The Impossibility Doctrine in Texas & COVID-19

Houston, TX – Regardless of whether a contract contains a force majeure provision, a party’s non-performance may still be excused by the common law doctrine of impossibility.

1. The impossibility doctrine in Texas.

The impossibility defense is an excuse to performance that Texas courts will refer to as impossibility of performance, commercial impracticability, or frustration of purpose—though the choice of terminology is of no significance, as each is applied identically. Philips v. McNease, 467 S.W.3d 688, 695 (Tex. App.—Houston [14th Dist.] 2015, no pet.).

Despite its name, the impossibility defense is available to discharge a party’s duty to perform even if the performance is not absolutely impossible. See Restatement (Second) of Contracts § 261, cmt. d (1981). The defense is better thought of as covering circumstances where performance has become “impracticable” rather than “impossible.” Id. Again, however, impracticability requires something more than performance becoming more economically burdensome. Philips, 467 S.W.3d at 696. The Restatement indicates that a mere change in the degree of difficulty or expense, 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. See Restatement (Second) of Contracts § 261, cmt. d.

2. Formal legal requirements for impossibility.

In Texas, the doctrine may be available in three circumstances: (1) the death or incapacity of a person necessary for performance, (2) the destruction or deterioration of a thing necessary for performance, and (3) prevention by governmental regulation or order. Key Energy Services, Inc. v. Eustace, 290 S.W.3d 332, 340 (Tex. App.—Eastland 2009, no pet.) Unless the individual who is obligated to perform dies, the third, governmental regulation avenue, is the most likely to be triggered by COVID-19 response.

Numerous factors will impact whether the impossibility defense can succeed. These include (i) the timing at which the contract was entered; (ii) when the event causing impossibility arose[1]; (iii) whether the event was foreseeable; (iv) whether performance was subjectively or objectively impossible (because in Texas, only objective impossibility is excused); (v) whether the event or its absence was an assumption underlying the contract, which is likely easily satisfied here because most people assumed that there would not be a global pandemic; and (vi) whether the party made reasonable efforts to perform.

[1] For reference, the World Health Organization declared the coronavirus outbreak a “public health emergency of international concern” on January 30, 2020. See Coronavirus Disease Situation Summary, The next day, on January 31, the Health and Human Services declared a public health emergency for the United States. Id. The World Health Organization then classified the coronavirus as a pandemic on March 11 and President Trump declared a national emergency on March 13. Id.

3. Examples of where impossibility has and has not traditionally been available in Texas.

Precedent provides examples of what may constitute impossibility. In Centex Corp v. Dalton, a company was obligated to pay a finder’s fee in connection with the company’s acquisition of a group of banks. 840 S.W.2d 952, 955–56 (Tex. 1992). However, after the agreement was signed, the Federal Home Loan Bank Board adopted a regulation prohibiting such a payment. Id. The Texas Supreme Court excused the company’s obligation to pay the fee, holding that the finder’s fee contract was unenforceable due to governmental regulation. Id. Similarly, in Merry Homes v. Chi Hung Luu, the Texas legislature enacted a statute allowing individual counties to prohibit the sale of alcohol within the county. 312 S.W.3d 938, 947 (Tex. App.—Houston [1st Dist.] 2010, no pet.). A tenant signed a lease requiring the premises to be operated as a “nightclub or bar,” but was unable to obtain a liquor license due to the county’s prohibition. Id. The Court excused performance. Id. at 950.

Though performance was excused in these two examples due to governmental action, courts typically take a narrow approach to the definition of “order or regulation.” In another case, Hewitt v. Biscaro, the defendants entered into a settlement agreement with plaintiffs and were then orally told by the Securities and Exchange Commission to withhold such payments pending completion of their investigation. 353 S.W.3d 304, 309 (Tex. App.—Dallas 2011, no pet.). The court found this verbal recommendation insufficient to qualify as an order or regulation, and so the impossibility defense did not apply. Id. Governmental actions usually do not not excuse performance unless they are mandates, in writing, and signed by the appropriate agency.

4. Impossibility & the Public Good.

We expect to see parties unable to perform due to COVID-19 conditions raise impossibility, or impracticability, as a defense even where current circumstances do not fit cleanly within the historical application of the doctrine. Parties will likely argue that performance could not be safely made, and that it was impossible to hold events, gather groups, travel, or complete other functions necessary to contractual performance, without endangering employees and the public welfare. Texas Courts have some sensitivity to this principle, at least where the performance would violate a statute intended to protect the public. See, e.g., Merry Homes, Inc. v. Chi Hung Luu, 312 S.W.3d 938, 946 (Tex. App.—Houston [1st Dist.] 2010, no pet.). It is not yet clear how far courts may be willing to extend that principle and the impossibility doctrine to parties who are, in their view, acting prudently to avoid gatherings, travel, and to promote social distancing under the encouragement, but not enforcement, of governmental authorities.

We note in closing this section that the impossibility defense is historically rarely granted by courts. Unfortunately, unless the party fails to perform because they have passed away or because performance became “objectively impossible” due to a written governmental order or regulation, the doctrine of impossibility has traditionally not provided much refuge. The actions by both federal and local governments, however, have created some limited opportunities through which the impossibility defense may provide relief. Success depends on the circumstances.

For more information, please contact McDowell Hetherington attorney Bobby Debelak.