What happens when a party to a contract asserts an inability to perform based on circumstances beyond its control? An Ebola outbreak, or even a single case, could make it difficult for healthcare providers to meet contractual obligations. The Texas hospital that treated Thomas Eric Duncan suffered a massive drop in business following news of Mr. Duncan's treatment, with approximately two-thirds of its beds empty and patients cancelling professional appointments in droves. That kind of sudden drop off in revenue could cause strain on existing contracts, particularly if the contracts contain outputs or requirements provisions. Another possible conflict could arise if a supplier to a healthcare provider is unable to meet its contractual obligations if an outbreak causes a spike in demand for a particular product. Whether you are seeking to enforce another party's contractual obligations or looking for relief from your own, the defense of impracticability may arise.
Under well-settled principles of contract law, "contract liability is strict liability . . . [t]he obligor is therefore liable in damages for breach of contract even if he is without fault and even if circumstances have made the contract more burdensome or less desirable than he had anticipated."1 As is often the case with the law, however, the rule is not absolute. The doctrine of impracticability provides for the discharge of contractual liability where an impeding event has occurred and the non-occurrence of that event "was a basic assumption on which the contract was made."2 The Restatement (Second) of Contracts lays out the contours of this concept:
Performance may be impracticable because extreme and unreasonable difficulty, expense, injury, or loss to one of the parties will be involved. A severe shortage of raw materials or of supplies due to war, embargo, local crop failure, unforeseen shutdown of major sources of supply, or the like, which either causes a marked increase in cost or prevents performance altogether may bring the case within the rule stated in this Section. Performance may also be impracticable because it will involve a risk of injury to person or to property, of one of the parties or of others, that is disproportionate to the ends to be attained by performance. However, "impracticability" means more than "impracticality." A mere change in the degree of difficulty or expense due to such causes as increased wages, prices of raw materials, or costs of construction, unless well beyond the normal range, does not amount to impracticability since it is this sort of risk that a fixed-price contract is intended to cover. Furthermore, a party is expected to use reasonable efforts to surmount obstacles to performance . . . and a performance is impracticable only if it is so in spite of such efforts.3
The United States Supreme Court also weighed in on the topic, stating:
For a successful impossibility defense the Government would have to show that the nonoccurrence of regulatory amendment was a basic assumption of these contracts . . . . The premise of this requirement is that the parties will have bargained with respect to any risks that are both within their contemplation and central to the substance of the contract . . . "[i]f [the risk] was foreseeable there should have been provision for it in the contract, and the absence of such a provision gives rise to the inference that the risk was assumed."4
Tennessee courts have taken a similar position,5 and Texas courts also follow the Restatement.6 Not all jurisdictions follow that reasoning, however. For example, Alabama does not recognize the Restatement defense of impossibility or impracticability, for under Alabama law:
Where one by his contract undertakes an obligation which is absolute, he is required to perform within the terms of the contract or answer in damages, despite an act of God, unexpected difficulty, or hardship, because these contingencies could have been provided against by his contract.7
As a result, jurisdictions like Tennessee and Texas, and under federal law, a party to a contract may find relief from their obligations under certain circumstances. Relief will only be granted, however, where the party's duties are made impracticable. Additionally, the party seeking relief faces the substantial hurdle of proving that the effect of the Ebola virus was unforeseeable, or at least unforeseen; and, therefore, the lack of a provision allocating the risk of the virus or other disease should not be used to show that they assumed the risk.
In those jurisdictions that follow Alabama's approach, impossibility or impracticability is not a defense to contractual duty because the law requires parties to allocate or assume the risks involved; whether those risks are foreseeable or unforeseeable. Because the spread and effect of the Ebola virus is a risk that could have been provided for, whatever the virus does to the parties' abilities to perform the contract it will not discharge the parties' duties to perform the contract.
So can a healthcare epidemic like an Ebola outbreak support a defense of impracticability? The answer is "it depends." In a jurisdiction like Alabama that does not recognize the defense a party will never be able to avoid contractual obligations based on impracticability. In jurisdictions like Tennessee that follow the Restatement model the answer may depend on whether courts in that jurisdiction have found other, similar risks to be foreseeable. In any case, healthcare providers concerned about a significant reduction in revenue based on a public health scare or concerned about other parties failing to meet their contractual obligations due to the same should know that the defense of impracticability might be raised. 8
Footnotes
1. Restatement (Second) of Contracts Ch. 11 Intro. Note (1981).
2. Id. (quotation omitted); accord U.C.C. § 2-615(a) ("Delay in delivery or non-delivery in whole or in part by a seller . . . is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made . . . .").
3. Restatement § 261 Comment d.
4. United States v. Winstar Corp., 518 U.S. 839, 905 (1996) (emphasis added). In Winstar the Supreme Court equated "impossibility" with "impracticability." See id. at 904.
5. Groner v. On-Site Grading, Inc., No. E1999-00219-COA-R3CV, 2000 WL 502843, at *4 (Tenn. Ct. App. 2000) (quoting Wilson v. Page, 325 S.W.2d 294, 298 (Tenn. Ct. App. 1958)) ("Moreover, failure to perform a contract is excused if performance becomes impossible due to a cause not attributable to the non-performing party and the impossibility is 'not among the probable contingencies which a man of ordinary prudence should have foreseen and provided for.'").
6. N. Natural Gas Co. v. Chisos Joint Venture I, 142 S.W.3d 447, 457 (Tex. App. 2004) (citing Centex Corp. v. Dalton, 840 S.W.2d 952, 954 (Tex. 1992); Tractebel Energy Mktg., Inc. v. E.I. Du Pont De Nemours & Co., 118 S.W.3d 60, 66 (Tex. App. 2003) opinion supplemented on overruling of reh'g, 118 S.W.3d 929 (Tex. App. 2003); Restatement § 261 ("The doctrine of commercial impracticability constitutes a defense to the performance of a contract in Texas.").
7. Silverman v. Charmac, Inc., 414 So. 2d 892, 894 (Ala. 1982) (quoting Alpine Const. Co. v. Water Works Bd. of City of Birmingham, 377 So. 2d 954, 956 (Ala. 1979)) (emphasis added).
8. Contracting parties may try to use the doctrines of "frustration of purpose" or force majeure to escape contractual duties. Restatement section 265 provides for discharge of contractual liability where "a change in circumstances makes one party's performance virtually worthless to the other, frustrating his purpose in making the contract." The requirements for a frustration defense are similar to those of an impracticability defense; the situations, however, are distinct because frustration does not require an "impediment to performance by either party." Id. at Comment a.
For further information visit Waller
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.