Managing Contract Disputes: Force Majeure, Impossibility, and Good Faith Defenses

Updated for 2025

When extraordinary circumstances disrupt contractual performance—whether through natural disasters, economic crises, regulatory changes, or global events—parties quickly discover whether their agreements anticipated the unforeseeable. Understanding the legal doctrines governing excuse of performance becomes critical for both preserving business relationships and protecting legal rights.

This comprehensive guide examines the key defenses to contract enforcement when unexpected events make performance difficult or impossible, with particular focus on applications relevant to real estate transactions and private lending relationships.

The Contract Dispute Landscape

Contract disputes arising from unexpected disruptions typically involve parties seeking to:

• Cancel or rescind agreements due to changed circumstances
• Modify terms to reflect new economic realities
• Delay performance pending resolution of external conditions
• Escape financial obligations they can no longer meet

Whether you’re a buyer facing financing challenges, a seller confronting market uncertainties, a lender managing portfolio risk, or a borrower experiencing cash flow disruptions, understanding available defenses and obligations proves essential.

Force Majeure: The Contractual Safety Valve

Force majeure clauses provide contractual mechanisms for excusing performance when specified extraordinary events occur. The term derives from French, literally meaning “superior force.”

What Qualifies as Force Majeure?

Historically, force majeure provisions contemplated “acts of God”—events beyond human control:

• Natural disasters (hurricanes, earthquakes, floods, wildfires)
• Wars and armed conflicts
• Strikes and labor disputes
• Government actions and regulatory changes
• Terrorism and civil unrest

Modern force majeure clauses increasingly include:

• Pandemics and public health emergencies
• Cyber attacks and technology failures
• Supply chain disruptions
• Energy crises

Essential Elements of Force Majeure Defense

To successfully invoke force majeure, the claiming party typically must demonstrate:

1. Unforeseeability: The event could not have been reasonably anticipated when the contract was executed
2. External Causation: The event was entirely beyond the party’s control
3. Impossibility or Impracticability: The event renders performance genuinely impossible or impractical, not merely more expensive or less profitable
4. Contractual Inclusion: The specific event falls within the force majeure clause’s listed circumstances

State-by-State Variations

Force majeure interpretation varies significantly across jurisdictions:

The Problem with Standard Contracts

Many form contracts—including standard real estate purchase agreements—lack force majeure clauses entirely. California Association of Realtors forms, for example, traditionally contained no such provisions (though post-2020 addenda have become available).

Without an explicit force majeure clause, parties must rely on common law doctrines of impossibility or impracticability to excuse performance.

Impossibility and Impracticability Doctrines

Even without contractual force majeure provisions, common law provides equitable defenses when unforeseen circumstances fundamentally alter the nature of contractual obligations.

Legal Impossibility

Performance is legally impossible when:

• Supervening law or regulation prohibits the contracted action
• Government orders prevent performance
• Required licenses or permits become unavailable through no fault of the performing party

Example: A government moratorium on all real estate closings would render sales contracts legally impossible to perform during the prohibition period.

Physical Impossibility

Performance is physically impossible when:

• The subject matter of the contract is destroyed through no fault of either party
• The specific person whose performance is required dies or becomes incapacitated (for personal service contracts)
• External events make performance objectively impossible for anyone, not merely difficult for this particular party

Example: A wildfire destroys the property subject to a purchase contract before closing, making delivery of the property impossible.

Commercial Impracticability

A less stringent standard than impossibility, impracticability excuses performance when:

• Unforeseen circumstances make performance extraordinarily difficult or expensive
• The burden of performance substantially exceeds what either party anticipated
• The risk of the circumstance was not allocated by the contract
• The party seeking excuse did not cause or contribute to the impracticability

Important limitation: Increased cost or economic hardship alone rarely qualifies. Courts require performance to be objectively unreasonable given the changed circumstances, not merely unprofitable or financially challenging for one party.

Frustration of Purpose

Related to impossibility, frustration of purpose applies when:

• An unforeseen event destroys the underlying purpose of the contract
• The principal purpose is substantially frustrated
• Non-occurrence of the event was a basic assumption of the contract
• The frustrated party did not assume the risk

Example: A party leases commercial space specifically to operate a restaurant. A long-term government prohibition on indoor dining might frustrate the fundamental purpose of the lease, even though technically occupying the space remains possible.

The Covenant of Good Faith and Fair Dealing

Every contract—whether explicitly stated or not—includes an implied covenant of good faith and fair dealing. Parties must:

• Act honestly and fairly toward each other
• Avoid undermining the other party’s contractual benefits
• Not use contractual provisions to escape obligations for pretextual reasons
• Communicate reasonably about performance challenges

Good Faith in Challenging Times

During periods of widespread disruption, the good faith covenant takes on heightened importance. Courts examine whether parties:

• Made genuine efforts to perform before seeking excuse
• Communicated promptly about performance challenges
• Proposed reasonable accommodations or modifications
• Used external events as legitimate defenses vs. pretextual excuses to escape unfavorable bargains

Red Flags for Bad Faith

Courts view skeptically when parties:

• Seized upon external events as convenient excuses to escape deals that became economically disadvantageous for unrelated reasons
• Made no attempt to mitigate or work around obstacles
• Failed to communicate about difficulties until performance deadlines passed
• Could have performed but chose not to, citing external circumstances as cover

Practical Application

If your business is thriving despite general market disruptions, claiming impossibility or force majeure to escape a contract will face tough scrutiny. Courts apply substance over form—if you’re genuinely able to perform but simply find the contract less attractive than when signed, claiming external excuse demonstrates bad faith.

Real Estate Purchase Contract Disputes

Real estate transactions present unique contract dispute challenges given their complexity, multiple parties, and typically substantial financial stakes.

Standard Form Contract Realities

Most residential real estate purchases use standard forms (e.g., California Association of Realtors, state bar association forms). These generally:

• Contain “time is of the essence” provisions requiring prompt performance
• Lack force majeure clauses
• Include specific contingencies (financing, inspection, appraisal)
• Provide for liquidated damages (typically 3% of purchase price)
• Require mediation before litigation

Buyer’s Perspective

Buyers facing performance challenges should:

• Why performance became impossible or impractical
• The specific external cause
• Efforts made to overcome obstacles
• Good faith attempts to work with seller on solutions

Seller’s Perspective

Sellers facing non-performing buyers should:

Evaluate Buyer’s Claimed Defenses: Does the buyer have legitimate impossibility/impracticability arguments, or are they using external circumstances as pretextual excuses to escape a deal that no longer serves their interests?

• Provided reasonable accommodations when requested
• Communicated professionally and promptly
• Gave buyer every reasonable opportunity to perform
• Acted consistently with the contract’s terms

Commercial Real Estate Distinctions

Commercial transactions involve more sophisticated parties and often custom-negotiated contracts. These typically:

• Include detailed force majeure provisions
• Provide for longer due diligence periods
• May address specific risk allocations
• Often involve more substantial deposits (5-10%+)

Commercial parties bear higher burdens demonstrating impossibility given their presumed sophistication in negotiating risk allocation.

Lender-Borrower Contract Disputes

Lending relationships present distinct contract dispute dynamics given the ongoing nature of the relationship and multiple parties involved.

Payment Deferrals and Modifications

When borrowers request payment deferrals or loan modifications, lenders should:

• Borrower’s business fundamentals
• Revenue sources and stability
• Management competence
• Market conditions for the underlying collateral

• Clearly state modified terms
• Address treatment of deferred payments (capitalized, due at maturity, etc.)
• Maintain security interests
• Preserve lender’s remedies for future defaults
• Obtain guarantor consents to avoid inadvertently releasing guarantors

Construction Loan Funding Disputes

Construction loans present unique disputes when lenders refuse to fund subsequent draws. Key considerations:

• Loan documents contain specific conditions precedent to each advance
• Material adverse changes occurred justifying termination under contract terms
• Borrower materially breached the loan agreement

Historical precedent from the 2008 financial crisis established that lenders cannot simply refuse funding because collateral values declined or their own financial circumstances changed. The loan commitment runs to the borrower’s creditworthiness as underwritten, with the property serving as collateral—not vice versa.

• Additional financing costs from replacement lenders
• Project delays and carrying costs
• Lost profits if project becomes infeasible
• Attorneys’ fees if provided by contract

Bankruptcy Considerations

Economic disruptions predictably increase bankruptcy filings. Private lenders should anticipate:

• Reducing interest rates to market rates
• Extending maturity dates
• Restructuring payment terms

Practical Guidelines for Managing Contract Disputes

1. Review Your Contracts Immediately

When circumstances threaten contract performance:

• Read the actual contract thoroughly
• Identify specific provisions addressing nonperformance, delays, and modifications
• Note notice requirements, cure periods, and procedural prerequisites
• Determine whether force majeure, impossibility, or other defenses might apply

2. Communicate Proactively

Early communication prevents many disputes from escalating:

• Notify counterparties promptly when performance challenges arise
• Explain specifically what obstacles exist and why they affect performance
• Propose reasonable solutions or accommodations
• Document all communications in writing

3. Act in Good Faith

Courts reward parties who demonstrate reasonableness:

• Make genuine efforts to perform despite challenges
• Propose reasonable modifications when performance becomes difficult
• Consider counterparty’s interests, not merely your own
• Avoid using external circumstances as pretextual excuses for deals you simply no longer want

4. Document Everything

In potential dispute situations, documentation proves critical:

• Maintain written records of all communications
• Document obstacles and challenges as they arise
• Preserve evidence of efforts made to overcome difficulties
• Keep clear records of any accommodations or modifications agreed upon

5. Seek Legal Counsel Early

Complex contract disputes benefit from early legal analysis:

• Assess whether valid defenses to performance exist
• Understand remedies and exposure under the specific contract
• Navigate notice requirements and procedural steps correctly
• Avoid inadvertently waiving rights or creating additional liabilities

6. Consider Business Relationships

Legal rights don’t exist in a vacuum:

• Litigation damages business relationships, often permanently
• Consider whether accommodation preserves valuable long-term relationships
• Evaluate whether enforcing strict contract rights serves broader business interests
• Balance principle against pragmatism

7. Know Your Realistic Alternatives

Before deciding on contract enforcement:

• Understand litigation costs and likely timelines
• Assess probability of prevailing on your claims or defenses
• Consider collectability even if you obtain judgment
• Evaluate whether negotiated resolution might serve interests better than full enforcement

Common Pitfalls to Avoid

Pitfall #1: Assuming Economic Hardship Equals Force Majeure

Increased costs, market downturns, or financial difficulties rarely qualify as force majeure or impossibility. These represent normal business risks parties assume when contracting.

Pitfall #2: Failing to Read the Contract

Many disputes could be avoided by carefully reading what the contract actually provides. Don’t assume—verify.

Pitfall #3: Using External Events as Pretextual Excuses

Courts see through attempts to use convenient external circumstances to escape unfavorable deals. If you could perform but simply don’t want to, external events won’t excuse you.

Pitfall #4: Acting Unilaterally

Attempting to modify contracts or cease performance without counterparty agreement and proper documentation creates breach claims.

Pitfall #5: Inadequate Documentation

Verbal agreements and informal understandings provide little protection in subsequent disputes. Put everything in writing.

Pitfall #6: Ignoring Procedural Requirements

Contracts often require specific notices, cure periods, or procedural steps before certain remedies become available. Failing to follow these precisely can waive important rights.

Key Takeaways for 2025

1. Force Majeure Requires Explicit Contractual Provision: Without force majeure clauses, you must rely on common law impossibility and impracticability doctrines

2. Economic Hardship Alone Is Insufficient: Performance must be genuinely impossible or objectively impractical, not merely unprofitable or difficult

3. State Law Varies Significantly: Understand your jurisdiction’s specific approach to interpreting these doctrines

4. Good Faith Matters: Courts examine whether parties acted reasonably and in good faith, not merely whether technical contract terms support their position

5. Communication Is Critical: Early, transparent communication about performance challenges often prevents disputes from escalating

6. Documentation Protects Rights: Written records of communications, obstacles, and efforts prove essential in disputes

7. Consider Relationships and Business Interests: Legal rights exist within broader business context—sometimes accommodation serves interests better than rigid enforcement

Contract disputes arising from extraordinary circumstances require careful analysis of both legal rights and practical business considerations. Understanding force majeure, impossibility, and good faith principles provides the foundation for navigating these challenges successfully.

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About Geraci LLP

Geraci LLP’s litigation and transactional teams provide comprehensive counsel on complex contract disputes, from initial assessment through resolution via negotiation, mediation, or litigation. Our attorneys help clients evaluate defenses, preserve rights, and achieve favorable outcomes in contract disputes across all business sectors.

For consultation regarding contract disputes or performance excuse defenses, contact our litigation department.

This article provides general information only and does not constitute legal advice for any specific situation. Contract law varies by jurisdiction and depends heavily on specific contractual provisions. Consult with qualified legal counsel regarding your particular circumstances.