In a time of disaster or emergency, it can be difficult or even impossible to perform contracts that your business agreed to before the disaster or emergency occurred. You may need to reschedule some work or even cancel the contract altogether. In an ideal world, you will be able to renegotiate your agreements with vendors and clients alike so that everyone is happy—or at least, not too unhappy. But knowledge is power, and going into the discussion well-informed will help your business figure out next steps.
Disaster or Emergency?
COVID-19 was declared a nationwide emergency on March 13, 2020. As of this writing, several states and tribal governments have disaster declarations, but it is not nationwide. There is a difference between a federal disaster declaration and a federal emergency declaration in terms of the kind of aid your business may be eligible for. How your contracts are affected by those declarations depends on factors including how your contracts are phrased and what your state’s laws have to say about various defenses to performance.
Most of the time, the “force majeure” clause (also known as the “Act of God” clause) is sadly neglected. It goes in the “miscellaneous” section at the end of a contract, if it appears at all, and is usually dismissed as part of “the boilerplate.” But at times like this, it can be the most important section of your contracts.
Force majeure clauses cover the circumstances where a party may be excused for a delay or failure to perform altogether. A typical list for a force majeure clause may include acts of war, acts of God, a specific list of natural disasters, labor disputes, failures of utilities and/or the Internet, and governmental acts. More detailed force majeure clauses may list other events, including epidemics, pandemics, or declarations of disaster or emergency. It also usually requires the non-performing party to take certain steps, such as informing the other party that it is not able to fulfill its end of the contract, or taking commercially reasonable steps to resume work as soon as the force majeure event has terminated. Some force majeure clauses allow the unaffected party to terminate the agreement if the force majeure event continues for a certain amount of time.
If you are unable to perform your contracts because of COVID-19 and the related governmental restrictions on movement, check your agreements for a force majeure clause and see whether there is anything that might excuse performance or allow delay of performance. However, be aware that exercising the force majeure clause typically requires that the performance be impossible to carry out, not merely more difficult or expensive; and that you must follow any requirements of the force majeure clause, such as informing the other party of the force majeure event within a certain amount of time, as closely as possible.
Defenses for Non-Performance
If your agreements do not have a force majeure clause, or your force majeure clause does not include circumstances like COVID-19, your business may have to rely upon defenses for non-performance under services contracts.
The first of these is impossibility. When extraordinary circumstances arise, they may change the circumstances so much that performance is no longer possible because performance relied upon an assumption that is no longer correct. For example, a contract for a venue space for a meeting of 100 people assumes that it will be legal to hold gatherings of 10 or more people.
The second is frustration of purpose. Again, where extraordinary circumstances arise, it is possible that one party is capable of performing its part of the agreement, but that the entire reason for having the agreement has disappeared. For example, a contract for a band to perform at an event assumes that people can gather at the event; if an order prohibits gatherings of 10 or more people, the band may be small enough to still legally perform, but there is no point in doing so if the audience is prohibited from gathering.
Amendments and Template Updates
In an ideal world, both you and your clients or vendors will take an amicable approach to this situation and agree upon exactly how to address the COVID-19 pandemic. It is important to amend any written agreements to reflect your changes in plans, even if additional changes in circumstances later require additional amendments. Properly documenting what you have agreed to protects both parties and helps everyone involved to know what their obligations are. And in the worst case, proper documenting can be helpful if you have to go to court.
We have heard from some experts that it is possible that this virus will come and go in waves over the next several months until an effective vaccine has been developed, and that these disruptions to our lives and businesses may continue to ebb and flow. It is important to make sure that your business’s template agreements are set up to address that eventuality, or at least to have strong force majeure protections for your business as we move into this uncertain time.
If you need assistance with these or any other contractual issues, please feel free to contact us.