The Credit Crisis and Commercial Impracticability
The bankruptcy of Lehman Brothers Holdings Inc. in September of 2008 resulted in a global credit crisis. It seems clear that this credit crisis has greatly exacerbated the current global recession and has been extremely damaging to developers of commercial real estate. An unresolved issue is the extent to which problems associated with the credit crisis may excuse performance of contractual obligations on grounds of commercial impracticability.
A high profile example is the litigation involving the Trump International Hotel and Tower project in Chicago. In November, Donald Trump’s development company commenced litigation against Deutsche Bank AG and other lenders asserting the right to an extension of the maturity date of the first mortgage construction loan for the project until the abatement of the credit crisis. In this litigation Trump asserted that the credit crisis constitutes a force majeure under the terms of their agreement. On March 3, 2009, the parties announced that they have suspended this litigation, which should permit construction to be completed. It is not clear whether the court will ever rule on the merits of Donald Trump’s assertion that the maturity date of the loan must be extended because of commercial impracticability resulting from the credit crisis.
Courts normally will enforce a force majeure clause in accordance with its terms. Commercial impracticability will not excuse performance when a court concludes that a party has assumed the risk of the event by the terms of the contract. Therefore, the result in any particular situation may depend on the exact wording of the contract between the parties.
Generally, courts in modern cases tend to require only a showing of impracticability rather than a showing of strict impossibility. Courts often look to Restatement (Second) of Contracts § 261 which states:
Where, after a contract is made, a party’s performance is made impracticable without his fault by 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 expansion of the legal defense of impossibility to include commercial impracticability has also been influenced by the provisions of Section 2-615 of the Uniform Commercial Code which deals only with the sale of goods and which provides in part as follows:
Except so far as a seller may have assumed a greater obligation and subject to the preceding section on substituted performance: (a) Delay in delivery or non-delivery in whole or in part by a seller who complies with paragraphs (b) and (c) is not a breach of his duty under a contract for sale if performance as agreed has been made impracticable by the occurrence of a contingency the non-occurrence of which was a basic assumption on which the contract was made or by compliance in good faith with any applicable foreign or domestic governmental regulation or order whether or not it later proves to be invalid. [emphasis added]
In general, a claim of commercial impracticability requires the absence of fault by the party seeking to be excused and an event that could not reasonably have been foreseen. Temporary impracticability merely suspends the duty of performance. Temporary impracticability resulting from the credit crisis would raise additional difficult questions: Has the credit crisis ended? When did the credit crisis end? What events marked the end of the credit crisis?
If you have questions, please contact Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.
