Impossibility of Performance: Economic Hardship, Risk Assumption, and Remedy

This is the second of two blog posts on impossibility of performance. The first post discussed physical and economic impossibility, and this post covers economic hardship, assumption of risk, and remedy.

Impossibility of performance exists when a contract cannot be performed according to its terms and conditions. A contractor may be relieved from contractual obligations to perform impossible specifications if it can prove that an impossibility exists, and it has not assumed the risk of design performance. Additionally, a contractor may receive compensation for its expenses in attempting to perform the impossible requirements plus a reasonable profit.

Economic Hardship
An impossibility due not to the nature of performance but due to a contractor’s inability does not discharge the duty created by the contract. Such an impossibility is considered subjective.

Unanticipated difficulties, hardships, or lost profits resulting from cost increases may not be sufficient grounds to establish economic impossibility. The basic law of contracts binds the parties to perform in accordance with the agreed upon terms. An inconvenience or excessive cost of compliance may not excuse a contractor from its contractual obligations. Thus, a 200 percent increase in the cost of a material that is essential to contract performance may not be sufficient to satisfy the contractor’s burden. The alleged impossibility should not include the probable contingencies that a person of ordinary prudence should foresee and provide for.

Assumption of Risk
Circumstances under which the contractor has been found to bear the risk of impossibility include: i) the contractor acquires knowledge of facts that would warn a reasonable person about an impossibility in time to prevent useless performance; ii) only performance specifications are involved; iii) the contractor holds itself out as possessing the special capabilities necessary to accomplish the work; and iv) the contractor initiates the design.

In general, the risk of performance is allocated to the owner when the impossibility is based on a design specification. To demonstrate entitlement under impossibility of performance, a contractor must prove it did not assume the risk of design performance.

A contractor may intentionally assume the risk of design constructability upon interpretation of the contract. If the contractor has no reason to know of the facts that make the contract impossible and has not assumed the risk, the contractor may be allowed to terminate the contract without penalty for default.

In most cases, the parties do not foresee, prior to engagement, the situation that renders a contract impossible to perform; determining which party assumed the risk may be difficult and can often be the deciding factor regarding entitlement. This determination is often difficult because it requires an assessment of what the contract objectives and intentions were at the time the parties entered the contract.

Remedy
A contractor terminated for default while attempting to perform impossible specifications may recover costs based on the common law theory of quantum meruit. Thus, impossibility under common law protects a contractor against liability for default and may entitle a contractor to recovery of costs incurred due to the impossibility plus a reasonable profit.

Most contracts contain a clause that allows the owner to terminate the contractor for convenience. In an example case, the parties contemplated the removal and disposal of a sunken barge utilizing a 50-ton crane. Practical impossibility was found when it was demonstrated that an 800-ton crane would be required, and the contract price would more than double. In this case, a default termination was converted to termination for convenience.

When a contractor encounters an impossibility, often the contract specifications will be relaxed or eliminated to allow completion of the work. Under such circumstances, the contractor may be entitled to recover reasonably incurred additional costs plus a reasonable profit under the contract’s changes clause.

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