Focus On Contract Law

Sharp  Thinking

No. 207   Perspectives on Developments in the Law from Sharp-Hundley, P.C.   April 2022

COVID Case Highlights Impossibility, Related Issues

By John T. Hundley, Sharp Thinking Editor

Hundley

A restaurant operator which attempted to have its rent obligations set aside under the doctrines of  impossibility, impracticability and commercial frustration failed to carry its burden  on summary judgment, the Appellate Court in Chicago has ruled.

Acting in 55 Jackson Acquisition, LLC v. Roti Restaurants, LLC, 2022 IL App (1st) 210138, the court said the record disclosed a genuine issue of material fact as to whether the tenant’s operation of its restaurant during the height of the COVID restrictions was “impossible, impracticable, or frustrated,” and that neither side was entitled to summary judgment.

Though failing to dispositively resolve the dispute before the court, 55 Jackson provides a valuable primer on the legal principles applicable when these three doctrines are invoked.

Impossibility:  “The doctrine of legal impossibility excuses performance of a contract only if performance is rendered objectively impossible because the subject matter of the contract is destroyed or by operation of law,” the panel stated.  “The doctrine applies only if the parties did not and could not anticipate the circumstances creating the impossibility, the party claiming impossibility did not contribute to the circumstances, and that party demonstrates that it has tried all available practical alternatives to allow performance. *** Impossibility excusing performance can arise from an intervening governmental regulation or order.”  It said, however, that the impossibility doctrine is “narrowly applied”.

Impracticability:  “Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged, unless the language or the circumstances indicate the contrary,” the court continued.  “A party is expected to make reasonable efforts to surmount obstacles to performance, and performance is excused only if it is impracticable despite reasonable efforts. *** A party seeking to excuse his performance must show that he can operate only at a loss and that the loss will be so severe and unreasonable that failure to excuse performance would result in grave injustice.”

Commercial Frustration:  “The doctrine of frustration rests on the proposition that if, from the nature of the contract and the surrounding circumstances, the parties when entering into the contract must have known that it could not be performed unless some particular condition or circumstances would continue to exist, the parties must be deemed to have entered into the contract on the basis that the condition or circumstance would continue to exist, so that the contract is construed to be subject to an implied condition that the parties shall be excused if performance becomes impossible from such condition or circumstance ceasing to exist,” the panel said.  “A party claiming frustration must show that (1) the frustrating event was not reasonably foreseeable and (2) the value of performance by the nonclaiming party has been totally or nearly totally destroyed by the frustrating event.”

The Context:  In 55 Jackson, the operator claimed that it should be relieved of its rent obligations because public health orders – requiring such things as social distancing and occupancy limitations — meant that it could not operate profitably.  The court found undisputed that the parties did not and could not anticipate the pandemic when the lease was negotiated, and that the allegedly frustrating event (COVID-19 and the orders) “were not reasonably foreseeable when the lease was formed.”  It also accepted the tenant’s representation that it had “tried all available practical alternatives to perform”.

The Ruling:  However, the court ruled that the “performance must be objectively impossible” and the record contained evidence that other restaurants in the area had operated. Noting the difference between objective impossibility (“the thing cannot be done”) and subjective impossibility (“I cannot do it”), the court said neither side had carried its burden and reversed summary judgment that had been entered for the restauranteur.

Another Case Voids Quantum Meruit When Contract Is Illegal

In Sharp Thinking No. 204 (January 2022), we discussed two recent cases holding that when a contract was illegal – or at least against public policy – the equitable remedy of quantum meruit was unavailable.  Add to that list Power Dry of Chicago, Inc. v. Bean, 2022 IL App (2d) 210043.

In Power Dry, a water and fire restoration service entered into an agreement with a homeowner whereby it agreed to perform restoration work and look to the insurer for payment.  The court found that this arrangement included the provision of adjusting services that the restoration service was not licensed to perform.  The court found the contract unlawful under the Public Adjusters Law (215 ILCS 5/1501 et seq.) and the adjusters and firms provisions of the Illinois Insurance Code (215 ILCS 5/512.51 to 512.64).  It held that plaintiff’s contract with the homeowner, and a resulting assignment of rights, “to be void, invalid, and unenforceable.”

The court then dealt with the quantum meruit claim.  Quoting 215 ILCS 5/1605, the court said the plaintiff’s “engagement as an unlicensed public adjuster is ‘inimical to the public welfare and *** a public nuisance.’”   “The invalidity of a contract precludes obtaining relief on a quantum meruit theory when the invalidity was due to a violation of public policy.”