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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.