What happens when a natural event or government order makes your work impossible to complete on time or budget or at all?  What happens if a government inspector is prohibited or physically incapable from inspecting the work at critical milestones?  This question has found new-found relevance with the novel coronavirus and COVID-19 pandemic (collectively, “COVID-19”).  

In the wake of COVID-19, Texas counties and cities have issued a patchwork of stay-at-home orders. The COVID-19 page of our website contains all the current stay-at-home orders. The majority of these orders deem construction an essential business and exempt contractors from the stay-at-home orders. There are exceptions.  And, even in counties that have declared construction an essential business, the significant disruption to the labor force and supply chains brought about by COVID-19 can have significant repercussions on construction projects.

As the Texas Supreme Court has observed, construction contracts are governed by a “web of contracts”. There are development contracts, design professional consulting agreements, general contractor agreements, subcontractor agreements, supplier agreements—the list goes on and on.  What happens when any one of those contracts becomes impossible to perform? How does it ripple through the “web”?

Impossibility of performance is a legal defense to breach of contact.  A contractor may be excused from a contractual obligation if the performance of the obligation becomes impossible or impracticable.  Said another way, where a party’s performance is made impracticable by some event, and the parties assumed the event would not occur at the time they entered into the contract, the party is discharged from performing the impacted duty. 

In a recent Texas Supreme Court case, a corporation was discharged from its obligation to pay a finder’s fee because federal bank regulations, issued after the parties entered into their agreement, prohibited the payment.^[1]  The Court found that the governmental regulation made performance impracticable and that the regulation was an event the parties assumed would not occur when they entered into their contract . Later decisions from lower courts in Texas have built on this holding, excusing a party’s performance due to a governmental order when the order direct prohibits the party’s performance, not just adds an expense to the performance.

Impossibility of performance is not without its own hiccups. There are four things that should be considered when considering using impossibility as a defense to a breach of contract claim. 

1. Was impossibility caused by the party’s own voluntary acts?
   If impossibility is created by a party’s voluntary act, that party’s performance will not be excused. 
2. Were the circumstances temporary?
   If the circumstances making a party’s performance impossible are temporary, the party’s performance is typically not excused forever. When the circumstances subside, the party may be required to continue its performance.  
3. Was it really impossible or just too expensive?
   Impossibility will not excuse performance simply because the circumstances have made the party’s performance expensive or more difficult than anticipated. 
4. It will not be quick.
   Whether performance of a contractual duty has been rendered impossible or impracticable is generally a question for the jury. This means that it, if the dispute lands in court or arbitration, it will not be decided quickly or summarily.

The attorneys at GS are available to answer any questions you may have and to assist you in navigating these uncharted waters. Contact us at info@gstexlaw.com.

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