Stay-at-home Order & Defenses to Contract Nonperformance.

Legal impossibility, or impossible performance, excuses a party’s performance under the contract when performance is rendered objectively^[4] impossible because the subject matter is destroyed or by operation of law.^[5] Examples excusing performance on the basis of impossibility are acts of God, such as floods and hurricanes, the death or incapacity of the person necessary for performance, or prevention of performance by governmental regulation or order.^[6] The doctrine of impossibility has been narrowly applied on the basis of judicial recognition that performance should be excused only in extreme circumstances.^[7]

Discharge of the duty to perform on the basis of impracticability is where a party’s performance is made impracticable without its fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.^[8] Under the doctrine of impracticability, a party’s performance may still be physically possible, but the duty to perform has become unfeasibility difficult or unduly burdensome for the party whose performance is due. A party may still be liable for non-performance, however, if the party implicitly or explicitly assumed the risk of the duties become impracticable.^[9] Likewise, a party’s nonperformance on the basis of impracticability may be temporary, and a party will be obligated to render performance of those parts of the contract unaffected by the event making performance impracticable.^[10]

Frustration of purpose, or commercial frustration, is also a viable defense under Illinois law.^[11] Like the doctrines of impossibility and impracticability, the doctrine of frustration is not applied liberally. Frustration of purpose occurs were a party’s principal purpose is substantially frustrated without its fault by the occurrence of an event, the non-occurrence of which was a basic assumption on which the contract was made.^[12] The leading illustration of this doctrine is a 1903 case captioned, Krell v. Henry.^[13]  In Krell v. Henry, Krell rented Henry a room for two days so that Henry could spectate the coronation of Edward VII.^[14] Unfortunately, the coronation was postponed when Edward VII came down with appendicitis.^[15] As a result, Henry refused to pay the balance of the rent.^[16] When Krell sued Henry for nonpayment, the court held in Henry’s favor, finding that Henry’s performance was excused because his purpose in renting had been frustrated.^[17] Albeit not explicitly stated in the contract, the court found Krell was implicitly aware of Henry’s purpose for renting the room and that the postponement of the coronation at the time the contract was formed was a contingency outside the knowledge, or power of influence, of either party.^[18]  The court reasoned that Krell was in a better position to bare the risk because he could always rent the room at a premium rate for the coronation’s new date.^[19] In order to prevail on this defense, the non-performing party must show that the frustrating event was not reasonably foreseeable, and the value of the counter-performance has been totally or nearly totally destroyed by the frustrating event.^[20]

The foregoing contracts defenses for nonperformance are subject to any contract language or circumstances that indicate the contrary. To this point, parties often negotiate among themselves how to allocate risk due to unforeseen circumstances in provisions commonly referred to as a force majeure clause. A force majeure clause is a contractual provision allocating the risk of loss if performance becomes impossible or impracticable.^[21] They generally apply to unanticipated circumstances or events falling outside the control of the parties, such as acts of nature (e.g., floods and hurricanes) and acts of people (e.g., riots, strikes, and wars).

The State’s Stay-at-home Order is having adverse effects on many businesses’ and individuals’ ability to conduct business and perform on their contracts. Those effects are likely to grow exponentially if the order is extended. Businesses at risk of contract nonperformance should consult with an attorney in their state to determine whether there is any recourse available to mitigate any potential exposure.