Tag: commercial frustration

Condo Buyer’s Illness Not Enough to Make Closing ‘Impossible’ – IL First District

An Illinois appeals court recently followed case precedent and narrowly construed the impossibility of performance and commercial frustration defenses in a failed real estate deal.

The parties in Ury v. DiBari, 2016 IL App (1st) 150277-U contracted for the sale and purchase of a (Chicago) Gold Coast condominium.  The contract called for a $55K earnest money payment and provided that the seller’s sole remedy in the event of buyer breach was retention of the buyer’s earnest money.

The seller sued when the buyer failed to close.  The buyer filed defenses saying it was impossible and commercially impractical for him to consummate the purchase due to a sudden serious illness he suffered right before the scheduled closing.  The Court rejected the defenses and entered summary judgment for the seller.  In doing so, the Court provides guidance on the nature and scope of the impossibility of performance and commercial frustration doctrines.

In the context of contract enforcement, parties generally must adhere to the negotiated contract terms.  Subsequent events – especially ones that are foreseeable – not provided for do not invalidate a contract.  The legal impossibility doctrine operates as an exception to the rule that holds parties to their contract obligations.

Legal impossibility applies where the continued existence of a particular person or thing is so necessary to the performance of the contract, it is viewed as an implied condition of the contract.  Death (of the person) or destruction (of the thing) excuses the other party’s performance.

The impossibility defense is applied sparingly and requires that a party’s performance be objectively impossible; not a subjective inconvenience or hardship.  Objective impossibility equates to “this can’t be done” while subjective impossibility is personal (“I cannot do this”) to the promisor.  A successful impossibility defense also requires the party to show it ” tried all practical alternatives available to permit performance.” (¶¶ 21-24, 29)

The defendant’s illness failed the law’s stringent test for objective impossibility.  His sickness was unique to him and therefore made closing only subjectively impossible.  The court pointed out that the condominium property was not destroyed and was still capable of being sold.

Another factor the court considered in rejecting the impossibility defense was that the defendant never tried to extend the closing date or sought accommodation for his illness.

The Court also discarded the defendant’s commercial frustration defense.  A party asserting commercial frustration must show that its performance under a contract is rendered meaningless due to an unforeseen change in circumstances.  Specifically, the commercially frustrated party has to demonstrate (1) the frustrating event was not reasonably foreseeable, and (2) the value of the party’s performance is totally destroyed by the frustrating cause.

Like with the failed impossibility defense, the claimed frustrating event – the buyer’s sickness – was foreseeable and did not destroy the subject matter of the contract.  Since the defendant’s weakened condition did not make the property worthless, there was no unforeseen frustrating event to give color to the buyer’s defense.

Afterwords:

1/ Impossibility of performance and commercial frustration are valid defenses but only in limited circumstances;

2/ Objective impossibility (“this can’t be done”) can relieve a party from contractual performance while subjective impossibility (“I can’t do this”) will not;

3/ Commercial frustration generally requires the contract’s subject matter be destroyed or rendered financially valueless to excuse a party from performance.

 

Car Seller’s Impossibility and Commercial Frustration Defenses Fail In Missing Mercedes Case – IL ND

SFcitizen (photo credit: www.sfcitizen.com (visited 7.6.15))

Sunshine Imp & Exp Corp. v. Luxury Car Concierge, Inc., 2015 WL 2193808 (N.D.Ill. 2015) serves as a recent example of how difficult it is for a breach of contract defendant to successfully argue the impossibility or commercial frustration defense.

There, a case involving multiple layers of interconnected luxury car sellers, the plaintiff car seller sued another seller for breach of contract when the defendant’s failed to deliver a $100k Mercedes to the plaintiff.

The defendant blamed one of its vendors’ for failing to produce the car.  That vendor, in turn, cited the embezzlement of one of its sellers as the cause of the breach.

The defendant argued that since it couldn’t control the various parties involved in acquiring the car, it was immunized from liability under the impossibility and commercial frustration defenses.

The court rejected the defenses and entered judgment for the plaintiff for the full amount paid for the no-show Mercedes.

The defendant first made a procedural challenge to plaintiff’s suit.  It argued that since the plaintiff never formally responded to defendant’s affirmative defenses, the plaintiff waived its challenge to them.  The court quickly disposed of this argument.  While under Illinois law, the failure to object to an affirmative defense can result in the admission of the defense and a waiver of a right to contest it, this isn’t the case in Federal cases.

This is because Federal procedural rules govern Federal cases and under FRCP 8(b), if a responsive pleading isn’t required, an allegation in a defense is considered denied or avoided.  Moreover, FRCP 7(a) specifies the types of pleadings that are allowed and a reply to an affirmative defense isn’t one of them.  As a result, affirmative defenses raised in an answer are automatically deemed denied in the Federal scheme since no reply to affirmative defenses are permitted (unless ordered by the court).

The defendant’s impossibility of performance and commercial frustration defenses also failed substantively.

The impossibility doctrine applies where there is  an unanticipated circumstance that makes performance “vitally different” from what was or should have been within the reasonable contemplation of the parties.  Impossibility applies in very limited situations – parties to a contract normally must adhere to the agreement terms and subsequent contingencies that aren’t spelled out in a contract won’t invalidate the contract.

What’s more, the fact that a promisor can’t control the acts of a third party won’t trigger the impossibility defense unless the contract explicitly says so.  What’s more, a contracting promisor isn’t absolved of his obligations due to a third party’s failure to perform.

The court found the defendant’s impossibility defense lacking since it was (or should have been) foreseeable that the defendant’s supplier would have failed to deliver the car for any number of reasons.

(**3-4).

The defendant’s related defense of “commercial frustration” also fell short.  This defense applies in two circumstances: (1) where a frustrating event isn’t foreseeable and (2) that event totally or almost totally destroys the value of the party’s performance.  An example of this is where the destruction of a building terminates the lease.

Like impossibility, commercial frustration applies sparingly; it is only where a party’s performance is rendered “meaningless” due to the unforeseen circumstance that the contract terminates.  The defense becomes operative where a contract assumes the continued existence of a certain state of things and that state of things ceases to exist.

A successful commercial frustration defense voids the contract and requires any monies paid to be returned to the paying party.

The court discarded the defendant’s commercial frustration defense on the basis that the defendant could have foreseen that its supplier would have failed to tender the Mercedes.  Since the defendant failed to negotiate this possibility into the contract, the defense failed.  (**5-6).

Take-aways:

The procedural lesson is that a formal response to an affirmative defense isn’t required in Federal court unless required by the court.

The case’s chief legal point is that in contracts where a party’s performance is dependent on that of a third party/parties, the party should spell this out in the contract.  Failing that, the contract will likely be enforced as written even though the breach is caused by someone’s else’s failure to perform.

Commercial Frustration and Prior Material Breach – Mizzou Appeals Court Weighs In

Clean the Uniform Co. St. Louis v. Magic Touch Cleaning, Inc., 300 S.W.3d 602 (Mo. 2009), a case from a jurisdiction I don’t practice in and that involves an unsexy fact pattern and monetary amount (less than $20K), still has some across-the-board relevance for its examination of liquidated damages clauses and the commercial frustration contract defense – two staples of commercial disputes.

The plaintiff and defendant entered into a three-year contract (the “Services Contract”) for plaintiff to rent cleaning uniforms and supplies to the defendant.  The contract called for the defendant to make at least partial payments on a weekly basis.  The contract contained a liquidated damages provision that said if the defendant prematurely terminated the Services Contract, the plaintiff could recover 50% of the average weekly rental charges for the six month period preceding the breach times the number of weeks remaining in the contract term.

The Services Contract also provided that it would be suspended for events that occurred beyond the parties’ control (a “force majeure” clause).

Defendant defaulted when its own one-year contract (the “Hospital Contract”) with a large VA hospital expired and wasn’t renewed.  Without the large VA hospital account, defendant couldn’t pay under the Services Contract.

Plaintiff sued to recover past-due amounts and liquidated damages under the Service Contract’s early termination provision.  The defendant argued that the VA hospital’s refusal to renew the Hospital Contract was an event beyond defendant’s control and excused its contract obligations to the plaintiff.

The trial court entered judgment for the plaintiff and the defendant appealed.

Held: Affirmed.

Q: Why?

The court found that the Hospital Contract’s termination was an event beyond defendant’s control.  The law is that if a party to a contract wants its performance to be excused if a certain event happens, and that event is reasonably foreseeable to happen after a contract is signed, the party should expressly provide for that contingency in the contract.

The commercial frustration doctrine posits that “if the happening of an event not foreseen by the parties and not caused by or under the control of either party has destroyed or nearly destroyed either the value of the performance or the object or purpose of the contract, then the parties are excused from further performance.”

While performance is technically still possible in a commercial frustration case, the defense will apply if the expected value of performance by a party has been destroyed by an intervening and unexpected event.

The court held that the defendants should have appreciated that the Hospital Contract could expire during the term of the Services Contract and not be renewed.  The defendant could have negotiated to make the Services Contract dependent on the continuing viability of the Hospital Contract but didn’t do so.  It wrote: “non-renewal of the [Hospital Contract] was a reasonably foreseeable risk at the time of contracting that did not excuse Customer’s performance under the [Services Contract].”

For the same reason, the defendant’s argument that it’s default was caused by an event beyond its control failed.  The Service Contract’s force majeure provision listed “strikes” and “lockouts” as specific events beyond the parties’ control.  But a third party’s refusal to renew an ancillary agreement (here, the Hospital Contract) wasn’t similar enough to a strike or lockout to absolve defendant’s payment obligations under the Service Contract.

Afterwords: To prevail on a commercial frustration argument, a defendant has a heavy burden.  Parties should take pains to spell out events that could happen during the term of a contract that makes it impossible for one party to perform its obligations.  A failure to clearly account for contingencies can result in a court finding that you assumed the risk of an intervening event making contractual performance impossible