Assessing Damages for Businesses During COVID-19

March 25, 2020
Young Yoon, Esq.Carmelo T. Torraca, Esq.

With state shutdowns and indefinite ban on most gatherings taking place,  including weddings and funerals, the course of this COVID-19 crisis continues to evolve as life affected by it plunges into a deeper state of paralysis.  Business is no exception, as the degree and duration of disruptions to business activity – from retail closing to event cancellations – seem indefinite, for now.  In light of COVID-19, businesses are assessing damage, in addition to available remedies, as a result of performance becoming impossible or impracticable.

“Force majeure,” or more commonly known as “acts of God,” means an event or effect that can be neither anticipated nor controlled — which now has taken on a whole new level of significance as the unforeseeable has become current reality.  It typically refers to natural disasters or other natural events, such as floods, hurricanes, tornadoes, etc., beyond the power of either party to avoid.  The doctrine of force majeure can excuse a contracting party’s performance when an unforeseen event, happening when it did, was one of such severity and unlikelihood that it could not have been anticipated or guarded against.  It protects parties from being held responsible for contractual duties, or put differently, the parties share the risk.   Although the clause is made exciting by the escape it offers, its application in the context of disease and/or epidemics, such as COVID-19 may require further guidance.

If the fear is the measure of this pandemic, it would be right to suggest that the COVID-19 outbreak may fit the definition above, where it was caused by neither party, which the parties could not reasonably have anticipated or controlled, or overcome.   However, those businesses who are naively inclined to make decisions under the belief that the COVID-19 outbreak satisfies the contractual requirements, and therefore, should provide a contractual excuse for non-performance, may belatedly realize that their force majeure may not provide liability immunity.

All depend on the wording of the contract.  For instance, force majeure clauses are narrowly construed in New Jersey and ordinarily, excuses performance only if the list of specific events are set forth in the contract. See Hess Corp. v. ENI Petroleum US, LLC, 435 N.J. Super. 39, 47 (App. Div. 2014).  Some force majeure clauses are general in nature and do not attempt to define the relevant supervening events; others set out an exclusive list of events; or, some strike the middle by setting forth the general requirements for the provision to trigger together with a non-exclusive list of events.   For example, an inability to provide services due to travel restrictions or the cancellation of planned public events due to quarantine may amount to force majeure if triggered by executive order or government directive.

However, despite the current state of danger, force majeure cannot automatically be established.  Instead, courts will not look elsewhere than the specific language of the parties’ agreements to determine whether COVID-19 related disruptions can excuse performance.  Courts place the burden on the party seeking to rely upon the force majeure clause to demonstrate the existence of force majeure, and that party must demonstrate that performance was physically or legally impossible, not merely more difficult or unprofitable.  Furthermore, contracts include a duty to mitigate damages that place additional burdens on the affected parties to take measures to mitigate the potential effects of such events whenever reasonable.

However, in the absence of a force majeure clause, performance can still be excused by impossibility or impracticability when it can only be done at an excessive and unreasonable cost, or when a party cannot perform due to circumstances beyond that party’s control.  Also, the legal doctrine of frustration of purpose excuses nonperformance in certain situations where the objectives of the contract have been utterly defeated by circumstances arising after the formation of the agreement.  Additionally, although these new realities of the pandemic are left to metastasize, in the face of the multiple directives being issued for purposes of public health, businesses could also face profound challenges to comply with the laws, orders, rules, regulations and requirements of all applicable federal, state, county, municipal and other agencies or authorities — where required.  Out of an abundance of caution, it may be prudent for a business to coordinate with the local authorities and concerned authorities in anticipation of the effects of the outbreak.

Accordingly, businesses should review their contracts or have their contracts reviewed by counsel to determine whether their particular impediments are sufficient to trigger a force majeure.  Please contact either Carmelo T. Torraca or Young Yoon at Cooper Levenson to discuss your business claims and related questions.

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