Does a natural disaster affect parties’ rights under a contract?

QUESTION: I represent a seller who is under contract using the Offer to Purchase and Contract (Form 2-T). The property is located in an area that has suffered severe flooding in the wake of Hurricane Florence. Fortunately, the property escaped any damage. The Settlement Date was early in the week before the Hurricane made landfall, but the lender has delayed funding the loan until satisfactory evidence has been provided showing that the property has not been materially damaged by the Hurricane and its aftermath, and the insurance company has also delayed in committing to issue a homeowners policy to the buyer.  My seller has asked me if he will be able to terminate the contract and keep the earnest money deposit if the loan doesn’t get funded before the 14-day delay period has passed and the buyer can’t close. What do you think?

ANSWER: Although under ordinary circumstances the answer to your question would likely be a straightforward “yes,” your client needs to understand that under extraordinary, unexpected circumstances like catastrophic flooding caused by a hurricane, the terms of the contract may or may not be rigidly enforced.

There are doctrines in the law known as the doctrine of impossibility and the doctrine of frustration of purpose. Without getting into detail about the elements of those two related doctrines, the basic idea is that if, after a contract is made, an unexpected event takes place that makes a party’s performance under the contract impossible or substantially frustrates the principal purpose of the contract through no fault of their own, the performance of the affected party may be excused or possibly suspended temporarily. Whether and how either of the doctrines may apply in a particular situation will depend entirely on an examination of the particular circumstances and will, in any event call for the exercise of considerable legal judgment. Hopefully, most buyers and sellers will be flexible and willing to enter into agreements to extend dates for performance or otherwise accommodate each other where strict compliance with a contract has become difficult or impossible as a result of the Hurricane. Parties who have questions about their rights should be directed to a North Carolina attorney for advice.

It should be noted that if your client’s property had been destroyed or materially damaged by the Hurricane, paragraph 12 of the contract addresses the parties’ respective rights in detail. In such a situation, the doctrines of impossibility and frustration of purpose likely would not apply since the parties have expressly agreed how things will be handled in the event of a casualty loss. (The “Risk of Loss” paragraph was the subject of last week’s Q&A, dated September 13, 2018.)

Release Date: 09/20/2018

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Filed Under: Contract Law,