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  • 03/31/2020

    Force Majeure – Important Contract Performance Issues for Today's Circumstances

    Client Alert

    Written by: Victoria Airgood, Esq.

    Force majeure may be Latin legal terminology, but when a case is decided its meaning is far from abstract. A court will define the term by reference to the specific facts of a case. So it is important to gather and preserve the facts, concerning formation of the contract and the reasons either party did not perform.

    The first step to evaluating how particular facts may play out legally when a party cannot perform its contract obligations is to determine whether the contract is for the sale of goods or for services. Many contracts combine both, and the question is which is paramount. For instance, a construction contract that includes installation of fixtures supplied by the contractor most likely would be considered a services contract. An information technology contract involving installation, service, training and hardware may be categorized by how much of the contract price is allocated to the hardware.

    Force majeure applies to contracts for services through the terms of a written contract and by common law – the series of court decisions that will be used as precedent to decide a case. Force majeure applies to contracts for the sale of goods through New Jersey’s Uniform Commercial Code, specifically N.J.S.A. 12A:615, and the parties’ contract. The Code’s requirements differ somewhat from the common law. For example, a seller of goods has a duty to allocate production and delivery. However, some questions for sale of goods contracts will be decided by reference to the common law. 

    For contracts to provide services or a combination of goods and services where the services predominate – a force majeure clause in the written contract will be a court’s first focus, but the clause may not entirely control the outcome. A court first will determine whether the language of the force majeure clause includes the circumstances claimed to prevent performance. If there is no force majeure clause, or if the court finds it doesn’t apply to the circumstances at hand, a court may consider whether the common law of “impossibility” or “impracticability” provides an escape route from the duties of the contract. In other words, the absence of a force majeure clause in a contract doesn’t entirely preclude a force majeure legal excuse for non-performance.

    One basis of force majeure defense potentially available now is the death or illness of a person who was to do the work. The most important question for this type of “impossibility” is whether both parties intended that person to do the work because of his or her individual skill or exercise of discretion. If either side did not have that intention, the work is “delegable” –it can be performed by someone else – and neither party can walk away from the contract without potential liability to the other side.

    Another situation currently of concern is performance of a contract requiring the gathering of people in close quarters. Performance of the contract may violate “social distancing” guidelines or “shelter in place” orders. Either side conceivably could want to call off performance and, if delayed performance is not provided for by the contract, what happens? Oftentimes, the contract terms themselves put the risk on one or the other party. If not, the common law may view this situation as the failure of a condition the existence of which was assumed by both parties to be possible: namely, that the necessary number of people could gather together to perform the services called for by the contract. This is one essential common law definition of force majeure. The Governor’s Executive Orders should be carefully examined to determine if performance of the contract would violate currently binding restrictions or public policy statements.

    A third situation of concern is a services contract dependent on a purchase or sale of goods (for example, installation of specific equipment or repair using specific materials). What happens to the services contract when the equipment or materials do not arrive and won’t arrive for an undetermined time? Again, the contract’s force majeure clause may give an answer and, if not, the common law will fill in as a basis for decision. Even more important may be the contract’s stated conditions, which define events or circumstances that must happen before performance under the contract is owed or must be accepted. Such contract conditions will be considered in the new light of today’s circumstances.

    For more information about this Alert or if you have any questions or concerns, please contact Victoria Airgood at (609)734-6373 or vairgood@hillwallack.com

    ©2020 Hill Wallack LLP. All rights reserved. Please contact Hill Wallack for permission to reprint. Notice: The purpose of this Client Alert is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, accuracy and completeness of which cannot be assured. This Client Alert should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.