The coronavirus pandemic is reverberating throughout commercial sectors, and countless contract obligations are going unperformed—shipments are not being made or accepted, payments are being missed, and contract milestone dates are lapsing every week that the pandemic and business shutdown continues. Those typically rare force majeure provisions are now being scrutinized. (For more on those topics, see previous entries in our COVID-19 “The Coronavirus Pandemic and Your Business: How We Can Help” client alert series, including “Litigation Issues That May Arise.”) And, in New Jersey, the precise language of such a clause is key, as courts in this state have held that they should be “narrowly interpreted as contemplating only events or things of the same general nature or class as those specifically enumerated.” Seitz v. Mark-O-Lite Sign Contractors, Inc., 210 N.J. Super. 646 (N.J. Sup. Ct. Law Div. 1986). With only some force majeure clauses including explicit references to pandemics, or broadly-worded “catch-alls,” the success of a force majeure defense is not necessarily certain.
But before (or in addition to) attempting to invoke that force majeure provision, consider whether a court would ultimately determine that contractual non-performance is due to an “Act of God” or rather is being caused by the governmental orders quarantining segments of the population and/or shutting down whole swaths of the economy. (See, for example, our firm’s coverage of NJ Governor Murphy’s Executive Order No. 122, ceasing non-essential construction.) In other words, did the virus actually infect the workforce or key personnel, thereby causing the non-performance? If not (and even if so), then a different legal principle may apply in these circumstances, separate and apart from force majeure—impracticability due to government order. As articulated in Section 264 of the “Restatement (Second) of Contracts”:
If the performance of a duty is made impracticable by having to comply with a domestic or foreign governmental regulation or order, that regulation or order is an event the non-occurrence of which was a basic assumption on which the contract was made.
Official comments to the Restatement contain some helpful examples, including:
A, a citizen of a foreign country, contracts with B to sell him the output of A’s mill for one year. War breaks out, and A’s government orders him to sell the output of his mill to it instead. A complies with the order in good faith and fails to deliver to B. A’s duty to deliver his output to B is discharged, and A is not liable for breach of contract. The result does not depend on the legal validity of the order.
Although war and health crisis are obviously not the same, this principle may apply here in equal measure. Over the years, New Jersey courts have acknowledged the validity of Section 264 of the Restatement in various contexts. For example, all citing Section 264:
- In M.J. Paquet, Inc. v. New Jersey Dept. of Transp., 171 N.J. 378 (2002), the New Jersey Supreme Court held that the state of New Jersey was excused from performance relating to a bridge painting contract after federal OSHA regulations revised relevant rules regarding this scope of work.
- In Petrozzi v. City of Ocean City, 433 N.J. Super. 290 (App. Div. 2013), the New Jersey Appellate Division held that the town of Ocean City, New Jersey was excused from performance from certain easement agreements with individual beachfront property owners, where performance was rendered impracticable due to a subsequent state statutory amendment governing beach dune heights.
- And in Directions, Inc. v. New Prince Concrete Constr. Co., 200 N.J. Super. 639 (App. Div. 1985), the Appellate Division reversed a trial court order rendered in favor of a subcontractor on a breach of contract action. The contract involved “civil flagmen” hired to direct traffic at a particular construction work site. But after the execution of the subcontract, the New Jersey Department of Transportation issued an order requiring the use of police flagmen to direct traffic, essentially rendering performance of the contract impossible.
During this pandemic and broad business shutdown, how will New Jersey courts view a wasted shipment, skipped payment, or missed milestone date in a commercial contract? If the virus actually infected the workforce, project leader, or boss, then this “Act of God” likely fits more neatly into traditional force majeure definitions that include unexpected events like weather catastrophes. But, if the business was otherwise able to perform but for the government shutdown order, then Section 264 may provide a separate defense to the contractual non-performance.
Health-related quarantines have (thankfully) not been frequent in our history, but they haven’t been entirely absent, either. Although these are practically ancient cases (and beyond New Jersey courts), in Central R.R. v. Combs, 70 Ga. 533, 48 Am. Rep. 582 (Sup. Ct. Ga. 1883), the Supreme Court of Georgia absolved a railroad company from damages for failure to honor a ticket in the face of a yellow-fever quarantine. And in Citrus Soap Co. v. Peet Bros. Mfg. Co., 50 Cal. App. 246, 194 P. 715 (Ct. App. Cal. 1920), a California appeals court excused a soap manufacturer from certain contractual obligations when the 1918-1919 influenza pandemic led the city of San Diego to issue a quarantine on “all factories and places of business.”
As these cases illustrate, courts around the country have long recognized that a government-mandated quarantine may provide an excuse to performance. Still, such an impracticability defense to breach of contract does not necessarily render the non-compliant party immune from all monetary liability, including restitution (as the defendants in M.J. Paquet and Petrozzi discovered).
Gibbons is—and will continue to be—here to help you navigate these uncertain times. And we have a wealth of experience examining and resolving contractual disputes, big and small.