Commercial impracticability is a legally acceptable excuse for non-performance under a commercial contract. When circumstances beyond a party’s control prevent that party from performing as agreed, performance may be excused, and the non-performing party will not be liable for breach of contract.
In Texas, non-performance may be excused by a force majeure clause in a contract or by law when the contract is silent on the subject. Contract clauses can provide broader and more specific protection for a non-performing party than the narrowly interpreted state laws.
Commercial Impracticability Can Be a Defense to Breach of Contract Claims
It has long been recognized that there can exist circumstances that will make a party’s ability to perform under a commercial contract either completely impossible or no longer practicable. If the non-performing party can demonstrate excusable circumstances, the party’s failure to perform may not be a breach of contract.
The circumstances preventing performance must generally be outside the non-performing party’s control, such that the party is objectively unable to perform as previously agreed. For instance, if a party agrees to put a roof on a building and then a hurricane destroys it, it would be impossible to put a roof on the destroyed building, so performance would likely be excused.
Subjective prohibitions of performance, such as personal or internal difficulties, are not typically acceptable reasons for non-performance. If, instead of destroying the building, the hurricane delayed the availability of roofing materials, which in turn delayed the timely application of the roof, the breaching party would likely be unable to claim commercial impracticability as a defense to non-performance.
Circumstances That Can Render Contract Performance Commercially Impracticable
Parties to a commercial contract can agree on what circumstances will excuse performance under the contract. If there is no such agreement, non-performance may still be excused for commercial impracticability under Texas law in certain situations.
Commercial impracticability may be a defense to liability for non-performance if one of the following applies:
Force Majeure Clauses
The general rule in Texas is that an act of God does not automatically excuse the obligation to perform under a contract.1
Force majeure clauses are provisions within a commercial contract that excuse performance when specified events make performance reasonably impossible. Texas recognizes and will enforce force majeure clauses, but courts will typically not excuse performance interference by the likes of hurricanes, floods, fires, or tornadoes without an agreement between the parties.
Force majeure clauses are intended to protect against circumstances unforeseen at the time the agreement was made and will generally not excuse performance merely because circumstances have made performance more complicated or expensive than anticipated.
Enforcement of force majeure clauses is dependent on the specific language of the provision. Force majeure clauses may include conditions precedent to obtaining relief, such as the need to give notice of a qualifying event, or the requirement that a party use reasonable diligence to attempt performance.
Texas Common Law
Texas recognizes the common law defense of ‘impossibility of performance’2 (also referred to as commercial impracticability or frustration of purpose) as described in Section 261 of the Restatement (Second) of Contracts.
The Restatement says that if, after a contract is made, an event occurs that the parties had assumed would not occur and makes performance by a party impracticable, the party’s duty to perform can be discharged as long as the party was not at fault for causing the event.
The common law defense of impossibility is basically limited to three situations that prevent performance:
- The death or incapacity of the person necessary for performance
- The destruction or deterioration of a thing necessary for performance
- Prevention by governmental regulation
In addition to demonstrating a qualifying event, a non-performing party must show that reasonable efforts were made to overcome the hardship caused by the event.
Texas Business and Commerce Code
Under the Texas Business and Commerce Code3, a seller does not breach its duty under a contract for sale if the seller’s delay in delivery or non-delivery was rendered impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made, or by good faith compliance with a government regulation.
The seller is required to notify the buyer of a delivery delay or non-delivery to obtain relief for the failure of presupposed conditions. If partial delivery is possible, the seller must allocate the available products fairly and reasonably among waiting buyers.
Commercial Impracticability and Force Majeure Clauses after COVID-19
The COVID-19 pandemic was an event not assumed by parties to commercial contracts, but it made performance by one or more of the parties difficult or impossible in many cases. Despite a surge in contract litigation with non-performers blaming the pandemic, Texas courts continued to adhere to a narrow interpretation of the law.
If force majeure clauses did not specifically address public health emergencies as excusable events, courts generally did not excuse performance. Even catch-all provisions such as ‘any other events’ were typically construed narrowly to apply only to events similar to those specifically listed.
The COVID-19 pandemic4 catalyzed the redrafting of force majeure clauses, making them more specific and comprehensive. Force majeure clauses may now excuse performance due to impediments such as public health emergencies, cyberattacks, government shutdowns, and global supply chain disruptions.
Why Commercial Impracticability is Narrowly Construed
The defense of commercial impracticability is intended to protect the parties to a contract from adverse financial consequences arising from extraordinary and unexpected events beyond their control.
Commercial impracticability is not a defense to non-performance when performance under a contract is made more difficult by normal, regular, expected, or foreseeable conditions or events that the contracting parties could reasonably anticipate.
Unless expressly stated in the contract, commercial impracticability will not excuse nonperformance when a party’s inability to perform is the result of the party’s own actions or limitations.
Well-Drafted Commercial Contracts Keep Texas Businesses Moving Forward
Good contracts promote good business. Commercial contracts need to express the parties’ intent and expectations clearly. Risk allocation is a key component of protecting financial interests by managing potential loss exposure. To adequately protect your business, a force majeure clause must appropriately cover the risk of non-performance due to commercial impracticability.
Whether it’s drafting commercial contracts, reviewing existing agreements, or resolving contract disputes, the Houston contract lawyers from Feldman & Feldman are a trusted legal partner to businesses operating within the world’s energy capital.
Sources:
1https://www.texasbar.com/AM/Template.cfm?Section=articles&Template=/CM/HTMLDisplay.cfm&ContentID=39705
2https://search.txcourts.gov/SearchMedia.aspx?MediaVersionID=71eaf4d5-418e-4ff3-8874-a01643a63dac&coa=coa07&DT=Opinion&MediaID=a4a06027-cb4b-48a2-9a95-43fd15084b8e
3https://statutes.capitol.texas.gov/?tab=1&code=BC&chapter=BC.2&artSec
4https://pmc.ncbi.nlm.nih.gov/articles/PMC7798591/#sec12