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.

The ‘Justifiable Reliance’ Element Of A Fraud Claim (Illinois Law)

In Siegel Development, LLC v. Peak Construction, LLC, 2013 IL App (1st) 11973, the First District affirmed summary judgment in favor of a building seller and contractor in the building buyers’ fraud suit.

Facts: The building buyers (plaintiffs) and defendants entered into a contract for the purchase of a four-unit apartment building that plaintiffs planned to convert to condominiums.  Plaintiffs forecasted spending about $700,000 to buy the building and then another $180K in renovation costs.  The renovation figure was based on a spreadsheet provided by the defendant contractor which outlined the projected costs.  The contractor also informed the plaintiffs that it could perform all renovation work under a limited repair-and-replacement permit from the City.

Before closing, an architect repeatedly told the plaintiffs that the building needed more extensive repairs than were estimated by the contractor and that plaintiffs would need a “full permit” (as opposed to repair-and-replacement one) to complete the repairs.  Plaintiffs ignored the architect’s suggestion and  proceeded to closing without securing a full permit and also opted against a pre-closing property inspection.

After plaintiffs bought the building, the contractor informed them that it couldn’t proceed with the spreadsheet repairs and  couldn’t perform the work under a repair and replacement permit.  Plaintiffs also discovered numerous structural defects in the building which required repair costs far exceeding the contractor’s spreadsheet estimates.  Plaintiff sued the seller and contractor (and its agents) for fraud, rescission and breach of contract.

Trial court and appeals court holdings: The trial court entered summary judgment for the defendants.

Reasoning:

Plaintiffs failed to raise a genuine issue of fact on whether defendants made an actionable misrepresentation to plaintiffs concerning the building and failed to show justifiable reliance on any of defendants’ building representations.

Illinois law requires a fraud plaintiff to establish (1) a misrepresentation or false statement of material fact; (2) by one who knows or believes the statement to be false; (3) made with the intent to induce action by another in reliance on the statement, (4) action by the other in reliance on the truthfulness of the statement; and (5) injury resulting from the reliance.  ¶ 111

Plaintiffs’ misrepresentation claim was premised on the contractor’s spreadsheet document that estimated building repairs at about $180K.  The Court found the document too indefinite to bind the defendants since there was no meeting of the minds on the project specifics and scope of work. 

The Court also affirmed the trial court’s finding of no justifiable reliance as a matter of law.  Fraud reliance must be reasonable.  To determine whether reliance is reasonable, the Court considers all facts known to the plaintiff and all facts which the plaintiff could have learned through the exercise of ordinary prudence. A fraud plaintiff cannot enter a transaction “with his eyes closed” and later claim he was deceived.  But where a representation concerns a fact that is uniquely within the speaker’s knowledge, the recipient can rely upon it without investigation.  ¶ 114

In finding no justified reliance as a matter of law, the First District cited record evidence that plaintiffs decided to purchase the property without a signed repair contract or a pre-closing inspection.  ¶ 114.

The Court also found that the sales contract’s written warranty prevented the plaintiff from claiming it relied on the defendants’ oral statements about the building’s structueral integrity.  Note: the opinion references that plaintiff’s breach of warranty claim against the seller remains pending and was not subject of the appeal.

Take-aways: Peak Construction illustrates how difficult it is for a plaintiff to prove fraud; especially where the plaintiff is a sophisticated business person or entity.  The case also shows that proving justifiable reliance is particularly hard where the plaintiff and defendant are on an equal bargaining footing and the plaintiff has an ample opportunity to investigate the truth of a supposedly false statement. 

 

 

Implied-In-Fact Contract Claims and Motions to Reconsider – Illinois Law

In 1801 W. Irving, LLC v. Splitt Architects, Ltd., 2013 IL App (1st) 121357-U (September 12, 2013) a plaintiff developer sued an architect for breach of an oral contract and for implied indemnity in connection with the construction of a condominium building. 

The trial court struck all counts of the developer’s amended complaint and the developer appealed.

Held: Affirmed in part; reversed in part. 

Reasoning:

Breach of Oral Contract Claim

The court found the claimed oral contract was too indefinite to be enforced.  

Illinois requires that a contract’s material terms be sufficiently definite and certain so that the court can determine what the parties agreed to. ¶¶ 30-31.  

While certain nonessential terms can be missing, the parties’ failure to agree upon an essential term signals that mutual assent is lacking.

The court found several key terms were missing from oral contract including basic compensation terms.  For support, the court cited the developer’s deposition admission that the contract terms were in constant flux. ¶ 31.

Motion to Reconsider

The Court sustained the trial court’s denial of the developer’s motion to reconsider summary judgment for the architect.  A motion to reconsider’s purpose is to bring to the court’s attention (1) newly discovered evidence, (2) changes in the law, or (3) errors in the court’s prior application of law.  ¶ 33;

“Newly discovered evidence” means evidence that was not in existence at the hearing which generated the order being attacked.

Since the developer supported its motion to reconsider with its agent’s affidavit – an affidavit that wasn’t filed with its summary judgment responsethe developer  didn’t meet the newly discovered evidence test and the Court correctly refused to consider the affidavit.  ¶¶ 28, 33-34.

Implied-in-fact contract

The Court did find there was an implied-in-fact contract between the developer and architect.

An implied-in-fact contract, unlike an express contract, results from the parties’ acts and conduct. 

A contract implied-in-fact is one where a contractual obligation is imposed by the court due to some “expression or promise that can be inferred from the facts and circumstances.”   ¶ 40

The Court found the developer adequately pled an implied-in-fact contract.  The allegations that the architect and developer worked together on the project for several years without incident reflected a tacit services-for-compensation arrangement. ¶ 22.

Take-aways: A valid breach of contract claim requires that material terms be sufficiently definite and that there is a meeting of the minds on them;

A motion to reconsider based on newly discovered evidence means that the evidence didn’t exist at the time the challenged order entered;

An implied-in fact contract can present a fallback theory to breach of an express contract (if no formal contract exists) where the parties’ conduct indicates a mutual relationship with reciprocal performance and compensation.