Contractual Impossibility? Global Economic Crash Doesn’t Excuse Performance Of Real Estate Deal – Illinois Court

In YPI 180 N. LaSalle, LLC v. 180 N. LaSalle II, LLC, 403 Ill.App.3d 1 (1st Dist. 2010), the court examined whether the 2008 global credit crisis was significant and unforeseen enough to merit application of the impossibility of  performance doctrine in connection with a real estate contract for the sale of a Chicago office building.

Facts

The parties entered into a contract to purchase the office building for a cool $124M.  The plaintiff – the buyer’s assignee – deposited $6M in earnest money.  When the world credit markets froze, plaintiff wasn’t able to get financing and couldn’t consummate the purchase.

The seller then terminated the contract and retained the buyer’s $6M earnest money.  Plaintiff sued to rescind the contract and for return of its $6M earnest money deposit claiming that the world financial crisis made it impossible for it to go forward with the building’s purchase.  The Court dismissed plaintiff’s complaint on defendant’s motion.  The First District affirmed.

Rules/reasoning

The basis for the plaintiff’s rescission claim was contractual impossibility: that the world credit crisis made it impossible for the plaintiff to obtain the necessary financing to buy the building. 

In Illinois, the impossibility of performance doctrine applies where the purposes for which a contract was made have become impossible for one side to perform.  Impossibility excuses contractual performance where performance is “objectively impossible” due to the contract subject’s destruction or by operation of law

But where a contingency that causes the impossibility could have been anticipated and guarded against, impossibility won’t excuse performance. The party asserting impossibility must show that events or circumstances making performance impossible were not reasonably foreseeable at the time of contracting and the defense won’t apply where the event creating impossibility lies within the promisor’s power to remove the obstacle to performance.  *6-7.

Here, the First District sided with the defendant and held that even if the credit crunch did make it impossible for the plaintiff to buy the building, its inability to get financing could have been anticipated and provided for in the contract.

The Court noted that an inability to secure financing is pretty much always a risk in any contract setting and that if the court allowed failed financing to excuse performance, it would completely undercut contract law.  *7.

The Court also pointed to the plaintiff’s financial largesse in rejecting the impossibility argument; the plaintiff’s $1.6 billion in assets showed that it had the power to remove any obstacles to performance selling off some of its assets and paying the $124M purchase price for the building. *8

Take-aways:

Not even a cataclysmic, world-wide financial disaster qualified for the impossibility defense.  There’s actually more to it than that but YPI definitely shows that the impossibility of performance defense (or offense) can be a tough sell and is sparingly applied in Illinois contract litigation.

The case also cautions parties to take pains to allocate risks and provide for obstacles to performance during the contract formation phase.  YPI also seems to suggest that if a party claiming impossibility has the financial resources to remove the obstacle preventing performance, an impossibility of performance argument may fail.

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.