As we prepare to emerge from the current shutdown one of the issues many will face pertains to obligations accrued during the shutdown. Assume your business was ordered closed by the Governor’s executive order. Must you nevertheless pay rent for the period you were unable to access your property? While it has been 100 years since the influenza epidemic, decisions addressing issues that arose as a result can help guide us today.
For example, in Gregg School Twnshp. v. Hinshaw, 132 N.E. 856 (Ind. App. 1921), a teacher had a contract with the township for a fixed period. However, due to the influenza epidemic, the school was closed by the local health officials. The teacher sued the township to recover her pay for the period the schools were closed.
In evaluating the parties’ rights, the court focused on whether the health authorities had the legal authority to close the schools. The court noted that the health officials indeed had the power to close the schools, a matter which was entirely beyond the authority of the township trustee. In ruling that the teacher was not entitled to be paid for the time the schools were closed by the health officials, the court stated:
The law delegating this authority to the board of health was in force at the time the contract involved was entered into, and it must be deemed to have been made with reference to the law. The law of the land is a part of every contract. It is the rule that when the performance of a contract becomes impossible, nonperformance is excused, and no damages can be recovered. After the contract was entered into, and when the exigency arose, the health board, in the exercise of the police power delegated to it, closed the school, and the contract, for the time that the order was in force, was impossible of performance, and hence unenforceable, and there could be no recovery for such time.
The rule for impossibility in Indiana is a strict one:
To invoke impossibility, one must demonstrate that performance is “not merely difficult or relatively impossible, but absolutely impossible, owing to the act of God, the act of the law, or the loss or destruction of the subject-matter of the contract.”
Ross Clinic, Inc. v. Tabion, 419 N.E.2d 219, 223 (Ind. Ct. App. 1981) (quoting Krause v. Bd. of Trustees of Sch. Town of Crothersville, 162 Ind. 278, 283-284, 70 N.E. 264, 265 (1904)). While there have been few cases in the past 100 years addressing the issue, the court’s decision in Kruse & Miklosko, Inc. v. Beedy, 353 N.E.2d 514 (Ind. App. 1976) provides an interesting illustration. In that case, a buyer had agreed to purchase the capital stock of a company that owned a fishing lodge. Prior to the closing, the fishing lodge burned. The buyer sought to avoid the contract, claiming impossibility of performance. The court rejected the argument, noting that the purchase was the stock, and not the lodge, and hence performance was not impossible. (The buyer may have fared better had the purchase been of the building itself).
In a number of cases, parties have attempted to avoid liability under a contract based on a claim of “frustration of purpose.” Although the doctrine of frustration of purpose is similar to the doctrine of impossibility of performance, frustration of purpose does not require a showing as severe as impossibility, but something closer to extreme impracticability of performance. Unfortunately, Indiana does not recognize the doctrine of frustration of purpose.
Governor Holcomb’s Executive Order 20-08 provides the premise for a claim of impossibility. As economic activity resumes there are sure to be disputes over liabilities accrued during the period it is in effect. If you have questions about your responsibility for such obligations, contact an attorney at Carson LLP to evaluate your situation.