August 8, 2022
Applicability of the Impossibility of Performance Defense for COVID‑19 Impacts in the Construction Industry
This blog post is the second in a series of eight that summarize the potential impacts of the COVID-19 pandemic on the construction industry, including the potential applicability of typical contract clauses to the impacts, best practices for mitigation of the impacts, and recommendations for avoiding claims related to COVID-19 in future contracts.
This blog post summarizes information published in articles and blog posts by various attorneys and law firms, and the intent is to provide a brief summary that may be beneficial to owners and contractors. This post is not written by attorneys and does not constitute legal advice.
Several authors discuss the potential applicability of performance obligation relief measures external to the contract with respect to COVID-19 impacts in the construction industry. In particular, the impossibility (or impracticability) of performance, a common law defense for non-performance, has been cited as a potential relief strategy as discussed below.
In “Dealing with the Construction Impacts of COVID-19,” American Bar Association Newsletters, Spring 2020, Michael A. Stover, Cynthia E. Rodgers-Waire, and Thomas J. Moran of Wright, Constable & Skeen write that an impossibility of performance defense may be applicable for non-performance issues attributed to COVID-19 impacts but note that if the contract specifically allocates risk for non-performance due to pandemics, the contract will take precedence over common law. They cite three factors typically required to show impossibility in most jurisdictions:
- Unexpected occurrence of the event;
- Non-occurrence of the event was a basic assumption when entering into the contract; and
- Impracticability of performance due to the event.
Stover et al. also note that all performance alternatives must be exhausted before relying on an impossibility defense. Additionally, they note that the impossibility duration will likely be temporary in nature and that the performing party should expect to resume performance at the conclusion of the impacting event.
In “COVID-19’s Impact on Construction: Is There a Remedy? – Time Extension, Force Majeure, or More?,” The National Law Review, 3 April 2020, William J. Shaughnessy, William E. Underwood, and Chris Cazenave of Jones Walker LLP write that the Uniform Commercial Code (UCC) and Restatement (Second) of Contracts recognize the impracticability defense, though it may not be recognized in all states. Shaughnessy et al. cite UCC §2-615(a) (Excuse by Failure of Presupposed Conditions) as stating that delays may be excusable due to impracticability of performance based upon an event outside the contractor’s control. They also cite §261 of the Restatement (Second) of Contracts as recognizing the impracticability defense for events outside of the contractor’s control.
In “COVID-19 Impacts on Construction Contracts: Legal Arguments For and Against Performance,” JD Supra, 13 September 2021, Laurie Stanziale of Fox Rothschild LLP states that while impossibility of performance due to unforeseen events is recognized, increased cost alone does not generally justify rescission of the contract. However, Stanziale cites commentary to UCC §2-615 as indicating that increased cost due to unforeseen contingencies or a severe shortage of materials may be contemplated under the clause. Additionally, she cites a recent decision in Cai Rail, Inc. v. Badger Mining Corporation, 2021 WL 705880 in the Southern District of New York (SDNY) as offering additional insights. This decision cited a case from 1987 indicating that while impossibility due to an unanticipated event can be a defense, performance being merely economically difficult or unprofitable would not typically be an excuse in New York courts. Stanziale indicates that it is not yet fully understood how these cases and theories apply to COVID-19-related impacts.
Finally, in “COVID-19: Legal Impact on Contractual Obligations,” 30 March 2020, Julia Zagonek and Pavel Boulatov of White & Case discuss impossibility of performance of an obligation as per Article 417 of the Russian Federation (RF) Civil Code. They note that notification of impossibility is required and if the contract is terminated on grounds of impossibility, the creditor cannot claim damages, and unjust enrichment must be considered with regards to payments made prior to termination.
As detailed above, several authors discuss the potential applicability of the impossibility defense as a performance obligation relief measure for COVID-19 impacts. The authors note that contract clauses typically take precedence over common law defenses and that in order for impossibility to be considered, the impacting event must be significant and not render performance merely uneconomical. As always, fully understanding the specifics of the contract and documenting the impacts contemporaneously are key for supporting (or defending against) potential claims.
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