How COVID-19 Is Impacting Commercial Contracts in NJMarch 23, 2020 – Alerts
Disrupted supply chains and state-mandated closures caused by the COVID-19 pandemic are forcing New Jersey businesses to evaluate existing contracts to determine whether they may be entitled to any relief.
Most commercial contracts contain force majeure provisions that address the possibility of extraordinary events or circumstance beyond the control of the parties. These provisions will need to be carefully reviewed in the context of New Jersey’s current state of affairs.
If a contract does not contain a force majeure provision – or such a provision cannot be interpreted to cover the COVID-19 pandemic – New Jersey businesses may be able to rely on New Jersey common law for relief.
Courts in New Jersey recognize the equitable doctrines of impracticability, impossibility and frustration of purpose in the absence of force majeure clauses, as potential grounds for relief from strict compliance with contractual obligations.
In 2007, in Facto v. Pantagis, the Superior Court of New Jersey, Appellate Division recognized that even if a contract does not expressly provide that a party will be relieved of the duty to perform if an unforeseen condition arises that makes performance impracticable, “a court may relieve him of that duty if performance has unexpectedly become impracticable as a result of a supervening event.”
Under Facto, to determine whether a party is relieved of its obligations under a contract, a court must evaluate: (a) whether the existence of a specific thing is necessary for the performance of a duty; and (b) whether its destruction or deterioration makes performance impracticable.
The essence of this principle, explained by the New Jersey Supreme Court in 2002 in M.J. Paquet, Inc. v. NJ Dept. of Transportation, is that a party's performance under a contract is rendered impracticable by the occurrence of an event “the non-occurrence of which was a basic assumption on which the contract was made.”
In 1950, in Duff v. Trenton Beverage Co., the New Jersey Supreme Court recognized that a party can be excused from a contractual obligation if performance is “objectively impossible,” unless the risk is assumed by the promisor.
A contractual obligation is “objectively impossible” if the impossibility arises from the impossible nature of performance (as opposed to arising from the incapacity or fault of the promising party). In other words, the contractual obligation must be impossible because “the thing cannot be done” as opposed to the fact that a promisor “cannot do it.”
Frustration of Purpose
Lastly, New Jersey courts recognize the defense of frustration of purpose under common law. In 2019, in Capparelli v. Lopatin, the Appellate Division stated that frustration of purpose arises when “the obligor’s performance can still be carried out, but the supervening event fundamentally has changed the nature of the parties’ overall bargain.”
“The frustration must be so severe that it is not fairly to be regarded as the risks that the party invoking the doctrine assumed under the contract.” The supervening event must fundamentally change the nature of the parties’ overall bargain.
Time is of the Essence Notices
The instability of the market is bound to result in breaches of contractual deadlines in commercial contracts throughout the State. A party seeking to enforce a contractual deadline against another party via a “time is of the essence” notice may face some difficulty in the upcoming weeks and months.
New Jersey has recognized a “reasonableness” test in determining whether a time is of the essence notice is effective.
In an unreported decision, the Appellate Division stated that the “date fixed in a contract of sale is considered a formality, unless the contract provides that time is of the essence”.
New Jersey courts recognize that, in the event a contract does not expressly provide that a deadline is time is of the essence, a party making a deadline “time is of the essence” must: (a) give reasonable notice of the deadline; and (b) the deadline must ‘bear a reasonable relation to the time already elapsed”. Specifically, the courts evaluate three (3) points in time: (i) the original deadline; (ii) the time the notice is given; and (iii) the proposed new deadline fixed in the notice.
With respect to the first factor regarding “reasonable notice”, the Appellate Division held that a reasonable notice will include both the time and place for the closing of a real estate transaction.
With respect to the “reasonable relation” factor, the courts must evaluate: (1) the delay that preceded the time of the essence notice and (2) the prejudice to the noticing party by any further delay beyond the date set forth in the time of the essence notice.
Ultimately, New Jersey courts will make the reasonableness determination based on the facts of each particular case. In light of the ongoing development of COVID-19 and the current unpredictable state of affairs (in not only New Jersey but throughout the country), New Jersey courts may be inclined to liberally excuse a breach of a contractual deadline based on the foregoing considerations, even in contracts without force majeure clauses.