The stay-at-home orders, social distancing, and other protocols arising from the COVID-19 pandemic (collectively, “COVID-19 Orders”), have impacted many parties’ abilities to comply with existing contractual responsibilities, schedules, and costs. Previously largely unknown and boilerplate “ force majeure,” “acts of God,” impossibility, impracticability, and frustration of purpose contractual doctrines are now being analyzed to determine the COVID-19 Orders’ impact on contractual obligations. Fortunately for legal practitioners, the courts in Illinois have a rich history of examining the impact of foreseeable and unforeseeable epidemics, wars, prohibition, blizzards, depressions and recessions, and change in governmental regulations that offer analogous guidance on how courts will view the deleterious effect of COVID-19 Orders on contractual obligations and the relative responsibility for any inability to perform. This article explores the case law in Illinois on force majeure, impossibility and related doctrines that are relevant to how the courts in Illinois will evaluate the COVID-19 Orders’ potential ramifications on contractual duties in general, and specifically in construction contracts and leases.
Overview of Force Majeure, Impossibility and Related Illinois Precedent Relevant to COVID-19 Contractual Issues
The long-standing general contract rule in Illinois is that a party is bound to perform a promised act unless rendered impossible “by the act of God or the public enemy.” Mere difficulty in performing and economic loss are no excuse for non-performance.
Parties often include terms in a contract excusing performance if certain unforeseen circumstances occur. Such provisions, commonly known as force majeure clauses, can relieve a party from contractual liability upon the occurrence of a stipulated event. “Force majeure” has been defined as “[a]n event or effort that can be neither anticipated nor controlled. The term includes both acts of nature (e.g. floods and hurricanes) and acts of people (e.g. riots, strikes and wars).”
The common law doctrine of impossibility of performance may also relieve a party to perform where the facts establish that an unforeseeable event has rendered one side’s performance “objectively impossible.” The doctrines of impracticability and commercial frustration, as seen below, are closely related to impossibility. Force majeure clauses in a contract supersede the common law doctrine of impossibility.
Early Illinois cases focused on the common law doctrine of impossibility to determine whether a party is excused from performance. For example, in the COVID-19 age analogous case of Phelps v. School Dist. No. 109, Wayne County, schools were closed by the State of Illinois due to an influenza epidemic. A teacher claimed pay for the time the school was closed, but the school district refused to pay the teacher because classes were canceled due to a public epidemic. The Supreme Court of Illinois in Phelps affirmed that a contagious disease was not an “act of God” that would relieve the school district from a duty to pay the teacher, where the teacher was ready and willing to perform his duties under the contract.
The Court was more sympathetic to a frustration and impossibility defense to the enforcement of a contract in Patch v. Solar Corporation. Patch involved a contract to produce washing machines during the early years of World War II. In 1942, the War Production Board issued an order prohibiting the manufacture of washing machines. The question for the Seventh Circuit was whether the order prohibiting the manufacture of washing machines canceled the contract.
The Seventh Circuit in Patch opined that there is an implied contractual condition of impossibility or frustration that can excuse a party from performance, either entirely or suspending the contract, depending on the facts. If the impossibility lasted long enough to frustrate entirely the intent of the parties, the contract may be dissolved. However, the law favors the preservation of contracts and a suspension of the contract while the war lasted was the preferable remedy.  Accordingly, the Seventh Circuit in Patch found that the government order prohibiting the manufacture of washing machines suspended, but did not nullify, the contract at issue until the government ban was lifted.
Evaluating the impact of the COVID-19 Orders on contractual duties is a fact-specific analysis that relies heavily on the language and intent of the agreements. The Illinois courts clearly do not favor voiding contracts based on force majeure, impossibility, or related doctrines. However, where unforeseen government action thwarts the ability of a party to perform its end of the bargain, such as the COVID-19 Orders, there is a cogent argument to be made that impacted agreements may be suspended, potentially voided, or costs re-negotiated as the facts may warrant.
Applicability of Force Majeure and Impossibility to Construction Contracts Due to COVID-19 Orders
Construction contracts are particularly vulnerable to adverse effects due to the COVID-19 Orders. Project impacts range from shutdown, delays attributable to social distancing and related health precautions, cost increases caused by these protocols, and labor or material shortages. Many construction contracts contain force majeure or analogous clauses, no damages for delay, and strict notice requirements. Each construction contract needs to be examined closely for such provisions.
There are few Illinois cases construing force majeure clauses in the context of construction contracts. Modern contracts, such as those published by the American Institute of Architects (AIA), do not use the term “ force majeure,” but include clauses allowing the contractor to claim extensions and recovery of damages for delay based on causes beyond the contractor’s control. In Glen Hollow Partnership v. Walmart Stores, Inc., the court considered the reasonableness of the delay in construction of a Walmart store due to a zoning dispute and ensuing litigation. The underlying agreement included a force majeure clause that allowed extension of the completion date if “performance is delayed by government regulations, civil riot, and unusually severe weather conditions.” After the zoning litigation ended, the contractor had not commenced construction for more than six (6) months later, causing Walmart to terminate the contract. The Seventh Circuit reversed the verdict in favor of the contractor and ordered a new trial on whether the delay in commencing construction was “directly and proximately related to the force majeure” event – the governmental regulations or zoning litigation.” The court ruled that construction should have commenced within a reasonable time after the impossibility caused by the zoning litigation ceased to exist.
As in Glen Hollow, the COVID-19 Orders could very well be construed as force majeure government action justifying the delay in performance of a construction contract. Care should be taken in carefully documenting the cause and extent of any such claimed delays.
There is a greater amount of authority in Illinois applying the doctrine of impossibility to a diverse array of construction contracts. For example, a contractor agreed to erect a steel lumber bridge in the case of State Improvement Co., Inc. v. State of Illinois. The contract specified the types of concrete pylons and required method of installation. The specifications, however, were impossible for the contractor to follow. Accordingly, the Court of Claims excused the contractor from performance. The court did not award lost profits to the contractor or damages to the State of Illinois since neither party was at fault due to the impossibility to perform.
A variety of other interesting cases provide a potential glimpse into how courts may interpret contractual impossibility claims caused by the COVID-19 Orders. In Fisher v. U.S. Fidelity & Guaranty Co., a contractor was relieved of performing under a contract for construction of a movie theater where the project was in violation of an ordinance. Similarly, in Moffitt v. City of Rock Island, the State of Illinois assumed control of a road rendering it impossible for the City of Rockford to comply with an agreement to complete the project within five (5) years. The court held that Rockford was relieved of its obligations under the agreement to complete the road due to the supervening impossibility of performance. In language applicable to the COVID-19 Orders, the court in Moffit stated:
The “takeover” by the State was wholly unforeseeable and not in any manner the fault of the City. Courts now grant relief to parties involved in this situation by discharging promisor of his obligation rendered impossible to perform where a supervening impossibility of performance occurs.
Pursuant to the authorities cited above, contractors therefore may be able to claim force majeure or impossibility to excuse performance, obtain schedule extensions, or cost increases in applicable circumstances arising from the COVID-19 Orders. The COVID-19 Orders were unforeseeable and not the fault of any party. The stay-at-home and social distancing requirements are unprecedented in modern times and Illinois courts have granted contractual relief in less egregious circumstances in the past.
Doctrines of Impossibility and Impracticability as Applied to Leases In the COVID-19 Context
The COVID-19 Orders have had a dramatic adverse impact on commercial lease agreements. Businesses leasing commercial space have closed because they are not essential business (e.g. restaurants, bars) or because of a lack of foot traffic brought in by other tenants. Even if a lease does not explicitly specify the reasons why a tenant could not render performance under a lease (viz. paying rent), the common law doctrines of impossibility and commercial frustration may apply.
Early Illinois Supreme Court cases were quite strict on this principle. In Bunn v. Prather, an attorney was to be paid funds arising out of the client’s sale of property after the attorney obtained a court order. The client died, but his property was owned in joint tenancy and so it passed to his daughter. The attorney wanted to collect his fee claiming that his performance was excused as a result of the client’s death. The Court disagreed, stating that when the law casts a duty, it may be excused by an Act of God; if the contract imposes the duty, the promisor is held to, since he could have provided against the contingency. Here, the contract could have been drafted so that the attorney was paid his money in the event of the client’s death, although not foreseen or within the control of the attorney.
In Deibler v. Bernard Bros., the principle was put to test in a lease agreement. The tenant’s business was an automobile dealership. Certain governmental restrictions prevented the tenant, however, from thereafter operating as a dealership and the tenant defaulted under the terms of the lease. The tenant claimed that performance was rendered impossible, but the Illinois Supreme Court disagreed. The Court first noted that the lease did not specify the purpose for which the premises could be used. The tenant’s only argument was that business was made more difficult by governmental restrictions on the manufacture and sale of automobiles. The Court also stated that no provision was inserted in the lease excusing the lessee from the performance thereof because of any condition which might thereafter arise, affecting the volume of, or the profits from, its business, or its financial convenience or ability to pay the rent. The Court went on to state that as the law is concerned, if the contract depends on the continued existence of some object or thing, then the non-existence of that object or thing will render performance impossible, which shall excuse performance. In what could be deemed prophetic language in the age of COVID-19, the Court reasoned:
It is common knowledge that retail business, generally, and of every kind, has been made more difficult and, no doubt, on the whole, less profitable, by innumerable restrictions and governmental regulation. If all such merchants and other, for that reasons, are to be relieved of the obligations of their contracts, then every butcher, grocer, merchant and other dealer, could abandon the lease with impunity.
Deibler is interesting because what the lease was missing was a permitted use for the premises; had that use been included and the facts remained the same, then the Court’s reasoning about the object or thing being destroyed could have come into play and the result may have been different.
The Supreme Court in Leonard v. Autocar Sales & Service Co. extended the impossibility doctrine to encompass a frustration of purpose under a lease. There, the parties had a written lease for a term. The Federal government, through condemnation proceedings, was granted temporary use and possession of the premises for World War II war efforts.
The tenant refused to pay rent as a result. One of the issues before the Supreme Court was whether the doctrine of frustration of purpose or commercial frustration was applicable. Citing prior precedent, the Court then articulated the “doctrine of frustration:” if the parties must have known that some condition or thing was required in order to perform, the parties are deemed to have made their bargain on the continued existence of that thing, and thus the contract must be construed as being subject to an implied condition that the parties shall be excused in case performance becomes impossible from such condition or state of things ceasing to exist. The Court noted that the history of this rule came after World War I when contracts for the sale of certain materials or for shipments on specific vessels or to specific ports was made impossible by war restrictions, embargoes, or seizure of vessels.
Applying this rule, the Supreme Court in Leonard found that the tenant’s leasehold was not destroyed by the Government’s use and its use did not extend during the entire term of the tenant’s lease. The Court also noted the tenant would be compensated for that portion of the leasehold appropriated by the Government.
An example of where the tenant prevailed on impossibility is Levy v. Johnston & Hunt, but the facts were a bit extreme. The tenant leased premises as a saloon and importantly, the lease provided that the premises could not be used for any other purposes. Congress passed a law prohibiting the sale of liquor and the Eighteenth Amendment soon followed. So the tenant’s operations obviously faltered. In upholding judgment for the tenant, the appellate court held that impossibility of performance due to intervening domestic legislation is a good defense for failing to perform one’s contractual obligations.
The general rule is that performance is excused where it becomes impossible owing to a change in domestic law after the making of the contract, provided that the promisor has not expressly assumed the risk of such change. Thus, since there was no indication that the tenant expressly assumed the risk of a change in the law and the premises could not be used for any other purpose except a saloon, the tenant prevailed under this defense.
In Smith v. Roberts, the appellate court set forth a two-part test for commercial frustration. It first noted that the commercial frustration doctrine was not to be applied liberally, and then set forth both elements, which it noted were rigorous: (1) the frustrating event was not reasonably foreseeable; and (2) the value of counter-performance by the lessee had been totally or near totally destroyed by the frustrating cause.
The COVID-19 Orders have resulted in the closing of non-essential businesses, including restaurants, retail shopping centers and stores, movie theaters, entertainment and sporting venues, and many more. Many of these establishments lease their premises.
A possible impediment to the application of the impossibility/frustration doctrines is the covenant to pay rent clause in a lease, which generally provides that the payment of rent is independent of any other obligation under the lease. Thus, if the lease requires the tenant to remain open during certain business hours during the week, but the tenant cannot because of governmental regulations, the contractual duty to pay rent stands on its own.
Tenants may be able to argue that the COVID-19 Orders are intervening domestic legislation that was not contemplated by the parties when a lease was executed. This would, of course, assume that the tenant did not assume this risk in a commercial lease. Commercial leases today are much different than early 20th century leases and no doubt, because the parties are much more sophisticated and experienced in the perils of leasing, are able to account for many more contingencies. Assuming a change in domestic legislation was not assumed by a tenant, one issue is whether the lease has a “permitted use” clause. Landlords do not want competing businesses in shopping centers, for instance, so such clauses are common. In the absence of such a clause (or with the landlord’s permission, and assuming it does not interfere with other tenants’ leases in a shopping center context), a business may be able to change its operations to one that is “essential” (e.g. distillery modifying operations to produce hand sanitizer; hobby store making face masks). Juxtaposing this argument is that the COVID-19 Orders are not expected to be permanent legislation; at some point it will cease. In that event, the temporary cessation of non-essential business operations will not have been totally or near totally destroyed. The circumstances could, of course, be different if the lease is set to terminate during the period of time that the COVID-19 Orders are likely to be in place. In that case, the tenant’s continued performance under the lease may be totally vanquished.
The COVID-19 Orders are likely to afford contracting parties some modicum of relief pursuant to force majeure, impossibility, impracticability, and commercial frustration in appropriate circumstances. Parties must be diligent in invoking these doctrines, placing the other side on notice, documenting the reasons for delay, mitigating any delays or damages, and diligently performing when any contractual impediments are resolved. Contractual language and intent must be scrutinized. Courts in Illinois will construe these defenses narrowly and endeavor to enforce contracts to the fullest possible extent, even where these doctrines may be found applicable.
In contracts executed in the post-COVID-19 Orders world, parties should consider adding contractual language to protect themselves from future uncertainties caused by the pandemic or its resurgence. The COVID-19 Orders are no longer unforeseen or unknown conditions and arguably parties have been on notice of COVID-19 since as early as December 2019. Common knowledge of adverse conditions will defeat a claim that a situation was “unforeseeable” and will require parties to make appropriate provisions in their agreements for these potentially-anticipated events.
Illinois has survived past pandemics, wars, natural disasters, and unforeseen government action. The law of contracts in Illinois has evolved to protect parties from these unforeseen calamities while preserving the integrity of bargained-for agreements.
First published in the DCBA Brief, the Journal of the DuPage County Bar Association