What is Commercial Impracticability?

Implied Contracts

Commercial impracticability may be a term that is most commonly discussed in law school classrooms and cases revolving around a contract claim.  The term is not discussed frequently outside of the people that deal with it daily, but it can be an important term to know when faced with a contract that has been influenced by an event so much so that the completion of the contract is almost or actually impossible.  While it is important to consult with an attorney if one believes that one may have a defense to a breach of contract claim, it can be helpful to understand the context of the claim and when it may arise.  Impracticability provides an excuse from completing contractual obligations, but it only applies in very rare circumstances.

In this article, we will discuss the definition of commercial impracticability, why its existence is important, and the elements necessary to use the defense.  There will also be a short discussion of the topics that relate to the doctrine, such as the applicability under the Uniform Commercial Code and force majeure clauses.  Finally, the article will end with an example of commercial impracticability in action to further illustrate how the doctrine may come into play and how to apply it effectively.

Defining Commercial Impracticability

Commercial impracticability is a term of art used in contract law to indicate that performance under the contract should be excused due to a circumstance that makes the performance unnecessarily unfair to complete, either by cost or difficulty.  The term is often confused for impossibility; however, in legal dictionaries, there is a slight difference in the definitions.  Impossibility allows a party to avoid performance under a contract based on the performance becoming impossible, such as death or natural disasters that destroy the ability to perform.  Impracticability, on the other hand, excuses performance when the performance is still physically possible, but completing the performance would result in an unfair cost to the performer in such a way that they were not able to bargain for it.  Impracticability allows a court to find that forcing performance is not possible due to a significant change in circumstance.  Even though these two terms have slightly different meanings, they are often grouped, and courts may use either term to mean the other.

Commercial impracticability is a legal defense to a breach of contract claim.  To better understand how the claim works, it is important to understand several key terms involving contracts.  These terms include:

  • Contract: A contract is an agreement between two parties with bargained for consideration. It includes an offer for contract and acceptance.  Common contracts include agreements to buy and sell goods, employment contracts, and marriage licenses.
  • Performance: A common type of contract involves completing a task in exchange for money or a different type of task. The completion of this task is known as performance.
  • Breach: A breach of contract occurs when one or both parties do not complete their performance of the contract. This allows the other party to sue for either performance or the return of some kind of payment.

When one party sues the other for a breach of contract based on nonperformance, the party that did not perform their contractual obligations can claim the defense of commercial impracticability, which means that they did not complete the obligation due to an unforeseen circumstance.

The Necessity of Impracticability

The importance of commercial impracticability is evident when one considers the ramifications of forcing a party to complete performance under a contract that would otherwise be deemed impracticable.  When parties are negotiating a contract, they are making decisions and basing the way that they negotiate on what they expect to happen.  This can leave some room for minor setbacks and inconveniences that could alter the value of their position slightly, but they cannot negotiate for the worst-case scenario all the time, or no contracts would ever be formed.  For this reason, when something happens that makes the performance of the contract so unfair or unplanned that it would force them to do something completely unconsidered when they formed the contract.  Impracticability exists because there has to be a way for parties to avoid being forced into a large and inequitable performance.

The Elements of Commercial Impracticability

For a party to be able to claim commercial impracticability, they must meet all of the elements of the legal defense.  Four elements must all be met for a party to successfully assert the impracticability defense.  The elements are:

  • Event: The first element of an impracticability defense is the occurrence of an event that affects the ability of one of the parties to complete their performance under the contract. The party claiming this defense must prove the existence of the event and the connection to the difficulty in performance to satisfy this element.
  • Assumption: Another element is that the nonoccurrence of the event was an assumption of both of the parties when the contract was created. Alternatively, in very limited circumstances, a party may argue that a fact that was in existence at the time of the contract was assumed to not be known if this fact made the contract impracticable from the start.
  • Risk: In some contracts, the parties will agree to assume the risk of an event happening or a fact existing. This means that they will perform even if the risk does occur.  This is common in contracts where one party desperately needs the other to agree or where there needs to be no reason to avoid the contract.  For a party to argue impracticability, they have to prove that they did not assume the risk or that they should have known the fact.
  • Fault: Finally, the party claiming impracticability must prove that the existence of the fact or the occurrence of the event was not their fault. This removes the potential issue of parties being able to claim impracticability after they created the situation to avoid the contract.  This is important because occasionally the person claiming impracticability has already received some benefit, even if they have to repay the other.  This saves the parties from gaining unjust enrichment due to their actions.

Impracticability was meant to be a difficult bar to meet, so the elements are intentionally limiting to ensure that most contracts are upheld, barring specific circumstances.  However, in the cases where impracticability does apply, it is important for the party claiming it to avoid penalties and avoid an occurrence they did not see coming.

Impracticability Under the UCC

An important clarification is the application of commercial impracticability under the Uniform Commercial Code (UCC), which applies to contracts for the sale of goods over $500.  This special code applies special rules and applications because contracts for the sale of goods can be difficult situations to put oneself in, depending on the seller to deliver the product promised.  Under the UCC, impracticability is very rare because the courts have refused to reward a party for making a bad deal. Under the UCC, there are also remedies such as partial performance that allow the seller to keep some of the money and the buyer to keep a part of the goods.  Additionally, there are two kinds of commercial impracticability under the UCC—special commercial impracticability and general commercial impracticability.

  • Special Commercial Impracticability: This is the defense that applies when the contract is for specific identified goods that are identified in the contract. This is for contracts that attach special significance to certain goods such that a replacement would not be equal.  An example of this would be a guitar played by a famous musician.  If there is total loss, the seller can avoid the contract.  If there is partial loss, the buyer may still be able to force the sale at a lower price after inspecting the damage.
  • General Commercial Impracticability: This type of impracticability is the most similar to other kinds of impracticability. Importantly, this has to be an occurrence that is outside of the control of the seller, such as a significant delay in shipment or fire destroying the product.  Additionally, a price increase, even up to 50% may not be considered impracticable.

The sale of goods is a special circumstance where the courts seek to protect both parties, and the uniform commercial code helps protect both buyers and sellers from issues that could arise, including impracticability.

Force Majeure

Many examples of an event that could excuse performance for the parties could be considered in a force majeure clause.  A force majeure clause is a clause added to a contract that excuses performance if a natural disaster or unforeseen event that makes the performance under the contract impossible or difficult.  The common examples of this are natural disasters or fires, but it does include most things that an impracticability defense would require without the clause.  Additionally, just like impracticability, the instance that excuses the performance must not be the action of the person claiming the clause.  Force majeure clauses are helpful to put in a contract, especially because the type of issues that it protects against are those that are unforeseen.  Importantly, these clauses may only be claimed if they are explicitly spelled out in the contract, so inclusion is necessary if one feels they need the protection.  

Example of Commercial Impracticability

Imagine that Patty, who owns a one-person painting business, agrees to paint Hayley’s house.  She tells Hayley that she will paint the whole house for $5000.  Hayley believes that is a fair price, and Patty and Hayley create a contract that requires the painting to be completed by December 23rd.  On December 21st, Hayley calls Patty and demands that she begins painting in the home.  Patty tells her that she will not be completing the painting job because she was in an accident that put her in the hospital.  Because she has no other employees, she cannot complete the contract in time.  Hayley is unhappy with the result and sues Patty for breach of contract because she needed her home painted before her family came to celebrate the holiday.  Patty claims impracticability.  A judge may find impracticability in this instance, and there may be a variety of ways that the judge could resolve the case.

Consider, alternatively, if Patty refused to paint the home because the cost of paint had gone up dramatically, and it would cost her half of her profit extra to purchase supplies.  In that case, a judge would likely not find impracticability here, because although the deal is not as good as when Patty created the contract, it is not impracticable for her to complete the contract.  The distinction between the examples helps to further illustrate how difficult and rare the impracticable defense may be, and even in the instance where Patty was in the hospital, there may not be a finding of impracticable if the judge finds that Patty could complete the work at a later date for a lower fee.  Many times, it is best to communicate with the other party and see if there is an agreement that can be come to before taking this issue to court.

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