CPA Exam — REG (Regulation)Business LawEasy
A small manufacturing company, 'Precision Parts Inc.', enters into a contract to produce 1,000 specialized components for 'Tech Innovations Corp.' The contract specifies that Precision Parts will deliver the components to Tech Innovations' facility. Before the delivery date, Precision Parts' factory is completely destroyed by an unexpected, unpreventable earthquake, making it impossible to produce the components. Tech Innovations sues Precision Parts for breach of contract. What is Precision Parts' most likely defense?
- AFraud in the inducement
- BLack of consideration
- CMutual mistake
- DImpossibility of performance
Show answer & explanationAnswer & explanation
Correct answer: D. Impossibility of performance
The destruction of the factory by an unpreventable earthquake makes performance objectively impossible, thereby excusing Precision Parts from its contractual obligations.
Why the other options are wrong
- A. Fraud in the inducement involves one party intentionally misleading another to enter the contract, which is not indicated in the scenario.
- B. Lack of consideration refers to a situation where there is no bargained-for exchange, which is not the case here.
- C. Mutual mistake occurs when both parties share a misunderstanding about a basic assumption of the contract, not an unforeseen event preventing performance.
Impossibility of Performance (Contracts)
A defense to breach of contract where unforeseen circumstances make performance objectively impossible, excusing the performing party.
- Event must be unforeseen and unpreventable.
- Performance must be objectively impossible, not just difficult or expensive.
- Excuses both parties from further performance.
Memory trick: Defend your contract with solid grounds, like an impossible feat.