Can COVID-19 Cancel My Contract? - How Force Majeure Clauses Can and Can’t Help Your Small Business
Updated: May 20, 2020
What is a Force Majeure Clause?
A “Force Majeure Clause” is a common contract provision which may excuse a party’s performance—for example, payment or provision of services—when certain extraordinary events prevent the party from performing. Although typically a boilerplate contract provision of little note, the force majeure clause is having its moment in the spotlight, as COVID-19 forces businesses and individuals across the world to seek relief from commercial leases, vendor agreements, and countless other contracts. While these clauses may initially appear to be a solution to a myriad of financial woes, the actual usefulness of a force majeure clause is case-specific and subject to several considerations.
Example Force Majeure Clause
1.1 Force Majeure. The Parties shall not be liable for any costs or damages due to delay or nonperformance under this Agreement arising out of extraordinary causes beyond the Party’s control, including such causes which are acts of God, governmental action, natural disaster, governmental action, outbreak or pandemic, or power failure.
Can a Force Majeure Clause Help My Small Business Now?
The economic disruptions caused by COVID-19 have led many small business owners to ask whether the force majeure clauses in their contracts may excuse their businesses from certain payment obligations. The only broadly applicable answer to this question is: “It depends.” The utility of the force majeure clause will ultimately rely on several case-specific considerations, including the following:
Plain Language. Does the force majeure clause in the relevant contract mention outbreaks, pandemics, or epidemics specifically? Alternatively, does it contain a “catch- all” provision which may otherwise include these events? Unfortunately, if the force majeure clause does not contain the specific language covering COVID-19 or a catch-all phrase, then it cannot be used to excuse a party’s performance. If the contract language covers COVID-19, then it may excuse performance, but the additional analysis described below is still required.
Governing Law. Which state’s law governs the contract and does that state enforce force majeure clauses liberally or sparingly?(1) State laws typically will consider and weigh in varying degrees three things: 1) The party’s mitigation efforts, 2) the actual impossibility of its performance and 3) the degree to which the force majeure event is directly responsible for the party’s nonperformance. In analysing these factors, the states’ requirements vary. States that apply force majeure clauses liberally may be satisfied by a party’s showing that its performance has become exceptionally difficult due to the occurrence of a force majeure event. Conversely, states who sparingly apply force majeure clauses frequently require a showing that the party’s performance has become wholly impossible due directly to the force majeure event without any intervening causes. To exemplify the differences, consider the following:
Your Circumstances. Finally, in light of your force majeure clause’s plain language and the governing law, your business's specific circumstances must also be considered. Is COVID-19 the cause of your nonperformance or merely correlated? Did you seek out and exhaust the alternative means reasonably available to you to facilitate your performance? Did you provide notice to the other party of your intent to invoke the force majeure clause?
Ultimately, in order to find relief under a force majeure clause, your small business will need to be able to show that the contract’s plain language covers COVID-19 and also that the governing law will find that your business’s circumstance falls under the clause.
So What if the Force Majeure Clause Can’t Help Me?
If your contract has no force majeure clause, or otherwise if the clause is present in your contract but does not apply in your circumstances, take heart, other paths to relief may still be available to you. The following alternatives are worth considering:
State Contract law. State contract theories of “impossibility,” “impracticality,” “illegality,” and “frustration of purpose” may grant relief to a party when performing the contract becomes impossible, impracticable, illegal, or if the reason for which a party entered the contract no longer exists. Similarly to force majeure clauses, the state’s create and apply these laws differently and you’ll need to consider that law that governs your contract.
CARES Act Funds. The recent stimulus package and subsequent stimulus packages may be an ideal avenue for your small business to obtain the funds needed to make payments on certain contracts, especially those contracts for operational expenses like your business’s lease.
Communication and Special Arrangements. A highly advisable, and often overlooked, avenue to relief from certain financial obligations is to simply discuss your business’s situation with the other party and establish an alternative plan for your business’s performance. Such plans may include grace periods, payment arrangements, and even partial forgiveness. While such attempts may not always work, this is a unique season where parties are incentivized to accept any form of payment under a contract rather than terminate the contract and receive no payments at all.
If you are seeking relief for your small business, contact Vennum Law and schedule a virtual meeting with an attorney from our legal team to discuss this information as it pertains to your small business’s unique situation.
1) Contract drafters can, and often do, stipulate that a specific state’s laws will govern the contract’s terms. They are free to select any state’s laws regardless of where the contract will be enforced.