Change of Circumstances in Interpreting Contracts

This time of economic instability and uncertainty provides good reason to review caselaw from the last economic downturn related to the contract concept of impossibility of performance. Ferguson v. Ferguson, 54 So.3d 553 (Fla. 3d DCA 2011), is instructive. The case held that absent truly extraordinary circumstances, contracts are ordinarily enforceable by their terms.

As its name suggests, Ferguson was a divorce case concerning a valuable family residence that was worth $950,000 and had a mortgage of $600,000. The parties agreed that the husband would refinance the property to remove the wife from the mortgage and acquire the property. He agreed to pay the wife $185,000. If the husband was unable to refinance the property, the parties would sell the property, and the husband would keep the proceeds, subject to the $600,000 mortgage and the $185,000 payment to the wife. Id. at 554.

Shortly after the agreement was signed in August 2008, the real estate market in Florida crashed, or as stated by the court “entered into one of its periodic downward adjustments, for which it has become famous since the time of the Great Depression.” The husband attempted to sell the home without first attempting to refinance, and the wife sued for the $185,000. Id. at 555. The trial court declared the agreed handling of the property “to be an impossibility of performance due to changes in the economy and therefore void.” Id. The trial court further ordered that the home should be sold and the net proceeds divided between the parties. Id.

The appellate court reversed and noted that:

The plain language of the agreement establishes that its object was (1) to bring about an unconditional payment of $185,000 to the former wife; (2) achieve an ownership transfer of the property to the former husband; and (3) relieve the former wife of any further financial responsibility for the property contemporaneously with the transfer. Notably, the couple, in paragraph (E) of the agreement, anticipated the possibility of one future circumstance, the failure of the former husband to refinance the property within 120 days of the execution of the agreement. In that circumstance, the parties agreed the property immediately would be placed for sale, with the net proceeds going to the former husband. It cannot be gainsaid that the couple’s mutual understanding of the value of the property influenced the negotiation.

Id. at 555. The court stated that “we find the trial court reversibly erred by voiding paragraph eighteen of the mediated marital settlement agreement for impossibility of performance due to changes in the economy.” Id. at 556. “Because of the central importance placed upon the enforceability of contracts in our culture, the defense of impossibility (and its cousins, impracticability and frustration of purpose) must therefore be applied with great caution if the contingency was foreseeable at the inception of the agreement.” Id. The court held that “[e]conomic downturns and other market shifts do not truly constitute unanticipated circumstances in a market-based economy.” Id. Further, the court held that the parties’ failure to contract for this contingency did not render the agreement ambiguous or unenforceable. Id.

The court’s analysis relied heavily upon (1) the sanctity of contract and (2) the proposition that the parties should account for foreseeable eventualities in their contracts. The parties essentially agreed to sell the wife’s interest in the marital home to the husband in exchange for $185,000 (which was a little more than half the estimated equity in the home). If the property had appreciated instead of losing value, the wife would not have received anything more than the $185,000. If the property had been under contract with a third party, that agreement would have also been enforceable. Therefore, the court had no difficulty enforcing the marital settlement agreement because fluctuations, even dramatic fluctuations, are foreseeable. ¹

It remains to be seen whether the Coronavirus will be deemed “foreseeable” for agreements predating the crisis, or if it is a truly extraordinary circumstance that would be the basis for application of one or more of the doctrines of impossibility, impracticability, frustration of purpose, or force majeure.

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¹The warning signs of problems in the property market dated back at least to 2007. If the husband wished to avoid the risk of price depreciation preventing him from refinancing the property and acquiring his wife’s share (the case implies that the price drop was so precipitous that the husband could not refinance the property and pay the wife the agreed sum), he had several options. He could have contracted to buy his wife’s share of the property, subject to him obtaining financing for the existing mortgage as well as the $185,000 to be paid to the wife. Alternatively, the husband could have sought financing and agreed to pay the wife one half (or some other portion) of the equity, based upon the appraisal value serving as the basis for the refinance, less the existing mortgage.

Michael P. Beltran is Counsel in our Florida office.