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There are four requirements that must exist before relief may be granted for frustration of purpose. First, the purpose that is frustrated must be a principal purpose of that party and must be so to the understanding of both parties. Second, the frustration must be substantial, and so severe that it is not to be regarded as within the risks assumed under the contract. Third, the non-occurrence of the frustrating event must be a basic assumption. Finally, relief is not granted if it may be inferred from either the language of the contract or the circumstances that the risk of the frustrating occurrence, or the loss caused thereby, should properly be placed on the party seeking relief.
Kuhn Farm Machinery, Inc. ("Kuhn") contracted with 7200 Scottsdale Road General Partners dba Scottsdale Plaza Resort (the "resort"), to use the resort's facilities for a convention at which Kuhn's European personnel were to present new products to Kuhn's dealers and employees. The agreement contained remedies protecting the resort if Kuhn canceled the meeting. Kuhn was required to pay liquidated damages for any decrease after January 25, 1991, of ten percent or more in the reserved room block. Additionally, the resort agreed to accept individual room cancellations up to seventy-two hours prior to arrival without penalty so long as total attrition did not exceed five percent. Because Kuhn refused to hold its dealers' meeting at the resort at the time specified in the agreement, the resort sued for breach of contract, seeking the liquidated damages provided for in the agreement. The resort then moved for partial summary judgment to obtain a ruling in its favor on the issue of liability. Kuhn filed a cross motion for summary judgment, alleging that its performance was discharged or suspended pursuant to the doctrines of impracticability of performance and frustration of purpose. . The trial court had granted summary judgment for Kuhn, ruling that the contract was discharged under the doctrines of impracticability of performance and frustration of purpose because of the risk of air travel posed by the Gulf War and threats of terrorism. The resort challenged the decision.
Under the circumstances, could the contract be considered discharged pursuant to the doctrines of impracticability of performance and frustration of purpose?
On appeal, the court disagreed that the contract was discharged and reversed the summary judgment for Kuhn. The court found that Kuhn had not presented a claim for impossibility or impracticability because the resort was still able to provide guestrooms, meeting rooms, and food and services. Kuhn also had not presented a claim of substantial frustration of purpose because the threats of terrorism were not an event that was a basic assumption of the contract. Also, Kuhn’s cancellation of the convention because of the perceived threat of terrorism was not an objectively reasonable response to an extraordinary and specific threat.