Hopefully, it is not the “…end of the world as we know it…” as R.E.M. sang, but we are surely in uncharted waters. Indeed, as Governor Murphy has said: “It is not time for business as usual.” On March 11, 2020, the World Health Organization declared the Coronavirus, now known as COVID-19, a pandemic that is “pushing the threat beyond the global health emergency…”. COVID-19’s disruptive effects are yet to be fully realized. One thing is certain however; the negative economic effects will continue to mount and all industries will be adversely impacted. Business owners are becoming increasingly concerned about their ability to not only perform their own contractual obligations, but enforcing the contractual obligations of others. Now is the time for business owners to evaluate their contracts and understand the applicability of a force majeure clause, or common-law alternatives if their contracts do not contain such a clause.
What is a force majeure clause?
A force majeure clause provides a means for parties to a contract to absolve contractual duties when forces beyond their control prevent performance. This type of clause is sometimes referred to as an “act of God” provision because the purpose of the clause is to allow termination of a contract as a result of some type of event arising “from inevitable necessity which human prudence could not foresee or prevent…”. New Jersey courts interprets a force majeure clause narrowly and, in some cases, will only excuse performance if the event that prevents performance is specifically enumerated in the contract. If the specific issue which prevents nonperformance is not explicitly set forth in the contract, then courts may look at the contract as a whole to determine if performance should be excused. One also needs to make sure that other provisions in the contract do not nullify a force majeure clause. Successful implementation of a force majeure clause will require a direct correlation between the occurrence and the obligation of the nonperforming party.
Is COVID-19 a force majeure event?
Historically, force majeure clauses have generally applied to wars, riots, hurricanes, floods, and natural disasters. Now, business owners will need to know if a force majeure clause will apply to this pandemic. A force majeure clause that specifically accounts for “pandemics” will be covered. On the other hand, if the force majeure clause does not specifically cover “pandemics,” a party may still be able to successfully invoke the clause because a force majeure clause typically includes “acts of government.” Therefore, an argument can be made that due to the recently mandated government shutdowns and quarantines (with more likely on the way), a party to a contract can successfully invoke a force majeure clause. If the force majeure clause has more general terms such as an event not within the parties’ control, it is likely that the COVID-19 pandemic and its devastating effects on the ability for businesses to operate, coupled with government mandated shutdowns, will allow a party to invoke the force majeure clause.
A party seeking to enforce a force majeure clause will also likely need to show that it made efforts to overcome the effects of the specific force majeure event. It will be important that the party invoking the clause be able to demonstrate that it took steps to mitigate the damage and prove that performance was truly impossible.
My contract does not have a force majeure clause, now what?
Even if a contract does not have a force majeure clause, parties to the contract can still be excused from having to perform based on certain common-law principles. Two established doctrines to excuse performance of contractual obligations are the doctrines of impossibility (or impracticability) of performance and frustration of purpose.
These doctrines can be used to relieve a party of its contractual obligations because the purpose of the contract is frustrated or destroyed due to an unanticipated supervening event. The supervening event must be one that had not been anticipated which alters the nature of the parties’ ongoing relationship. The New Jersey Appellate Division explained that these two doctrines are concerned with “[a]n extraordinary circumstance [that] may make performance [of a contract] so vitally different from what was reasonably to be expected as to alter the essential nature of that performance.”
The doctrine of impossibility or impracticability of performance excuses a party from having to perform because performance has become “literally impossible.” The doctrine of frustration of purpose is typically relied upon when the contractual obligation can still be performed but the supervening event fundamentally changed the nature of the parties’ overall bargain.
A party looking to invoke one of the common-law doctrines needs to be aware of the fact that courts may not excuse non-performance where the event preventing performance was expected or foreseeable. One can argue that given prior viral outbreaks, such as SARS, the Swine Flu and H1N1, parties could have foreseen future epidemics or pandemics.
What steps should be taken now?
In the wake of COVID-19, businesses should take proactive steps to make sure they can perform their contractual obligations. If businesses expect that COVID-19 may result in their own or the other party’s inability to perform their contractual obligations, businesses need to evaluate the scope of any force majeure clause or the common-law principles that excuse non-performance. Parties should communicate with each other to try and agree to some resolution if performance will be either temporarily delayed or permanently impossible. One must also be mindful of any requirement in the contract to provide notice of termination if it is concluded there is no other alternative. Such notice provisions would need to be strictly followed.
Lastly, moving forward, businesses should make sure that a force majeure clause is placed into future contracts so that their operations can be protected against a multitude of unforeseen circumstances. To the extent that contracts are in the process of being negotiated, the inability to perform because of continued disruption resulting from COVID-19 should be addressed.
Disputes concerning force majeure clauses are fact sensitive and will vary from case to case. If you have any questions or concerns, please contact Lawrence Weiner at email@example.com or 973.585.3154, or Boris Peyzner at firstname.lastname@example.org or 973.327.6605.