COVID-19 has had a major impact on businesses worldwide, and aspect in particular that it has affected is pre-existing contracts. What happens if you have entered into a contract with someone and you can no longer perform under that contract due to the restrictions of COVID-19 or vice versa?
Sometimes, we don’t pay enough attention to much of the boilerplate language in contracts. In fact, some business owners may have removed some boilerplate language because they didn’t understand it, or they believed it didn’t apply to their business. Now, some businesses are realizing they made a huge mistake when removing boilerplate language.
During this time, it’s important to see if your company contracts have a Force Majeure clause.
Force Majeure means “irresistible compulsion or greater force.” A Force Majeure clause is a standard contract clause that allows the parties to suspend or excuse performance if there is a catastrophic event. Thus, if there is a catastrophic event that falls under this clause, causing the business to not perform its end of the contract, then that business can cancel or postpone.
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How does a Force Majeure clause work in the context of COVID-19?
Take a screen-printing business, for example. The screen printer’s business is most likely shut down because it’s a non-essential business. Additionally, the screen printer’s business cannot operate remotely because it requires screen printing equipment.
However, the screen printer has a contract with a client to screen print shirts by a certain date. Will the screen printer be in breach of contract with the client when the deadline rolls around and the screen printer hasn’t printed the shirts?
Not if the screen printer’s contract has a Force Majeure clause in place.
Under the Force Majeure clause, the screen printer is excused from performance because its business is closed due to the unforeseen pandemic of COVID-19. The events of COVID-19 are beyond the reasonable control of the screen printer. Therefore, the client wouldn’t be able to sue the screen printer for breach of contract.
It’s important to note that the virus, alone, is not reason to be excused from contracts. However, because the World Health Organization (WHO) classifies this as a pandemic, coupled with the fact that it is illegal in many places for non-essential businesses to be operating right now, makes performance in contracts excusable.
So, what about the client’s money? Is the screen printer required to provide a refund? Most likely, no.
However, once business is back up and running, the screen printer still needs to print the shirts and provide them to the client. In this instance, the screen printer will not be liable for failure to provide the shirts by a certain date, but must still provide the shirts.
Other common business contracts that may be impacted by COVID-19 include conferences. Whether you’re hosting a conference, attending, or sponsoring, COVID-19 is most likely impacting your startup’s upcoming events in some manner.
As the conference host, you have to appease sponsors and ticket purchasers. If you have a favorable contract, the truth is, you may not have to provide refunds to sponsors or ticket-goers. However, it’s best to reach out to an attorney to determine your best options.
How do I know if this clause is included in my company’s contracts?
The good news is, Force Majeure clauses are standard boilerplate clauses that are included in most contracts. It’s very likely your contracts include Force Majeure clauses, usually buried in the “fine print.”
Make sure to review whether or not the clause within your contracts is limited to certain events. For example, if the Force Majeure clause is limited to hurricanes, earthquakes and fires, then COVID-19 may not be covered.
The clause is not included in my company’s contracts—what now?
If your contracts do not have a Force Majeure clause, you may still be in luck. Some states provide for a default Force Majeure clause. Additionally, most people are being very understanding with one another during this unprecedented time.
If your business cannot perform under a contract, talk to the other party and explain the situation. Contracts can be altered with the written consent of both parties.
If you’re worried about not being able to perform under a company contract, go through the following checklist:
- Does your contract contain a Force Majeure clause?
- If so, check to make sure that the clause is not limited to certain events
- Give notice that your business cannot perform under the established contract due to the Force Majeure clause
- If your contract does not have a Force Majeure clause, talk to the other party in order to work something out that makes sense for both parties
- If necessary, consult with an attorney to determine your best course of action
Please note that this content is meant to be informative in nature, and does not constitute legal advice, nor should it be relied upon solely for making legal decisions. We encourage you to consult with your lawyers, CPAs and financial advisors for further details.