are taken in that sense.¹

INTRODUCTION

This classic Holmesian statement of the formalist theory of contract interpretation begs several questions. This Comment will tackle just one: how is silence interpreted according to "the usage of a normal speaker of English"? Is silence to be interpreted as an assumption of risk by one party, or carelessness that the judiciary must fix? Is silence active or passive, aware or negligent, in the English language? The doctrine of impossibility requires the judicial system to answer these questions when performance under a contract is rendered impossible by an event that the contract did not address; the cost of the impossibility is allocated based on this ex post interpretation.²

This Comment describes a fundamental problem with the contract doctrine of impossibility: it is no longer well suited to address precisely the type of problems that it was created to solve. Unfortunately, it has taken the occurrence of several terrifyingly destructive events-Hurricane Andrew in

1992,³the Northridge Earthquake in 1994,⁴the September 11 attacks in 2001, and most recently Hurricane Katrina in 2005⁵-to highlight the problems of dealing with risk allocation ex post, as the contract doctrine of impossibility proposes.⁶

There is potential for an enormous silver lining in the tragedy of Katrina: The Gulf Coast, and the nation as a whole, must seize the opportunity to assess its choices, rethink its safety nets, and develop plans to manage risk and limit future loss. This Comment proposes that these assessments should focus on insurance law, rather than contract law, as the vehicle for efficient risk allocation and management.⁷

Part I traces the development of the impossibility doctrine from its origins in Roman Civil Law all the way to its modern expressions. Part II focuses on the Uniform Commercial Code (U.C.C.) and the superior risk bearer models, examining their particular methods and assumptions outside the historical context. In Part III, the theories developed in Part II are applied to a hypothetical Katrina-affected contract. In applying those theories, this Comment critiques the theories as well. Part IV describes how insurance law may offer solutions to the problems encountered in the application of traditional contract law doctrines. Finally, this Comment offers conclusions relating the critiques set forth in Part III and the proposal described in Part IV.

I. THE HISTORY OF THE IMPOSSIBILITY DOCTRINE

Contracts may be understood, in a very basic way, as risk allocation devices.⁸A perfect contract allocates all risks in an efficient manner.⁹

However, when parties fail to allocate all risks of nonperformance in their contract, and an unforeseen situation affecting timely performance arises, the doctrine of impossibility, later codified under the heading of commercial impracticability in the U.C.C.,¹⁰may come into play. To best understand how

Katrina-affected contracts are treated-and how they ought to be treated-this Comment will pursue a brief survey of how contract law has traditionally handled risk allocation and unforeseen circumstances.

A. Roman Civil Law and the Doctrine of Impossibility

Problems relating to unallocated risk have plagued the interpretation of contracts since people began forging agreements for the purpose of mutual benefit. Indeed, analyses of Roman civil law indicate that this sort of problem arose frequently.¹¹

The most common form of unallocated risk occurred in the context of personal performance contracts. In these cases, only a certain individual-or a certain class of individuals-could perform the service described in the contract.¹²When death, disability, or some other unforeseen circumstance prevented the personal performance envisioned by the contract, the parties were left to grapple with the consequences of incomplete risk allocation.¹³In response to these cases, courts developed a method of interpretation to deal with the class of contractual obligations-obligatio de certo corpore¹⁴-that required personal performance.¹⁵In cases where an obligation of this class exists, the promisor is excused from performance when the object of the contract "has perished, neither by his act, nor his neglect, and before he is in default, unless by some stipulation he has taken on himself the risk of the particular misfortune which has occurred."¹⁶Thus, civil law allowed for a very narrow impossibility defense. The promisor was excused from performance only when the object of the contract was a living thing that had ceased to exist at the time of performance.

B. Impossibility in British and Early American Common Law

Building on Roman civil law, British common law expanded the scope of the impossibility defense to cover all manner of contracts, including those outside the obligatio de certo corpore class. This expansion came at the expense of the positivist notion of contracts, which finds an absolute obligation of performance absent an express allocation of risk to the contrary.¹⁷The positivist approach was famously articulated in Paradine v. Jane, in which an English court found that the promisor's performance-in the form of rent- was not excused despite the fact that the promisor had been exiled from the rental property as the result of war.¹⁸The court noted that "when the party by his own contract creates a duty or charge upon himself, he is bound to make it good, if he may, notwithstanding any accident by inevitable necessity, because he might have provided against it by his contract."¹⁹

However, even in this hard-line approach, we can detect an early form of the modern impossibility doctrine. In the above language, the court stipulated that performance is required only if it is possible.²⁰A similarly narrow interpretation of the impossibility doctrine appears over a century later in Stees v. Leonard.²¹There, the Minnesota court was unwilling to excuse performance of a construction contract despite several failed attempts at constructing the contemplated structure.²²As in the Paradine decision, the availability of the impossibility defense was not completely foreclosed but rather limited: "If a man bind himself, by a positive, express contract, to do an act in itself possible, he must perform his engagement, unless prevented by the act of God, the law, or the other party to the contract."²³

It should be noted that in the context of British and early American common law, excuse of performance is equivalent to excuse...