What Business Owners in New Jersey and New York Need to Know About COVID-19 Disruptions to Contractual Promises

COVID-19 has substantially disrupted business as usual. The governments of most States have declared a state of emergency and have placed a number of restrictions on non-essential business and the free movement of people. Manufacturers and service providers are struggling to perform as required by their contractual agreements under these recent governmental restrictions enacted to prevent the spread of COVID-19. If COVID-19 has interfered with regular business operations, proprietors need to consider the terms of their contracts and fundamental common law principles to guide their decision-making. This article discusses force majeure clauses and the doctrines of impossibility and frustration that may apply in New Jersey and New York.

New Jersey

For contracts governed by New Jersey law, business owners need to look to force majeure clauses in the contract, and also consider the doctrines of impossibility and frustration.

The Contract: Force Majeure Clause

A force majeure clause provides a means by which the parties to a contract may anticipate in advance a condition that will make performance impracticable. The clause will condition the performance of a party on the non-occurrence of some event beyond the party’s control (e.g., war, famine, fire, flood) and serious enough to interfere materially with performance. When an unforeseen event occurs, which materially affects the performance of a contract, the contractual clause will be given a reasonable construction in light of the circumstances. To interpret a force majeure clause, a court will consider the language of the provision, the surrounding circumstances, and the purpose of the contract.

Business owners should determine whether their contracts include a force majeure clause, and what the clause actually covers. Consider whether the clause is limited to only certain listed events, such as fire, flood, or war, and determine whether a pandemic is a listed occurrence excusing performance. Also, determine whether the clause excuses performance due to an “act of God.” Courts in New Jersey have construed an act of God to include more than just natural events such as storms; a pandemic may meet the definition. Also, look to see whether the provision includes a catch-all phrase for “other unforeseen circumstances,” or some similar language. Remember, the scope of each force majeure clause will be different, and the specific language will determine whether the provision is of any use.

The Common Law: The Doctrines of Impossibility of Performance and Frustration of Purpose

In addition to a force majeure clause in the contract, parties should also consider the common law principles of impossibility of performance and frustration of purpose in situations where COVID-19 undermines contractual performance. New Jersey recognizes both the doctrines of impossibility and frustration. Both of these defenses are based on the concept that all contracts are subject to the implied condition that the parties should be excused if the fundamental basis of the contract ceases to exist without default of either of the parties.

Impossibility of performance exists and will excuse performance where the party’s performance has become literally impossible, or at least inordinately difficult, because of the occurrence of a superseding event that was not within the original contemplation of the parties. In contrast, frustration exists and will excuse performance in cases where the party’s performance can still be carried out, but a superseding event has, without the fault of the party, substantially frustrated the principal purpose of the contract. In other words, an event renders a party’s performance worthless to the other party, frustrating the reason the contract was made.

To determine whether the defenses of impossibility or frustration apply, businesses must consider whether COVID-19 regulations have made performance of a contractual duty impossible. Even if performance is not impossible due to COVID-19 regulations, businesses should consider whether, in light of the COVID-19 restrictions, the performance of the contract has been rendered worthless, and may therefore constitute frustration.

New York

In contrast to New Jersey, the same concepts are more strictly construed in New York. Business owners may still rely on force majeure clauses and the doctrines of impossibility and frustration of purpose, but the considerations will differ slightly.

The Contract: The Force Majeure Clause

Under New York law, force majeure clauses are narrowly construed, meaning that only events specifically identified in the clauses will excuse a party’s performance. Business owners should look at the provision’s language for public health related language that could possibly cover the COVID-19 pandemic (e.g., flu, epidemic, pandemic, plague, disease, emergency outbreak, acts of government).

In addition to public health related language, a force majeure clause may also include broad catch-all language, such as “for any reason” or “other similar causes beyond the party’s control.” In New York, these phrases are construed pursuant to the doctrine of ejusdem generis, meaning “of the same kind.” Accordingly, only events like those specifically identified in the provision will fall within the scope of the catch-all language.

The Common Law: The Doctrines of Impossibility of Performance and Frustration of Purpose

In the absence of a force majeure clause, a party may still avail itself of the contractual defense of impossibility, which may excuse the party’s performance. Here again, New York construes the doctrine narrowly. The defense of impossibility is only available when the destruction of the subject matter of the contract or the means of performance makes performance objectively impossible. The impossibility must be produced by an unanticipated event that could not have been foreseen or guarded against in the contract.

New York also recognizes the doctrine of frustration of purpose. To invoke this defense in New York, the frustration must be “substantial” and the frustrated purpose must be at the core of the transaction as set forth in the plain language of the contract. Like impossibility, the frustrating event must have been unforeseeable and non-occurrence of that event must have been a basic assumption of the contract. Unlike the doctrine of impossibility, however, the doctrine of frustration of purpose may apply even if there is no substantial impediment to performance, so long as the party can prove the frustrating event goes to the core of the contract’s purpose.

David A. Gonzalez is located in our New Jersey office.