What are impossibility and commercial impracticability of a contract?

Impossibility of performance and commercial impracticability may excuse a party's duty to perform a contract. Further, it will relieve the party from liability for the non-performance. Each is discussed below.

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What is Impossibility of Performance?

A party may be excused from her duty to perform under a contract if performance becomes impossible. Events that make a contract impossible include:

• Illegality of the subject matter;
• Example: I enter into a contract with you to sell you cleaning chemicals. The sale of such chemicals becomes illegal. My duty to perform is excused.
• The subject of the contract (property) is destroyed;
• Example: I enter into a contract to sell you a car. Before I can sell it to you, a branch falls from a large tree and destroys the car. I am excused from my duty to sell an undamaged car.
• One of the parties to the contract dies or becomes physically or mentally disabled;
• Natural forces interrupt the contract;
• Example: A tornado, earthquake, severe storms, flooding, etc., permanently interrupts a partys ability to perform her contractual obligations.
• Performance would cause substantial risk of physical harm to one party.
• Example: I enter into an agreement to replace the shingles on our house. Upon inspection, the roof of the house appears to be structurally unsound. Replacing the shingles would put me in an unreasonably dangerous situation. I did not anticipate this danger when entering the contract. As such, my duty to perform is relieved.

Impossibility of performance will only excuse a partys performance if the impossibility is not the fault of the non-performing party. Further, impossibility will not excuse liability for non-performance if the contract expressly contemplated the risk of conditions making performance impossible and specifically placed those risks upon the non-performing party.

• Example: I enter into a contract to sell you a piece of machinery. In the contract, we expressly state that I must repair any malfunction of the machine that occurs prior to sale. The machinery breaks before the sale date. In this situation, the contract anticipates a risk and places it on me. I must repair the machine prior to sale.

Discussion: What do you think is the justification for allowing the above situations to excuse a persons duty under a contract? Can you think of any other situations that you believe should excuse a persons duty?

Practice Question: Derek agrees to sell Artem sheet rock for a construction job. Derek leaves the sheet rock outside and it rains. The sheet rock is ruined. Artem has to purchase sheet rock from another source at a much higher price. If Artem decides to sue Derek, what will be the likely outcome?

• The impossibility of performance doctrine enables a party to be excused from performing his obligations under the contract due to an occurrence that is beyond his control. Where the party is unable to perform his obligations under the contract due to an occurrence that is beyond his control, the party is free from all liability that would otherwise arise. In this scenario, it is likely the fault of Derek that the sheet rock is destroyed. Because the cause of the interruption is foreseeable under the situation, given the conduct of Derek in leaving it outside, Derek will likely be liable to Artem.

What is Commercial Impracticability?

Commercial impracticability arises when performance of a contract by a party has become unfeasibly difficult or costly to perform. The difference between impracticability and impossibility is that impracticability is still physically possible; however, performance will result in a substantial hardship to the performing party. Impracticability will excuse performance where the excused party did not have control over (or was not at fault for) the condition that made performance impracticable. Further, the excused party must not have expressly or impliedly assumed the risk of the duties becoming impracticable. Generally, impracticability is only found in extreme circumstances.

• Example: I enter into an agreement with you to sell goods or perform services. The cost of performing the contract spikes because of a government tax, regulatory hurdles, raw material rates, etc. When entering the contract, we did not contemplate the price of goods or the cost of performing services to go up. If performing the contract would result in a serious financial burden to me, I may be able to get out of the contract by claiming that commercial impracticability excuses my performance.

Discussion: How do you feel about the doctrine of commercial impracticability? How unforeseeable must the intervening event be to make the contract impracticable? How severe must the damage suffered by the performing party be?

Practice Question: Tom agrees to sell lobsters to Suzie for resale in her restaurant. Tom sets the price at a specific dollar value per pound. Later, the government imposes a large tax on sales of lobsters. If Tom continues to sell at the contract price, he will go out of business. What are Toms options?

• The doctrine of commercial impracticability arises when a party cannot perform their obligations under the contract due to an uncontrollable event that makes it extremely difficult (but not impossible) to perform. Courts in the United States have come up with a test to ascertain if the defense of commercial impracticability is applicable in any given situation:
  • Something must have happened whish as assumed not to have occurred in making the original contract.
  • The occurrence must specifically make certain performance under the contract exceptionally difficult or expensive; and
  • The parties could not have reasonable foreseen that the problem could occur.

In this case, performance has been made commercially impracticable, as a price hike (thus an increase in the cost of performance) could cause Tom to suffer an extreme loss.