The coronavirus (COVID-19) outbreak is an unexpected situation impacting people and businesses throughout the world, leaving many with questions on how to move forward. One area of confusion is contracts, which obligate you to provide services, goods, or pay money to another party, which may be challenging or impossible in the current environment. If you are struggling to perform as promised, take a close look at your business contract to determine what options you have.
Many commercial contracts include what is known as a “force majeure” clause. The term means “superior force” in French, and it serves to relieve both parties of their contractual obligations if an event arises that is 1) out of the parties’ control and 2) could not have been anticipated at the time the contract was created. This event must make performance under the contract impracticable, illegal, or impossible.
To determine if your contract includes a force majeure clause, you may find a section titled “force majeure,” or “Act of God.” The contract may specify situations that fall under force majeure, such as natural disasters or changes in the law or, sometimes, pandemics. There may also be a catch-all provision for any event that is unforeseeable and beyond the parties’ control. Each contract may specify the result of the force majeure clause being invoked, such as the right to end the contract and the obligations of each party to attempt to mitigate the damages.
Depending on the particular language of the clause in your contract, the results of the Coronavirus outbreak may relieve both parties of their duty to perform. Many of the consequences of the outbreak are outside of everyone’s control, such as the decision to close certain businesses to the public. Assuming the contract was drafted before the outbreak, it is easy to argue that neither party could have anticipated the current situation.
The question comes down to whether or not performance is now impracticable or impossible. If you operate a business that is entirely online, for example, it may be possible for you to stay in business and continue to perform under your contracts. On the other hand, if your business is organizing weddings, you have a strong argument that it is not possible to perform as agreed.
A similar clause is the Material Adverse Change (MAC), also referred to as the Material Adverse Effect (MAE) clause. This is often found in merger contracts and provides that the buyer can walk away from the deal if there is a material change from the time the contract is signed to when the transaction is to take place. Like force majeure, it must be that the change could not have been anticipated, and it was not caused by the parties.
The particular clause in your contract may specify that changes in general economic conditions do not amount to a MAC. Instead, you may be required to show a significant change in your particular area of business. In other words, the fact that the economy is on the whole doing poorly will not amount to a material change. If your particular industry is suffering, like if contract concerns the airline business or a hair salon, this may apply.
Depending on your business and your particular contract, there may be a number of additional clauses to review. For instance, there may be a provision regarding when and how you can return items or cancel services. Short of canceling the entire contract, you may have the option to ask for a refund. Similarly, if you are having issues with your supply chain and cannot acquire the goods you need to perform, the contract may specify that this excuses your performance.
Many contracts include a duty to mitigate costs. This means that even if you are impacted by the outbreak, you must make an effort to continue with your existing obligations as best you can. For example, if you are able to reschedule your services for a future date instead of canceling them completely, this may serve to minimize the damages.
Even if your contract does not have any of the above clauses, there are general contract principles that may apply. This includes frustration of purpose and impracticability. You would look to these general principals only if your contract does not have other provisions that would apply, such as a force majeure clause or a MAC clause. Both frustration and impracticability are grounds for breaking the contract, meaning neither party is obligated to perform as promised. Moreover, if one party does not perform, the other party does not have grounds to sue for breach of contract to seek damages.
Frustration of purpose refers to when an unforeseeable situation undermines the principal purpose for the contract. Both parties must have understood the purpose of the contract, and the frustration must be complete. In other words, it does not apply where one party will simply lose money or make a smaller profit. For example, if a wedding planner contracted for a wedding photographer, but the wedding has been canceled due to the outbreak, this could be considered frustration of purpose.
Impracticality exists when something unforeseeable occurs that could not have been anticipated, and this makes performing under the contract unreasonably difficult. This is similar to the force majeure clause, and under similar circumstances, you could argue impracticability applies to your contract.