August 7, 2023
Impossibility of Performance: Physical and Economic Impossibility
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. This is the first of two blog posts on impossibility of performance. This post discusses physical and economic impossibility, and the second post will cover economic hardship, assumption of risk, and remedy.
Often referred to as “actual impossibility,” physical impossibility means the construction cannot be physically performed by adherence to the plans and specifications. For example, a contractor is required to place owner-furnished equipment into a room with only half the physical space required to do so. Another simplistic example of physical impossibility is requiring a contractor to produce cobbles by screening from an owner’s borrow source that contains only sand. Also, the inability to obtain the necessary permits for a project can result in impossibility of performance. One contractor’s strike and a resulting work stoppage may not render another contractor’s performance impossible if a subcontract agreement clarifies how to deal with events such as strikes.
To prove a physical impossibility, the contractor must prove that the impossibility is objective, conclusively demonstrating that the requirement that renders the contract impossible for the contractor to perform is also impossible for all contractors. If another contractor could perform the allegedly impossible requirement, then the impossibility is subjective, meaning it is impossible only for the contractor in question due to its own limitations or inabilities. An objective impossibility grants a contractor relief from contractual duties and liabilities while a subjective impossibility does not. Also, a contractor may not be relieved of liability for its nonperformance of a contract based on the impossibility of performance defense where the contractor’s own conduct causes the impossibility or where the impossibility is caused by developments that the contractor could have prevented, avoided, or remedied by appropriate corrective measures.
The term “economic impossibility” has several synonyms:
- Commercial impracticability
- Practical impossibility
- Commercial senselessness
- Commercial frustration
Economic impossibility is made of two basic elements:
- The occurrence of an unanticipated event that the parties did not foresee or contemplate and that falls outside the scope of the contract.
- Further performance of the contract requirements is commercially impractical.
A classic example of an unanticipated event creating an economic impossibility is a case where a contractor was repairing and renovating a building, and prior to completion, the building caught fire and burned down. Because neither party had contemplated nor caused the fire, the contractor was excused from performing the contract and was granted compensation for work completed prior to the fire. The court reasoned that the contract had an implied condition that the building would be provided as specified and that, with the destruction of the building, the implied condition was not met. To require the contractor to perform the contract by providing an entirely new building would be impractical.
An economic impossibility may also occur when performance of the specifications becomes commercially impractical or senseless. In an example case, the specifications called for exposed concrete walls with “tan and brown washed river gravel.” The contractor searched potentially suitable aggregate sources in five states yet could not find aggregate that met the specifications. The contractor requested the owner’s assistance in locating the specified aggregate, but the only source that the owner recommended also failed to meet the specifications. The court concluded that the specifications were defective because the owner could not provide a sample that met its own specifications. Furthermore, the contractor established commercial impracticability because it did not limit its search to convenient sources but repeatedly attempted to locate a supply source within a commercially practical distance.
The doctrine of commercial frustration provides that a contractor’s performance under a contract may be excused when, through neither the owner’s nor the contractor’s fault, the contract’s principal purpose has been totally prevented. The doctrine excuses a contractor’s performance when it can show that (1) the event was neither foreseen nor caused by the owner or contractor, and (2) the event has destroyed or nearly destroyed either the value of the performance or the object or purpose of the contract. The doctrine allows an allocation of a risk when the parties have not anticipated or allocated the risk in their agreement.
Although the doctrine of frustration is akin to the doctrine of impossibility of performance because both have developed from the commercial necessity of excusing performance in cases of extreme hardship, frustration is not a form of impossibility even under the modern definition of that term, which includes not only cases of physical impossibility but also cases of extreme impracticability of performance. Performance remains possible, but the expected value of performance to the party seeking to be excused has been destroyed by an ill-fated event, which supervenes to cause an actual but not literal failure of consideration.
Ascertaining the point at which obligations become so impractical as to excuse the performance of a contract for being partially impossible is difficult. In an example case, a contractor agreed to remove gravel from a certain parcel of land for use on a construction project. After removing a portion of the gravel, the contractor began using gravel from another site because the remaining gravel on the original site had become submerged under water. Upon finding that the cost of removing the underwater gravel would be ten to twelve times the original cost, the court held that economic impracticability of the situation was equivalent to impossibility.
However, the right of a contractor to recover is limited. Unless otherwise ordered to continue to perform, when a contractor becomes aware that the performance of a contract is clearly impossible, the contractor is obligated to inform the owner and stop performance because a continued effort to perform would be useless.
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