Impossibility as a Defense to Breach of Contract
Sometimes events happen that make it impossible for a business to meet its obligations under a contract. In true situations of impossibility, impossibility becomes a defense to a claim for breach of contract; that is, the courts will say that nonperformance is “excused.”
What is Impossibility?
Impossibility is simply the idea that, for any number of reasons, it is not possible — or no longer possible — for one party to a contract to perform. Under court-created case law, facts that created “impossibility” generally fall into three broad categories:
- Death or incapacity
- Destruction of something essential to the contract for which “cover” is not possible
- Illegality after the contract is made
If you promised to perform some service, and then you became deceased, it is impossible for you to perform. Your estate is not liable for breach of contract. Likewise, if the contract involved some unique item like art or a race horse and if such unique item was destroyed, performance is impossible and no claim for breach of contract is allowed. Finally, if the law changed making performance illegal, the courts deemed that change in law to make performance “impossible” and thus, nonperformance is excused.
Not Just “Too Expensive”
For impossibility to be a defense, the performance must truly be impossible. As an example, if you make a contract to deliver a unit of 10,000 apples at $100 per unit but your employees leave your apples in the sun causing them to spoil, performing your obligation is not “impossible.” While you may no longer have any saleable apples, there are many, many, many apple orchards in the world. Under customary rules, if you can “cover” your obligations by buying the items to fulfill your contractual obligations, then you must cover. This is true even if the cost of “covering” is high. In our example, to avoid breach of contract, you must buy 10,000 apples from some other apple grower even if the unit cost is $200.
Ultimately, it is a business decision whether the cost of cover exceeds the risk of being sued for breach of contract and the attendant legal costs, litigation expenses and attorney’s fees.
Modern UCC Creates “Commercial Impracticability” as a Defense
In recent decades, a new defense has been created by section 615 of the Uniform Commercial Code called “commercial impracticability.” This defense only applies to the sale of commercial goods and products. Under the doctrine of impracticability, performance can be excused if the intervening event was unforeseen and unexpected.
In our example, theoretically you might successfully argue that paying $200 a unit is “commercially impracticable.” However, a court will likely say that the doctrine of impracticability does not apply because leaving the apples out in the sun was not “unforeseeable” and was something under your control. However, if we vary the hypothetical and say lightning struck your orchard and destroyed all your trees, then impracticable might be a defense assuming that a court agrees that having to pay $200 a unit is excessive.
What to do? Use Written Contracts
What constitutes “impossibility” and “impracticability” are thorny legal issues and highlight the importance of having written contracts. Courts will enforce contractual provisions related to these concepts. In our example, a written contract could have specified that “cover” is only required if the “… cost of replacement apples does not exceed $120 per unit.”
A good business lawyer will advise that the parties to a contract should consider and decide which party should bear the risk of various foreseeable adverse events. Such allocation of risk provisions are important and should be included in any written contract. This is particularly true for long-term contracts where probabilities of foreseeable risks increase by the passage of time.
Contact San Diego Corporation Law Today
If you would like more information about breach of contract defenses and how to use written contracts to reduce and allocate risks of loss, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Every business needs a good business attorney. Mr. Leonard can be reached at (858) 483-9200 or via email.