COVID-19 and Contracts - what now?
Most of our clients’ product and service offerings are captured in contractual agreements. While this is a scary time health wise, it is also a scary time business wise. Because I have received numerous emails, calls, and Facebook messages with contract questions about how COVID-19 relates to contracts, I found it imperative to write this blog.
Contracts are important!
If you know me, you know I practice law in a business preventative way. Meaning, don’t just call a lawyer for a shit hits the fan moment. Pandemics don’t happen everyday, but other things may. Contracts allow us to take agreements (however small or large) and turn them into legally binding and enforceable documents that hold up in court. We can use them to set forth processes on when you get paid, how many edits you do, who pays for shipping, or who owns the intellectual property. We can also use them to set forth a requirement that one party or both maintain business insurance, explain where the liability falls in certain circumstances, and add preferences for dispute resolution such as requiring mediation vs. arbitration or litigation should an issue occur. For purposes of time and prominent relevance, I will focus primarily on the “force majeure” clause.
What is a force majeure clause?
“Force Majeure” means superior or irresistible power in French. It is used in contracts to refer to unavoidable disasters or natural occurrences that we can’t control/are beyond our reasonable control. It’s often referred to as an “Act of God” clause. The goal of the clause is to protect both parties when an event of this gravity occurs.
Its effect is to protect the parties should they not be able to perform their contractual duties. It does not control negligence or intentional acts (or intentional failures to act) by a party. It also does not control or allow people to get out of their contract for things like traffic, running late, or even a common cold. It has to be “impossible” or “impracticable” for one or both parties to fulfill their contractual duties.
Here’s an example of a force majeure clause:
Neither party shall be held responsible or liable to the other party nor be deemed to have defaulted under or breached this Agreement for failure or delay in fulfilling or performing any obligation under this Agreement when such failure or delay is caused by or results from causes beyond the reasonable control of the affected party, including but not limited to fire, floods, embargoes, war, acts of war (whether war is declared or not), insurrections, riots, civil commotions, and acts of God provided, however, that the party so affected shall use reasonable commercial efforts to avoid or remove such causes of nonperformance, and shall continue performance hereunder with reasonable dispatch whenever such causes are removed. Either party shall provide the other party with prompt written notice of any delay or failure to perform that occurs by reason of force majeure. The parties shall mutually seek a resolution of the delay or the failure to perform as noted above.
Does a force majeure clause cover pandemics?
The answer that may frustrate you which is the answer to almost all questions you ask me is: It depends. One, it depends if you have a force majeure clause in a signed contract with a client prior this COVID-19 fiasco. Two, it depends on how broad that clause is. The example clause above is pretty broad. It not only says “including but not limited to” which allows for events that are as heightened to apply, it also adds things like “embargoes” and “civil commotions.”
Could you have a more specific way to address potential pandemics? Sure. Could you add one now that would have an effect? For contracts signed before the pandemic, it’s probably too late. For contracts you are about to sign or will be signing soon, you can definitely add a force majeure clause if you don’t have one. And if you do have one, you can make it more broad.
You’re probably wondering what I would suggest adding to this clause. My suggestion would be to add one or both of these:
“public health emergencies”
“acts, omissions or delays in acting by any governmental authority”
The challenge with contract law right now in relation to COVID-19
We don’t have pandemics every day or year. While we have encountered illness and tragedy throughout our lives in various ways, a public health emergency like this is truly unusual.
As you are aware, events are being cancelled left and right. A few days ago, prior to mayoral, gubernatorial, and presidential statements, orders, and emergency declarations, fears of coronavirus may have been looked at differently. Meaning, one may not have been able to get out of contractual duties if the other party felt they were just “worrying” or being “overly cautious.”
With the state of emergency and similar announcements, there is no question today and in the days that follow that this crisis has reached proportions to the degree of allowing a force majeure clause to be in full force, allowing both parties to end the agreement.
But - that isn’t the end of what you should consider in your contracts.
On Balancing Equities, Unjust Enrichment, and Doing What May Be Right vs. Contractually Binding
There is the law and there is what is equitable. Let me introduce a term called Unjust enrichment which implies that even if you could keep the full amount of a contract that has been or will be cancelled, maybe you shouldn’t. For example, if you could keep all of the money from a catering job (retainer and remaining), should you really if you didn’t have to buy the food, make the food, and cater the event? Granted, we all need the funds.
What if I also told you that long term goodwill could be created by waiving your right to contractual funds. For example, maybe you keep the retainer but no more. Or, maybe you give the retainer back knowing that by doing so, this client will come back to you when all of this pandemic bullshit is over.
What does this mean for contracts that have been cancelled/will be cancelled?
In summary, I cannot give you a simple answer on what to do with your existing signed contracts. Here are three factors to consider when looking at your contracts in this current situation:
In the current time, the Force Majeure clause can release the duties of the parties. In previous days and weeks, fear of something wasn’t enough to make this clause apply. For future contracts, you can add clauses or make them stronger. Know that if you didn’t already have one, your client may have a strong argument for why you are in breach should you not perform your contractual duties.
If the clause is invoked, parties usually get paid or keep work done up to that point and there’s a strong argument of keeping the retainer (because you did in fact secure a date and prepare for the contract) --- but also consider unjust enrichment and how to balance equities between parties.
Remember that good and frequent communication are necessary in times like these. Do not make assumptions. Do not presume bad intent or ill will. Remember that your business reputation will not only shine now if you approach this appropriately, but it will continue to shine after this.
Final Thoughts
Be safe out there. Know that this is generalized advice. You may require specific, personalized legal consulting. Also know that by reading this blog, I or our firm have not created a legal duty with you and/or your business. If you need any of the following please reach out to us:
A newly drafted contract
Contract revisions
Consulting on what to do regarding a specific client/contractual issue.
Visit the contact form on our website to request any of these. https://rationalunicornlegalservices.com/contact
We already offer at or below market rates and include emails and calls in our project fees. That said, we will try our best to balance both our necessity of paying our operational costs with our love and support for our clients and community.