The freedom to contract and the ancillary ability to either enjoy the benefits of the contract or pay the cost of breaching the contract is a treasured right of most Americans. The ability to control one’s own personal and business future by electing what obligations to undertake is central to our economic and personal well-being. As one expert once stated, the freedom to contract is akin to the freedom to engage in the world of commerce either as vendor or consumer.
All of us enter into dozens of contracts every week. Every time you buy a product using an online account or a credit card, you are entering into a contract to pay the credit card company for the product delivered. Each time you purchase a ticket to an event or pay a parking garage, you are contracting to pay dollars for access to space. The list is endless. Our lives are surrounded by contractual obligations we undertake constantly.
The average legal action is either a suit to impose liability for negligently causing an injury to another (tort cause of action) or for damages for breach of contract. As discussed in our article on contracts, the plaintiff in a contract action must show the existence of an enforceable contract, the breach of the contract by the defendants, and the damages caused by the breach.
And it is up to the defendant to either deny the existence of the contract, deny the breach, deny the damages, or give a valid legal reason why the contract is not enforceable.
One such defense is that of impossibility of performance. A party can invoke impossibility and argue that it did not perform its contractual obligations because it was impossible for it to do so. Under some circumstances, impossibility of performance can excuse failure to perform. A typical example would be a painter not finishing his contractual obligation to paint a home that had burned down during the project.
The key issue is defining what is true impossibility and determining what the actual effect of the “impossibility” should be. In cases that involve the impossibility defense, one party may argue it was impossible for it to perform, while the other claims it was merely difficult or burdensome. This article shall discuss the essential elements of the impossibility defense in California.
The Basic Law:
Impossibility is usually defined to mean that there was literally no possible way for the party to perform its duties. If the only way to perform would be to go to extreme hardship or expense, it is still “possible,” and the obligation is not usually excused. Another typical example: I am to dig a well for you for five thousand dollars but discover the soil is far more rocky than I thought and the cost to me is doubled. Am I excused? Usually not, since the task is simply more difficult, not impossible.
Basic types of impossibility
California courts tend to find impossibility in a case where one of the parties died or suffered incapacitation, which would make it impossible for that person to perform. Another case of impossibility is when an item crucial to performance becomes destroyed (through no fault of the defaulting party) and there is no reasonable substitution. Third, impossibility also arises if, after the parties sign the contract, a new law comes into being that makes performing illegal.
In the unique context of transactions between merchants, the Uniform Commercial Code carves out an exception and allows the defense of commercial impracticability for contracts that involve the sale of commercial goods. Impracticability can apply if, after the contract, an unforeseen event occurred to make performance unreasonable difficult or expensive. The event must be such that the parties cannot have reasonably foreseen it happening and it cannot be something within the parties' control. A typical example is that a war breaks out and a critical component of a product is either impossible to obtain or so expensive that it makes the transaction commercially impractical.
Expansion of the Doctrine of Impossibility in California
The legal expansion of the meaning of "impossibility" as a defense, (which at common law originally meant literal or physical impossibility of performance) to include "impracticability" is now generally recognized as a valid defense (6 Williston on Contracts (rev.ed.) § 1931, pp. 5407-5411).
In the leading California case approving this expanded meaning, Mineral Park Land Co. v. Howard, 172 Cal. 289 [156 P. 458, L.R.A. 1916 F 1], the court accepted the defense of impracticability in an action which involved a contract to take all gravel necessary to effect the construction of a fill and complete the cement work on a proposed bridge when the evidence showed that the defendant used all gravel that was available except submerged gravel, the cost of the extraction of which would have been ten or twelve times the cost of removing the surface gravel.
As stated in 6 Corbin on Contracts, section 1325, page 338: "A performance may be so difficult and expensive that it is described as 'impracticable,' and enforcement may be denied on the ground of impossibility." (See City of Vernon v. City of Los Angeles, 45 Cal. 2d 710, 719 [290 P.2d 841]; 12 Cal.Jur.2d, Contracts, § 238, pp. 461-462.)
However, this does not mean that any facts, which make performance more difficult or expensive than the parties anticipated discharge a duty that has been created by the contract (Rest., Contracts, § 467, pp. 882-884). The courts are clear that circumstances which only make performance harder or costlier than the parties contemplated when the agreement was made do not constitute valid grounds for the defense of "impracticability" unless such facts are of the gravest importance. And whether the facts justify the impractical defense is a matter of fact for the judge to determine.
In Snow Mountain W. & P. Co. v. Kraner, 191 Cal. 312, 324-325 [216 P. 589], it was held that "Appellant was not absolved from his contract by the natural obstacles intervening, unless they rendered performance practically impossible. Mere difficulty, or unusual or unexpected expense, would not excuse him. (Carlson v. Sheehan, 157 Cal. 692, 697 [109 P. 29].)
When Performance Becomes Impossible or Unfeasible - Who Bears the Risk?
Whether performance is excused often depends on the event that makes performance impossible or unfeasible, and whether that event was contemplated under the contract. If the event was so unusual and unexpected that the parties could not reasonably have foreseen it, and if it is unfair to place the risk of its happening on either party, then the Court may excuse further performance of the contract on both sides. On the other hand, if the risk that such an event could happen was one that the parties should reasonably have anticipated, or if the contract assigned that risk to one of the parties, then the Court normally would not excuse further performance. Known risks assigned by contract will not excuse performance no matter how disastrous the consequence of that risk.
The Categories of “Impossibility”
Courts often cite three levels of impossibility:
Impossibility of Performance
Where performance becomes physically impossible, further performance would almost certainly be excused. For example, a roofing contractor would not be in breach for failing to complete a roof on a building destroyed by fire through no fault of his or hers.
Frustration of Purpose
Where the principal purpose of a contract is destroyed, further performance would possibly be excused, absent a contract provision to the contrary. For example, the roofer who contracts to buy material for use on a building destroyed by fire may be able to cancel that material contract. While the purchase of roofing material is not rendered impossible by the fire, the purpose for which the materials were contracted is impossible to achieve through no one's fault. This is a harder argument to advance since the material supplier can argue that he bears no responsibility for the frustration but is made to suffer more than the roofer. Again, the court is likely to balance the equities.
Where performance becomes so difficult or costly that the value of the contract to one party is destroyed, continuing that performance to completion may be financially impractical. However, despite severe economic consequences, further performance may not be legally excused unless the direct cause of the difficulty could never have been foreseen. Absent extraordinary circumstances, losing money is not a legal defense to a breach of contract action. Note that in agreements between merchants under the UCC different criteria may be applied.
Where performance is excused after work has begun, recovery will usually be allowed for the fair value of work actually performed, but not for lost profits on work not done as could be recovered in a breach of contract action. In a recent Massachusetts case, a General Contractor was permitted to cancel a material contract with a supplier because the owner unexpectedly deleted that material for the Project. The court ruled the owner's deletion wholly destroyed the purpose of the contract with the supplier, which excused further performance. The supplier was ruled entitled to recover for material supplied but not entitled to its profit on the remaining part of its contract that was cancelled.
In general, in commercial settings, unanticipated circumstances may excuse a failure to perform contract work completely but only where:
an unexpected event occurs without the fault of the party invoking the defense;
that event makes further performance impossible or so difficult or expensive as to frustrate the purpose of the contract or destroy its value; and
the agreement between the parties does not allocate risks of unexpected events arising.
It is vital for the parties to understand that unless in a commercial setting, increased difficulty or expense will not normally amount to an excuse to evade obligations under the contract. But if an agreement is truly impossible to perform without fault of the party seeking to evade the contract, the defense of impossibility is available, and the defense of impracticality is becoming increasingly supported by the courts in California.