A good indicator of a well-drafted contract is that it accounts for every possible scenario (within reason, of course). However, even the best-written contracts can’t predict the unpredictable. For instance – what happens if it becomes impossible to perform your work? Let’s talk about impossibility of performance.
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What is “Impossibility of Performance” in Construction?
Impossibility of performance is a defense for breach of contract. It occurs when a construction business cannot execute their contract because doing so has become impossible. In situations where performance becomes impossible, if proven, the impossibility of performance will protect a construction business from some, and potentially all, damages stemming from their failure to perform.
Understanding Breach of Contract in construction:
What Situations Make Performance Impossible?
Impossibility of performance could arise under a number of different situations, including death or disability of a necessary and irreplaceable party, destruction of the project property, or when performance would be illegal. Let’s explore these three categories further.
Death or Disability
Death or disability of a person who was necessary for performance could create a situation where it’s impossible to perform when the work requires some sort of highly specialized skills or services. This rarely applies to any contractors, project managers or superintendents because someone else can always be brought in to do their work. However, it’s possible that design or engineering contracts might qualify if the designer or engineer is highly specialized or unique, to the point that they cannot be replaced.
Destruction of a job site, specialized equipment, or something else that’s pivotal to the project could result in the impossibility of performance. However, if something can be replaced relatively easily and overall performance is still possible, impossibility of performance might not be an excuse for nonperformance.
An excellent example of this would be a renovation contract. Suppose a contractor is hired to do renovations and repairs on a building, but before starting work, a fire ends up destroying the structure. The existence of the building itself was essential to the contract, thereby excusing the contractor from the performance.
If performing under the contract would be illegal, that may result in performance being considered impossible. Illegality could be triggered when, during the performance, there’s a change to building codes, zoning restrictions, or any other regulations making the construction of the intended structure impossible to perform.
Consider commercial impracticability as an “impossibility-lite” defense. Historically, proving that the ability to proceed is impossible was way too high of a threshold to cross. Often, performance may be technically possible, but nevertheless commercially impractical. In those situations, courts have found that a failure to perform should be excused.
In order to argue that performance is impractical, the triggering event can’t be caused by the party arguing against the need for performance. Further, the event which makes performance impractical can’t be a risk that’s set out or even assumed in the contract. A small shift in the degree of difficulty or expense does not amount to impracticability unless it goes way beyond the normal range. Particularly in fixed-price contracts, changes in costs are considered an assumed risk.
Frustration of Purpose
Frustration of purpose is pretty similar to impracticability. The critical difference between the two is that this defense focuses on the reasons the parties entered into the contract, rather than the ability to perform. To be successful, the frustrated purpose must be the principal reason for entering into the agreement. To serve as a frustration of purpose, the frustration must be substantial. Plus, the contract must basically assume that the event won’t happen. Like impracticability, the frustrating event can’t be caused by the party using the defense.
Most courts are pretty reluctant to grant the defense of frustration of purpose. In the construction context, this is particularly rare. One case where this was granted was a contractor hired to repair fire damage. The homeowners were in the middle of divorce proceedings and waiting on the insurance claim to pay for repairs. The court issued a freeze from transferring assets, the contractor stopped work and filed suit. The court granted the homeowner the defense of frustration of purpose, stating that the usage of insurance payment for repairs was the basis upon which the parties contracted.
How Foreseeability & Assumption of Risk Come Into Play
Courts look at whether or not a risk was foreseeable and whether the risk was assumed by the parties when making determinations about impossibility of performance, impracticability, or frustration.
Consider foreseeability and risk as defenses-to-defenses. One party argues breach, the opposing party argues impossibility (or impracticability or frustration), then the original party argues that the risk was assumed and/or foreseeable.
Speaking of Risk…
Was the event which made performance impossible foreseeable at the time the contract was formed? If the event was foreseeable, the courts will deny the defense of impossibility because the risk was from the outset.
Assumption of Risk
Parties often assume the risk of certain events that may cause impossibility. If the risk of impossibility as assumed from the get-go, then it’d be hard to argue that impossibility should serve as a defense against performance of the contract. Some examples are representations and warranties, indemnification clauses, or risk of loss clauses. There doesn’t even need to be any explicit language, just that the risk may have been contemplated or accounted for in the contract.