Illinois courts have recognized both impossibility and commercial frustration as defenses to a breach of contract. Whether a court would find either defense viable in a case where a commercial borrower was required to temporarily suspend its business due to a government order depends on the unique facts and circumstances of the case, and the current COVID-19 pandemic essentially is unprecedented. However, we have summarized below some of the Illinois case law on these defenses.

A party raising an impossibility defense must show: (1) an unanticipated circumstance, (2) that was not foreseeable, (3) to which the other party did not contribute and (4) to which the party raising the defense has tried all practical alternatives. The defense “has been narrowly applied due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.”

In 2011, the Northern District of Illinois struck down a borrower’s defense that it was unable to perform under a loan agreement “due to an unforeseeable and unprecedented economic downturn and recession.” The court found that “impossibility . . . never justifies failure to make a payment, because financial distress differs from impossibility” and that “financial inability does not discharge” a borrower’s duties under a loan agreement “based on their commercial impracticability.”

A party raising a commercial frustration defense must show: (1) the frustrating event was not reasonably foreseeable; and (2) the value of the counterperformance has been totally or nearly totally destroyed by the frustrating event. Courts have found that “[t]he doctrine of commercial frustration will render a contract unenforceable if a party’s performance under the contract is rendered meaningless due to an unforeseen change in circumstances.” Courts also have found that the doctrine of commercial frustration should not be applied liberally.

We are aware of an Illinois appellate case in which a borrower claimed that a change in the government’s economic policies and a bank’s subsequent actions in light of those policies frustrated the borrower’s ability to make loan payments. However, the court was not persuaded that “the continued existence of a stable economic environment and, hence, interest rates was an implied condition necessary to the performance of the contract between the parties,” especially since the loan had a variable interest rate. Accordingly, we believe it is unlikely that a borrower would be successful in claiming that a government order temporarily suspending their business totally or nearly totally destroyed their counterperformance, rendering the loan agreement meaningless.

For resources related to our guidance, please see:

• Bank of America, N.A. v. Shelbourne Development Group, Inc., 732 F. Supp. 2d 809, 827 (N.D. Ill. 2010) (“A party raising an impossibility defense must show: (1) an unanticipated circumstance, (2) that was not foreseeable, (3) to which the other party did not contribute, and (4) to which the party raising the defense has tried all practical alternatives. . . . ‘The rationale for the defense of commercial impracticability is that the circumstance causing the breach has rendered performance so vitally different from what was anticipated that the contract cannot be reasonably thought to govern.’ This defense, ‘like the doctrine of good faith, is a gap filler; it must not be used to alter an agreed upon allocation of risk. Parties to contracts know better than a court does what allocation of risk is best for them.’”)

• YPI 180 N. LaSalle Owner, LLC v. 180 N. LaSalle II, LLC, 933 N.E.2d 860, 865 (1st Dist. 2010) (“The doctrine excuses performance where performance is rendered objectively impossible due to destruction of the subject matter of the contract or by operation of law. Leonard, 392 Ill. at 187; see also 407 East 61st Garage, Inc. v. Savoy Fifth Avenue Corp., 23 N.Y.2d 275, 281, 244 N.E.2d 37, 41, 296 N.Y.S.2d 338, 343-44 (1968) (‘impossibility of performance is limited to the destruction of the means of performance by an act of God, Vis major, or by law’) ; Seaboard Lumber Co. v. United States, 308 F.3d 1283, 1294 (Fed. Cir. 2002) (performance of contract only excused under doctrine of impossibility when it is objectively impossible). This doctrine has been narrowly applied ‘due in part to judicial recognition that the purpose of contract law is to allocate the risks that might affect performance and that performance should be excused only in extreme circumstances.’”)

• Bank of America, N.A. v. Shelbourne Development Group, Inc., 732 F. Supp. 2d 809, 821 (N.D. Ill. 2010) (“[T]he remaining affirmative defenses . . . are premised . . . on allegations that . . . Shelbourne was unable to perform under the loan documents due to an ‘unforeseeable and unprecedented economic downturn and recession.’”)

• Bank of America, N.A. v. Shelbourne Development Group, No. 09 C 4963, 2011 U.S. Dist. LEXIS 21258, at *14-15 (N.D. Ill. Mar. 3, 2011) (“Bank of America now argues that the commercial impossibility or impracticability defense is inapplicable to Defendants' monetary defaults. To clarify, the ‘“impossibility” doctrine never justifies failure to make a payment, because financial distress differs from impossibility.’ . . . Indeed, Defendants' financial inability does not discharge their duties under the Loan Agreement based on their commercial impracticability defense. See Days Inn of Am., Inc. v. Patel, 88 F.Supp.2d 928, 933 (C.D. Ill. 2000) (‘simple inability to pay does not create an impossibility or impracticality which excuses a party's performance of his contractual obligations’). Therefore, the Court grants Bank of America's motion to strike Defendants' commercial impracticability affirmative defense as to Defendants' monetary defaults.”)

• Farm Credit Bank v. Dorr, 620 N.E.2d 549, 555-56 (5th Dist. 1993) (“While the defense of commercial frustration is a viable doctrine in Illinois, it will be applied only when the defendant has satisfied two rigorous tests: (1) the frustrating event was not reasonably foreseeable; and (2) the value of the counter-performance had been totally or nearly totally destroyed by the frustrating cause.”)

• Illinois-Am. Water Co. v. City of Peoria, 774 N.E.2d 383, 390-91 (3rd Dist. 2002) (“The doctrine of commercial frustration will render a contract unenforceable if a party's performance under the contract is rendered meaningless due to an unforeseen change in circumstances. In order to apply the doctrine of commercial frustration, there must be a frustrating event not reasonably foreseeable and the value of the parties' performance must be totally or almost totally destroyed by the frustrating cause.”)

• American National Bank v. Richoz, 189 Ill. App. 3d 775, 780 (2nd Dist. 1989) (“Although the doctrine of commercial frustration is a viable defense, it should not be applied liberally.”)

• Farm Credit Bank v. Dorr, 620 N.E.2d 549, 555 (5th Dist. 1993) (“In this case defendants argue that the government's economic policies, and the Farm Credit Bank's subsequent actions in light of those policies, interfered with interest calculations so as to render defendants' performance on their loan obligations impossible. Defendants' argument is tantamount to the theory, under the doctrine of commercial frustration, that the continued existence of a stable economic environment and, hence, interest rates was an implied condition necessary to the performance of the contract between the parties. We disagree. It is uncontroverted that the foreclosed-upon loan was a variable-rate loan. Consequently, defendants knew that the interest rate was subject to periodic change. . . . Given that the loan in this case was a variable-rate loan, the parties were on notice that the interest rate could fluctuate, and we cannot insert stable interest rates as an implied condition of the loan agreement.”)

• Farm Credit Bank v. Dorr, 620 N.E.2d 549, 554-55 (5th Dist. 1993) (“As a general rule, where the parties to a contract, by their own conduct and positive undertaking, create a duty or charge upon themselves, they must abide by the contract and make the promise good, and subsequent contingencies not provided against in the contract, which render performance impossible, do not bring the contract to an end. . . . An exception to this rule is where the continued existence of a particular thing is so necessary to the performance of a contract that, by law, it is implied as a condition of the contract that the destruction of that thing shall excuse performance.”)