August 03, 2020 Construction Law 101

Impossibility, Impracticability and Frustration of Purpose in the Age of COVID-19

Kelly J. Bundy

As the world struggles to come to grips with COVID-19, and to prepare for eventual recovery, many in the construction industry are grappling with how the pandemic may impact their projects.  Contractors, owners and others want to know whether the pandemic might excuse performance under a contract or whether a contractor might be entitled to recourse for delays associated with labor shortages, supply chain issues, or governmental orders suspending work or imposing restrictions on construction. 

Though many contracts contain a force majeure provision addressing the effect of unforeseen circumstances outside of the parties’ control, some do not.  In the absence of a force majeure provision that might excuse performance under a construction contract, a party might be able to rely, instead, on the common law doctrines of impossibility, impracticability and frustration of purpose. 

Impossibility, Impracticability and Frustration of Purpose Explained

Impossibility, impracticability and frustration of purpose are, as a practical matter, variations on the same theme and often treated interchangeably by courts. 

Under the defense of impossibility (sometimes referred to as impracticability or commercial impracticability), a party’s obligation to perform under a contract is discharged if: (i) after entering into the contract, an unexpected intervening event occurs, (ii) the non-occurrence of the intervening event was a basic assumption underlying the contract, and (iii) the intervening event made performance wholly impossible or objectively economically impracticable.  Frustration of purpose discharges contractual duties to perform when an unexpected, intervening event—the non-occurrence of which was a basic assumption of the contract—frustrates the underlying purpose of the contract.  To the extent courts distinguish between frustration of purpose from impracticability, it is on the basis that no actual impediment to performance exists for either party.  Rather, circumstances have changed such that one party’s performance is virtually worthless to the other.

Impracticability or frustration of purpose may be temporary or partial.  Temporary impracticability occurs when the unexpected, intervening event renders performance temporarily impracticable.  In that event, the duty to perform is not discharged but generally is suspended until performance becomes possible.  The duty to perform is only discharged if, after the cessation of the impracticability, the performance would be materially more burdensome. Partial impracticability or frustration occurs when the unexpected, intervening event renders only part of a party’s performance impossible, in which case, the promisor must render the part of its performance that is possible.

Proving Impossibility Can Be Difficult, If Not Impossible

Proving impossibility is harder than it may seem.  Many states strictly construe the doctrine of impossibility.  New York courts, for example, consider several factors when determining whether the doctrine of impossibility might excuse a contracting party’s performance—the foreseeability of the event occurring, the fault of the non-performing party in causing or not providing protection against the event, the severity of harm and other circumstances affecting the just allocation of risk.  Many courts distinguish between subjective and objective impossibility, refusing to excuse subjective impossibility, or impossibility related solely to the individual promisor, but excusing objective impossibility relating to the nature of the promise.

Notably, economic hardship, even that resulting in bankruptcy or insolvency, does not constitute a factor bearing on the determination of impossibility. Even in the event of a government-issued order, a party asserting impossibility generally must have explored viable alternatives that would permit performance.

In many instances, even if the doctrine of impossibility might apply in the context of one contract, it may not apply in other contracts on the same project.  Accordingly, the termination or suspension of work on a project may not relieve a party from its obligation to pay for materials or their delivery and shipment, if appropriate provisions have not been incorporated into those agreements.

Tips for Parties Who May Want to Rely On Impracticability, Impossibility or Frustration of Purpose

Parties who may want to rely upon the defenses of impracticability, impossibility or frustration of purpose to either excuse delay or to discharge their contractual responsibilities, should observe these best practices:

Check the contract.

A party who wishes to rely on these doctrines should first check its contract.  Contract language may disallow reliance on the doctrine of impossibility, impracticability or frustration of purpose.  Provisions concerning allocation of risk may also impact a party’s ability to rely on these doctrines.  A party should identify the governing law of its contract as jurisdictions may treat these doctrines differently.

Consider negotiating a provision specifically addressing COVID-19.

For parties negotiating contracts during the pandemic, consider inserting an additional provision related to COVID-19.  Address any underlying conditions and assumptions related to (1) the pandemic, (2) present restrictions on construction and (3) the availability of labor and materials. Appropriately addressing these assumptions can help ensure the availability of these defenses if things go sideways.

Be mindful of contracts with subcontractors, suppliers and others.

Even when the doctrines of impossibility, impracticability and frustration of purpose may apply in one circumstance, they may not necessarily be applicable to other contractual agreements.  To the extent that certain assumptions or conditions are inherent in performance under one contract, ensure that you have taken appropriate steps to preserve the applicability of these defenses downstream.

Sufficiently document impacts and issues as they occur, and provide notice frequently and often.

Document impacts or issues as they occur and provide notice frequently and often.  Documentation will be key if forced to establish one of these defenses down the road.

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Kelly J. Bundy

Hirschler, Richmond, VA, Division 4 (Project Delivery and Construction Technology)