Impracticable

What Is Impracticable?

In finance and law, the term "impracticable" refers to a situation where fulfilling a contract or satisfying a regulatory obligation becomes excessively difficult, costly, or burdensome due to unforeseen circumstances, even if not strictly impossible. This concept falls under the broader category of [Legal and Regulatory Compliance] and serves as a potential legal defense or justification for deviating from a standard procedure when adherence is unreasonable. It implies that while a task could theoretically be completed, the practical barriers are so substantial as to make it unreasonable to expect performance.

History and Origin

The doctrine of impracticability in contract law evolved from the older and stricter doctrine of "impossibility of performance." Historically, a party was only excused from contractual duties if performance was literally impossible (e.g., the subject of the contract was destroyed). Over time, courts recognized that circumstances could arise that, while not making performance impossible, rendered it extraordinarily difficult or expensive, going beyond the commercial risks assumed by the parties. This led to the development of the impracticability doctrine, particularly within common law and the Uniform Commercial Code (UCC) in the United States. It allows for relief when an unforeseen contingency, whose non-occurrence was a basic assumption of the contract, makes performance excessively difficult, expensive, or harmful.¹¹

This evolution acknowledges that a narrow interpretation of "impossibility" could lead to unjust outcomes when unforeseen events drastically alter the fundamental assumptions of an agreement. For example, Section 2-615 of the Uniform Commercial Code, which governs the sale of goods, specifically addresses situations where performance becomes "impracticable" due to unforeseen events.¹⁰

Key Takeaways

• Impracticability means performance is extremely difficult or costly, not literally impossible.
• It serves as a legal defense to excuse a party from fulfilling contractual obligations under specific, unforeseen circumstances.
• The standard for proving impracticability is high, requiring more than mere inconvenience or increased cost.
• The concept is relevant in contract law, particularly concerning commercial agreements, and in financial reporting standards.
• Impracticability often hinges on whether the unforeseen event fundamentally altered the basic assumptions of the original agreement.

Interpreting Impracticable

Interpreting "impracticable" requires a careful assessment of the facts and circumstances surrounding a given [obligation]. It is a high legal bar, meaning that simple economic hardship, market fluctuations, or minor increases in cost or difficulty are generally insufficient to claim impracticability. Instead, the event must be truly unforeseen and its impact must be severe enough to make [performance] objectively unreasonable or financially ruinous. Courts typically look at whether the occurrence of the contingency was a basic assumption on which the contract was made, and whether the difficulty was not anticipated by the parties.

For instance, in financial reporting, a requirement might be deemed impracticable if an entity cannot apply it after making every reasonable effort, perhaps because historical data was not collected in a manner that allows for retrospective application of a new accounting policy.⁸, ⁹

Hypothetical Example

Consider "Horizon Construction," which secures a contract to build a new commercial complex. The original plan involves excavating a large basement using standard drilling techniques, with the understanding that the ground composition is typical for the region. Midway through the project, during excavation, Horizon Construction discovers an unexpectedly large, deep, and extremely hard rock formation, previously undetectable by standard due diligence surveys.

Removing this formation using the contracted methods would require highly specialized equipment not readily available, would extend the project timeline by years, and would incur costs exceeding the original contract value by 300%. In this scenario, while physically possible to remove the rock, the original method of performance has become "impracticable." Horizon Construction might argue that the unforeseen geological condition fundamentally altered the basic assumptions of the contract, making adherence to the original terms unreasonable and subjecting them to disproportionate financial burden beyond typical construction risk management.

Practical Applications

The concept of impracticability appears in several practical areas within finance and business:

• Contract Law: It is a common defense in default of contract claims. Businesses might invoke it when external events, such as severe supply chain disruptions, natural disasters, or new regulation, make fulfilling an agreement extraordinarily difficult or expensive. This is often debated in conjunction with force majeure clauses in contracts.⁷
• Financial Reporting: Accounting standards, such as IAS 8 "Accounting Policies, Changes in Accounting Estimates and Errors," permit non-retrospective application of a new accounting policy or correction of a prior period error if it is "impracticable" to do so. This typically means that data was not collected in a way that allows for retrospective application, and it would be impracticable to recreate the information.⁵, ⁶ This offers companies a practical exception when strict historical restatement or disclosure would be unduly burdensome or impossible to accurately reconstruct.⁴
• Legal Frameworks and Compliance: Beyond specific contracts, general legal framework and regulatory bodies may consider impracticability when setting rules or assessing compliance. While "undue burden" is a more common term in regulatory contexts, the underlying principle of extreme difficulty or expense can provide grounds for seeking an injunction or a waiver from certain requirements.

Limitations and Criticisms

While providing a necessary escape clause for unforeseen events, the doctrine of impracticability faces several limitations and criticisms:

• High Threshold: Proving impracticability is challenging. It requires demonstrating that the intervening event was truly unforeseen and that the resulting difficulty or cost is extreme, not merely a typical business risk. Courts generally do not excuse contract performance simply because it became unprofitable or more burdensome than anticipated. This strict interpretation helps maintain the sanctity of contract and prevents parties from easily escaping agreements due to market shifts.
• Subjectivity: The determination of "excessive difficulty" can be subjective, leading to extensive litigation and unpredictability in outcomes. What one party considers impracticable, another might consider an expected part of commercial risk management.
• Foreseeability: A common defense against an impracticability claim is that the event was, to some degree, foreseeable, or that the contract should have explicitly allocated that specific risk. Parties are expected to conduct thorough due diligence and anticipate potential challenges. For example, general economic downturns are usually considered foreseeable business risks.
• Mitigation Requirement: Even if an event makes performance impracticable, the party seeking relief is generally expected to have taken all reasonable steps to mitigation the impact of the event and fulfill as much of their obligation as possible. Failure to mitigate can undermine the claim.

Impracticable vs. Impossible

The terms "impracticable" and "impossible" are related but distinct concepts, particularly in legal and financial contexts. The key difference lies in the degree of difficulty in performance.

While "impossible" refers to a situation where a contract simply cannot be performed, "impracticable" denotes a situation where performance can still be carried out but only at an extreme and unreasonable cost or difficulty that was not anticipated when the agreement was made. The doctrine of impracticability evolved to provide relief in circumstances that fall short of literal impossibility but still fundamentally alter the underlying assumptions of the contractual obligation.², ³

FAQs

Is "impracticable" the same as "impossible"?

No, "impracticable" is not the same as "impossible." "Impossible" means something cannot be done at all. "Impracticable" means it could be done, but it would be so extraordinarily difficult, expensive, or burdensome due to unforeseen events that it's unreasonable to expect someone to do it. It's a higher bar than mere inconvenience but lower than literal impossibility.¹

What kind of events can make something impracticable?

Events that can make something impracticable are typically unforeseen and severe. Examples include natural disasters (e.g., a flood destroying a crucial component), significant changes in law or regulation that make performance illegal or excessively costly, or extreme and unforeseeable supply chain disruptions. Normal market fluctuations or expected increases in cost are generally not considered grounds for impracticability.

How does impracticability affect a financial contract?

If a financial contract is deemed impracticable, the party whose performance has become impracticable may be excused from their obligations, or the contract may be modified or terminated. This depends on the specific terms of the contract (e.g., force majeure clauses), the applicable law, and the ruling of a court or arbitrator. It provides a legal defense against a claim of default.