If conditions change after parties enter into a contract, one of them might want to be excused from performance or at least have its obligations revised. Under certain circumstances courts have excused performance invoking the doctrines of impossibility, frustration, impracticability, or mutual mistake. Courts will sometimes keep the contract alive, but rewrite it. It is not uncommon for German courts to revise the price term in a long-term contract; see Dawson (1983). While that is rarely done in American courts, it is not unheard of.

Richard Posner and Andrew Rosenfield [9.1] attempt to provide an economic explanation of the impossibility doctrine. They emphasize the importance of putting liability on the party that is the superior risk bearer. In part, this means the party that is in the best position to avoid costs. But they also place great emphasis on the risk aversion of the parties and the relative costs of insuring against risk. I am, it should be recalled, generally hostile to explanations centering on attitudes toward risk. In the following selection, I present an alternative explanation that does not require explicit assumptions as to the risk preferences of the parties. The explanation hinges on an understanding of why contracts will often include force majeure clauses, which state that in the event of certain “acts of God” – fire, breakage of machinery, strikes, and so forth – performance will be excused.

Contracting parties can anticipate the need for change by including in their initial agreement some mechanisms for adjusting the contract price – for example, a price index.