Impossible? The contractual defense of impossibility of performance
10 Jul 2019
Introduction
Is there an excuse for the non-performance of duties under a legally binding contract on the basis that ‘it simply couldn’t be done’? There might be when one considers that the essentialia of a valid contract are (or ought to be) based on the assumption that the contractual obligations undertaken are physically possible to perform. However, what happens in instances where performance is (allegedly) literally impossible?
The case of Unlocked Properties 4 (Pty) Ltd v A Commercial Properties CC[1] deals with this question, and in doing so illustrates the differences between subjective and objective impossibility when it comes to performance of contractual obligations. This element of our law of contract is especially important when it comes to offers to purchase or sale agreements of land where there are mortgage bonds registered against the property and there is a shortfall that the Seller allegedly cannot afford to pay to enable transfer. The same principles might apply to the situation where a seller claims that it is unable to pass transfer because it cannot afford to pay, or cannot obtain accurate, rates clearance figures to enable transfer.
Facts
Unlocked Properties (the Applicant, being the “Purchaser”) and A Commercial Properties CC (the Respondent, being the “Seller”) were parties to a contract for the sale of immovable property. The contract included a contractual undertaking/obligation on the part of the Seller to transfer the property into the name of the Purchaser upon the Purchaser making payment of the purchase price. However, the Seller’s ability to perform was affected by a mortgage bond registered over the property in favour of Albaraka Bank Limited (the “Bank”), securing pre-existing amounts owed by the Seller.
The Shortfall
The agreed purchase price as between the Purchaser and the Seller of said property, comprising of 29 units, 22 flats and 7 shops, was R 4500 000.00 (Four Million, Five Hundred Thousand Rand). However, at the time the application proceedings were instituted, there was a shortfall of R 420 016.07 (Four Hundred and Twenty Thousand, Sixteen Rand, and Seven Cents) between the purchase price paid by the Purchaser, in terms of the contract of sale, and the Seller’s indebtedness to the Bank. It was clear from the Seller’s answering affidavit that it did not have the financial means to provide guarantees to the Bank in order to prove that it could pay/settle the shortfall amount as well as cancel the bond and transfer same into the name of the Purchaser.
Cancellation/Repudiation
The Seller then informed the Purchaser that it cancelled the contract and that it had no option but to revise the property’s sale price to R 8 500 000.00 (Eight Point Five Million Rand). The Purchaser considered the Seller’s unilateral cancellation a repudiation (which it refused to accept) and demanded specific performance from the Seller to achieve transfer of the property into the name of the Purchaser.
Defense of Impossibility
When the Purchaser took the matter to court, to compel the Seller to transfer the property to it, the Seller raised the defense of impossibility of performance. The Seller also raised the defense that a court has a discretion to refuse a decree of specific performance on the basis that the Seller can prove that it is, in fact unable, beyond all doubt, to render the performance.
Analyzing the law, the court reiterated that the defense of impossibility will not succeed if the impossibility is self-created, or due to one’s own fault. Further, impossibility will only make the contract in question void if the impossibility is absolute. It must not be possible for anyone else in the same situation to make that performance. Where the impossibility is subjective, it arises out of one’s personal situation and does not affect the validity of the contract and the party who allegedly finds it impossible to perform subjectively will be held liable on the basis of breach of contract.
Applying the law to the facts of the case, the court found that the impossibility was self-created by the Seller, and that it was not absolute or objective in the sense that no person would have been able to comply in the circumstances. It was subjectively impossible only, and as such, it did not excuse the Seller from its contractual obligations. The court held further that in the circumstances and based on the papers before it, it was not appropriate for it to exercise its discretion to refuse to order specific performance. The Seller was thus directed to take all necessary steps to ensure that transfer of the Property passed to the Purchaser, failing which the sheriff would be authorised to proceed accordingly.
Conclusion
A party’s defense of impossibility of performance does not nullify a contract or excuse that party from performance where that impossibility is subjective – created by or unique to that party. Only where the impossibility is absolute or objective – in the sense that no other person in the shoes of the party could have performed – will it serve as a valid defense to non-compliance.
See also:
- “I will only move when you pay me my damages”
- The significance of force majeure provisions on contractual arrangements
