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Authored - NJ Contract Law Update - (1) Literal Impossibility Of Performance (As Contract Is Drafted) Does Not Preclude Interpretation Approximating Parties' Intent; (2) Materiality Of Breach; And (3) Liquidated Damages
JANUARY 17, 2014 | Commercial Litigation

In 5907 Blvd. L.L.C. v. West N.Y Suites, L.L.C., ___ N.J.Super. __, 2013 WL 762695 (App.Div. July 19, 2013), the Court addressed the following contract issues in an illuminating Opinion instructive to the contract practitioner:

1. (a) What is the correct concept to apply when (i) the contract is literally impossible to perform as written, but (ii) both parties are aware of that literal impossibility and continuing negotiating (or even preliminarily performing)--and (iii) there is a reasonable substitute mechanism? The Court's answer was that the appropriate result was to modify the agreed procedure in order to carry out the heart of the parties' intent--specifically, where the contract called for the buyer to take steps before the closing (with regard to condominium registration) that can only be accomplished after the closing.

(b) Presumably, the 5907 Blvd. courts were performing some type of reformation1, and discussed the matter in a fairly logical vein from that perspective--but did not (i) name the controlling principle(s) relied upon, or (ii) cite legal authority.

(c) Fairly identifiable in the case (albeit also written between the lines) were principles concerning (i) failure to cooperate and (ii) a frustration of the ability to perform the contract (presumably as reformed).

2. Is a breach material where (a) a remedy is provided; and (b) there is no express statement that the requirement is "material" (semble)? The Court held that where there was no express representation that all rent increases were lawful, and where a specific remedy was provided for unlawful rent increases, the breach could not (a) be considered material, and therefore (b) excuse non-performance by the other side. There was also some sense (in the Court's Opinion) that the Court may have felt that the buyer's focus on this breach was tied to a desire not to close at all (semble).

3. The enforceability of the liquidated damages provisions--deemed enforceable in 5907 Blvd., where (a) actual expenses in fact exceeded the predictive liquidated damages amount; (b) the party resisting the liquidated-damages payment did not adduce evidence as to its unreasonableness or as to a rise in value of the property; (c) the party resisting liquidated damages "offered no evidence to show that plaintiff could have mitigated its damages by placing the property back on the market and selling it to another buyer", since the "market" would only have allowed sale at a loss; (d) even in hindsight (i.e., based on factors not expressly set forth in the contract), numerous factors rendered actual damages unpredictable; (e) the parties stood in comparable bargaining positions and experience;; and (f) the total amount of liquidated damages was only about 2% of the purchase price.

The Court also enforced liability under a mutual attorneys fee clause.

Leaving aside the precise facts of 5907 Blvd., some of the general principles illuminated are these:

(A) When drafting, it may be advantageous to (a) state conditions entitling a party to terminate the agreement; (b) expressly state which provisions are material (or in some instances that all provisions are material); (c) expressly recite (as stipulated) crucial facts or desired facts (set forth as recitals, and/or built into representations, warranties, and/or covenants); and/or (d) express additional stipulated facts as to why damages are unpredictable, thus necessitating a liquidated damages provision.

(B) Specialists in various areas can review contracts before they are signed, to make sure they are not impossible of performance.

(C) If a contract proves impossible to perform--and especially if such an interpretation is favored by your client--immediate notice should probably be provided to the other party that the contract is not acceptable for that reason, subject to countervailing tactical considerations.

(D) The issues litigated and adjudicated in any ensuing dispute should be expressly tied to cognizable legal theories--and this author respectfully believes that courts should be cognizant of this point, even in 'unpublished' Opinions, especially since the parties would want to know as well--so as to preserve the continuity of our jurisprudence and to improve the predictability, reliability and comprehensibility of outcomes.

Contact & Legal Disclaimer

Clark Alpert is the author of Guide to New Jersey Contract Law, published by the New Jersey Institute for Continuing Legal Education and now in its third edition. His updates on New Jersey contract law are based on recent issues and practical methods for addressing similar situations in your practice or business. They are not intended to serve as legal advice. Clark welcomes your questions and comments

1 One can imagine a mutual-mistake analysis, if the case had been litigated that way--which is, at best, unclear.

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