Will a Court Grant Contract Rescission Because of Global Recession?
May a party request that a court rescind a contract on the ground of impossibility of performance because of the 2008 global credit crisis? The First District Appellate Court of Illinois, in the recent decision of YPI 180 N. LaSalle Owner, LLC v. 180 N. LaSalle II, LLC, stated that in a commercial transaction for the sale of real property, the 2008 global credit crisis was not a basis upon which a party may seek a rescission of a contract based on the impossibility of performance.
The purchaser received notice that one of its lenders had pulled out of the financing arrangement because the economic conditions in Ireland had forced it to withdraw from the credit markets. After the purchaser failed to close on the purchase of the property, the seller terminated the contract and retained $6 million of earnest money as its sole remedy for the purchaser’s breach of the contract. The purchaser filed suit against the seller seeking that the court rescind the contract and demanded recovery of the $6 million in earnest money retained by the seller.
The purchaser argued that pursuant to the contract-law doctrine of “impossibility of performance,” it was excused from performing its obligations under the contract due to the 2008 global credit crisis as it was this credit crisis that prevented it from obtaining the financing contemplated when the contract was originally formed. The trial court granted the seller’s motion to dismiss striking the purchaser’s complaint with prejudice.
The court had to determine whether the contract was rescindable on the ground of impossibility of performance under the specific facts of the case. In affirming the trial court’s dismissal of the complaint, the appellate court noted that the purchaser’s argument that its performance under the contract was made impossible due to the global credit crisis was misplaced.
According to the court, the primary issue was whether it was foreseeable that a commercial owner might not provide the purchaser with the financing that was sought. The court noted that the inability to obtain commercial financing is generally considered a foreseeable risk that can be readily guarded against by including financing contingency provisions in the contract. Such contingencies were not set forth in the purchase agreement at issue. In addition, the doctrine of impossibility of performance does not excuse performance as long as it lies within the power of the promissor to remove the obstacle of performance. The court noted that the purchaser had sufficient assets to pay the contract purchase price without the financing and, therefore, the means by which to remove the obstacle to performance. The court found that under the circumstances of the case, the purchaser’s failure to obtain the financing sought was not an adequate ground to rescind the contract under the doctrine of impossibility of performance and affirmed the trial court’s dismissal of the case with prejudice and without leave to amend.
Many commercial projects have been affected by the global credit crisis. Precautions need to be taken and contingencies written into contracts and purchase agreements that permit a party that is affected by a prospective lender’s inability to provide financing to rescind the contract.
From time to time we report on new cases that have been filed that are related to the construction industry. 