Who Bears the Risk of Regulatory Change? Ohio Court Weighs In
A recent case out of Hamilton County, Ohio, Mt. Pleasant Blacktopping Co., Inc. v. Inverness Grp., Inc. (1st Dist.), 2025-Ohio-284, addressed an often-overlooked contracting issue: who bears ultimate responsibility for regulatory compliance when completed work fails to secure governmental approval?
Background Facts
- Developer Inverness Group, Inc. (“Inverness”) contracted with Mt. Pleasant Blacktopping Company, Inc. (“MPB”) to install sewer lines for a housing development project;
- The contract required that MPB “obtain all permits and licenses that may be necessary for the proper performance.” It further required that MPB’s work “conform to the requirements of all governmental agencies . . . having jurisdiction over the Project” “in accordance with the specifications” of the same. MPB’s performance would not be complete until it received “the satisfaction of . . . all government agencies having jurisdiction.”
- The County’s Sanitary Engineering department denied approval of two lines because of multiple bellies with standing water in the pipes and refused to issue service permits until the lines were removed and reinstalled;
- This regulatory rejection left the parties fighting over who was responsible for the cost of remediation.
Trial Court Decision
During the bench trial, MPB argued that the “County had not previously interpreted its regulations so strictly, and that the stricter interpretation came after changes in County personnel and policy.”
The trial court agreed with MPB, holding that performance was excused because the County’s new interpretation was unforeseeable, retroactively applied, inconsistently enforced, and adopted without notice. The court found Greene County acted arbitrarily and unreasonably, concluded MPB had substantially performed, and awarded it damages.
Appellate Court Decision
On appeal, the First District reversed and remanded. The appellate court found that because obtaining regulatory approval was an express requirement of the contract, MPB did not substantially perform when its work failed to satisfy that requirement. The court then considered whether MPB’s nonperformance was excused under the doctrine of impossibility – whether the “unexpected regulatory rejection prevented [MPB] from satisfactorily performing its duties under the contract.”
The appellate court set forth the elements for a defense of regulatory impossibility or impracticability:
1. a supervening regulatory action occurred;
2. the action was unforeseeable and undermined a basic assumption of the bargain, considering the parties’ allocation of risk and industry practice;
3. the action rendered performance impossible or impracticable; and
4. the party claiming excuse made good-faith efforts to comply with or avoid the regulation.
Although MPB satisfied the first two elements, the court found it had not shown performance was truly impossible.1 Evidence showed the sewer lines could be repaired or replaced, albeit at significant cost—$240,000, nearly one-third of the $765,000 contract price. The court emphasized that “[a] party cannot be excused from performance merely because performance may prove difficult, burdensome, or economically disadvantageous” and noted that even substantial increases in cost do not render contractual performance impossible or impracticable.
The Court of Appeals remanded for consideration of whether the County’s regulatory action truly rendered performance legally impossible and whether MPB did all that good faith required before asserting its impossibility excuse.
Key Takeaways
This decision:
1. Reaffirms express performance obligations by underscoring that when a contract explicitly requires regulatory approval, failure to obtain that approval—regardless of changes in regulation—means failure to perform.
2. Limits the doctrine of unforeseeability (or regulatory changes) as a blanket excuse, clarifying that unforeseeable regulatory change does not automatically excuse nonperformance.
3. Urges parties whom are entering into construction contracts to ensure that they are clearly allocating risk: Who bears the risk of regulatory change? What counts as sufficient notice? What remedies or flexibility exist if regulations change during the course of the project? The parties should provide that the regulations that exist at the time the contract was entered are the ones that control.
4. Endorses the consideration of change-in-law clauses: Construction contracts can expressly address the risk of regulatory or code changes by including a “change-in-law” or “governmental action” clause that allocates responsibility, cost recovery, or schedule relief.
5. Confirms impossibility is a high bar by re-emphasizing increased cost alone is not enough to render performance impossible or impracticable.
6. Validates that damages are limited: Where impossibility applies, restitution—to compensate partial performance to the degree such performance has benefited the other party—is the proper measure, not expectation damages.
7. Highlights the importance of documenting regulatory interactions with inspectors and regulatory agencies. If interpretations shift mid-project, contemporaneous documentation can help prove notice issues or support equitable remedies.
For more information on this or other construction issues, contact Susan M. White or any member of the firm’s Construction Practice Group.
1 The court also cast doubt on whether MPB showed evidence sufficient to satisfy the fourth element of good faith.
