Contracts & COVID 19
Contracts 101, Other Important Things to Know
You’ve heard it before – we are living through unprecedented circumstances and we are all grappling with how to best serve our clients while sustaining our businesses and livelihoods.
Although I’m still on maternity leave, I’ve been part of various conversations with the community and clients about how the rise of the coronavirus impacts your contracts. I want to clear up some confusion and highlight a few things as it pertains to your service agreements with your clients. Specifically:
- Understand if the Force Majeure clause applies to your circumstances
- Document changes to your contract with an amendment
- If a contract must be terminated, document the contract termination appropriately.
Understand if the Force Majeure clause applies to your circumstances
Step 1: Does your contract includes a force majeure clause?
Review your contract to determine if it includes a force majeure clause. (Note if you’ve purchased a Your Legal BFF ® contract template for services, these templates include a force majeure clause). Generally, a force majeure clause provides that should certain unforeseen events or circumstances beyond a party’s reasonable control occur, then it will excuse that party from its performance obligations.
If your contract does not include a force majeure clause or similar language, there are other doctrines that may allow a party to avoid liability for breach of contract. These include the doctrine of impossibility of performance, commercial impracticability, or frustration of purpose. Discussion of these concepts is beyond the scope of this post, but I wanted to raise them in case you’ve heard the terms or are in a situation where your contract does not include a force majeure clause.
Step 2: If your contract includes a force majeure clause, does it encompass epidemics/ pandemics and the like? If not, can it be reasonably interpreted to include the coronavirus event?
If your force majeure clause expressly includes events like pandemics or epidemics, it increases the likelihood of enforceability. But if it doesn’t include such language, would the coronavirus outbreak fall under another part of the force majeure clause? Think things like acts of God or events beyond the control of a party, governmental or administrative action, etc. If you’re going to invoke force majeure, you must be able to establish that the coronavirus falls within the scope of the force majeure clause.
Step 3: What is the standard of proof?
Review your force majeure clause to determine the standard of proof – it may require that performance be “impossible,” as opposed to a lesser standard such as requiring performance be “impeded,” “impracticable,” or “hindered.”
Step 4: Is the coronavirus the reason why a party cannot perform under the contract?
This one’s important – the coronavirus must be the true reason you cannot satisfy your contractual obligations. Depending on the relevant standard, a party may not be excused simply because the ability to perform has become more difficult or expensive. If you can still perform in an alternate manner (such as by obtaining materials or labor from another, more expensive source), there’s an argument that you may not be released from your obligations.
Step 5: Are there any other provisions you must comply with in order to invoke the force majeure clause?
For example, some clauses may require that the party invoking force majeure provide timely notice to the other party or make efforts to mitigate. Make sure you understand your obligations for invoking the force majeure clause.
Step 6: What are the risks of declaring force majeure?
Before invoking the coronavirus as a force majeure event, make sure to consider the potential ramifications of doing so – such as your business reputation, customer and vendor relationships, the risk of litigation from your client, etc.
Step 7: How will invoking force majeure impact your other obligations under the contract?
Generally, if the force majeure clause is applicable and you invoke it, you will be relieved of those performance obligations that have been prevented by the force majeure event (here, the coronavirus) without being in breach of contract. However, you may still be able to perform certain aspects of the agreement, as the force majeure event may only influence some, not all, of your contractual responsibilities.
Document changes to your contract with an amendment
If you have an existing signed contract between you and a client and you need to make changes to it, document those changes with an amendment to a contract.
Here’s an example: You’re a wedding planner and the wedding is going to be rescheduled to a later date. This change will impact payment schedules and other deadlines that need to be documented and signed by the parties.
Check out our Amendment to a Contract template product for more details.
If a contract must be terminated, document the contract termination appropriately
As you’re working through your service agreements with your client, you might need to terminate your contract entirely.
Using the example above, let’s say you and your client cannot agree to rescheduling the wedding date; but rather agree to refund $1000 to the client and cancel your wedding planning services. Listen to this episode to learn about what to do when either you or your client decides to end the relationship and terminate the contract.