Smith Currie | October 22, 2018
In today’s ever-changing legal and political climate, contractors are being forced to deal with events and circumstances that seemed improbable just a short time ago. These changing circumstances have led some contractors to question whether they are required to continue performing in the face of uncertainty and, in many cases, potentially large losses. The doctrines of impossibility and impracticability, if proven, can serve as powerful defenses and excuse performance of a construction contract. However, contractors should exercise great caution before relying on these defenses as an excuse for nonperformance, as the consequences of stopping work without proper justification can be disastrous.
One of the hottest topics in the business world today is trade and tariffs, and what impact the various proposed U.S. tariffs on foreign materials, such as steel and aluminum, will have on the construction industry. Will tariffs lead to across the board price increases and materials shortages? Will contractors and subcontractors have to bear these added costs? If so, do the doctrines of impossibility or impracticability offer contractors and subcontractors a defense to excuse performance?
The doctrine of impossibility excuses contractors from performing if something unexpected occurs that is not addressed by the contract or custom, and makes performance commercially impracticable. Put another way, if the question of how to deal with an unexpected event, like an unforeseen tariff on foreign steel, can be answered by referring to the construction contract, then the doctrine of impossibility is unlikely to excuse performance.
As it relates to material cost increases and/or shortages that might result from the imposition of tariffs, the vast majority of construction contracts today contain clauses that specifically address and allocate risk for these issues from both a cost and scheduling standpoint. Notably, some construction contracts address these issues through the definition of “force majeure” by specifically excluding materials cost increases and material shortages from the definition. Thus, assuming the construction contract at issue contains clauses that allocate risk for material cost increases and shortages, or otherwise addresses these issues, impossibility is unlikely to succeed as a defense to performance. Depending on the language in the contract, contractors and subcontractors may have to shoulder these added costs.
The related doctrine of impracticability may apply irrespective of contractual language and excuses performance where changed conditions make the cost of performance excessive or unreasonable. The key words here are “excessive or unreasonable.” So unless the unexpected imposition of a tariff results in added material or time-related costs that are “excessive or unreasonable,” contractors and subcontractors will not be able to assert impracticability as a defense. And while there is no magic number at which point the costs of performance become excessive or unreasonable, case law is full of examples where contractors and subcontractors are required to absorb costs that significantly exceed that which they anticipated due to circumstances beyond their control. In short, the doctrine of impracticability should not be thought of as an insurance policy against losses, even heavy losses.
Another issue facing the construction industry is labor shortages. Can a contractor or subcontractor successfully assert the defense of impossibility or impracticability in a circumstance where new immigration policies reducing the number of visas for foreign workers result in across the board labor shortages that lead to added costs? Possibly, but similar to the discussion above regarding tariffs, unlikely. Again, most construction contracts contain specific provisions that allocate labor requirements and risk, or otherwise address labor shortages through definitional exclusions related to force majeure. Thus, the doctrine of impossibility will likely not be applicable. And even though labor shortages resulting from unexpected changes in immigration policies could result in increased costs to contractors and subcontractors, only in the rarest of circumstances it is likely that such increased costs will meet the definition of “excessive” or “unreasonable.”
This is not to say that there are absolutely no circumstances in which imposition of tariffs, changes in immigration policy, or any number of other unexpected events could result in a situation where the doctrines of impossibility or impracticability could be successfully asserted as a defense to performance of a contract. Nor is it to suggest that contractors and subcontractors have no other defenses in the face of new tariffs or immigration policies that affect their work, as many construction contracts would consider these actions a change in law under which relief may be available. But by and large, circumstances under which new tariffs or changes in immigration policy would permit a contractor to successfully assert the defense of impossibility or impracticability and excuse performance are probably the exception, not the norm.
Remember, a contractor’s defense of impossibility is an owner’s claim of abandonment. The consequences of improperly relying on the defenses of impossibility or impracticability as an excuse to stop work and walk off of a job can be disastrous, resulting in liability for all costs of completion of the contract and, in the case of public work, possible debarment or disqualification from future work. Contractors and subcontractors should exercise extreme caution and seek legal advice before relying on the defenses of impossibility or impracticability.