Can I Cancel My Contracts Due to Covid-19?

 Many businesses are wondering whether they can cancel contracts due to Covid-19. Others are trying to determine how to proceed with contracts going forward. These questions come from parties to both B2B and B2C agreements. Here are some FAQ about force majeure clauses that we are receiving at Hilfer Law along with answers.

I. What is Force Majeure?

Q. What does “Force Majeure” mean?

A. The phrase is French for “superior force.” In the context of a contract, a force majeure clause usually describes what kinds of forces, outside the control of the parties, could affect contractual performance. The clause most often defines a force majeure event and describes what happens to contractual obligations when such an event occurs. Many contracts provide for a cessation or termination of obligations due to unforeseen events with a “force majeure” clause.

Q. What types of outside forces does the typical Force Majeure clause cover?

A. Many times, these clauses are inserted into a contract with little change to “boilerplate” language adopted from a form. Most clauses will list certain kinds of force majeure events: “acts of God,” natural or weather disasters, strikes, and government restrictions. The clause may or may not include references to pandemic, epidemic, or public health emergency. Finally, the clause may include a “catch-all” phrase such as “causes outside a party’s control.” You should not assume you can automatically cancel contracts due to Covid-19 just because your contract includes a force majeure clause.

Q. What is an “act of God”?

A. While it is tempting to consider any unpredicted event outside of the parties’ control to be an act of God, courts have typically applied a narrow interpretation to the phrase. Usually, the courts have interpreted an “act of God” to be a weather or natural disaster. There is little case law in the USA to support interpreting the phrase to include a pandemic.  That may change in the aftermath of Covid-19, given the global impact the virus is having. At the moment, however, relying on the phrase “act of God” for a Covid suspension or termination of obligations may not be your best option.

Q. Do government mandated shut-downs mean I don’t have to perform under my contract?

A. If your business if under direct government order to close, you likely can avail yourself of the government restrictions, regulations, laws, or ordinances language in a force majeure clause. You may under those circumstances be able to cancel contracts due to Covid-19. Of course, it would depend if you are ordered to cease operations vs work remotely. If, however, your business is not under direct order to close, such language may not be helpful. In addition, it is important to note the date of the government order. If your non-performance started before the government ordered shut-down, you likely will not be able to cite a force majeure clause, at least for a portion of any non-performance.

Q. If my force majeure clauses cites to a “pandemic”, “epidemic,” or other type of public health emergency, can I suspend or terminate my obligations without penalty?

A. The answer is it depends. Courts have required that there is a direct link between the force majeure event and nonperformance. Some courts also look for unforeseeability  and whether you have mitigated your non-performance.  After 9/11, many court cases examined this issue. The courts distinguished between the events that took place on 9/11 and the economic consequences of 9/11. The force majeure event was the terrorist attack. The economic consequences were not considered force majeure events. Typically, economic challenges are not enough to invoke a force majeure clause. Query: in those jurisdictions where courts look for unforeseeability, was Covid 19 unforeseeable given the news coming from China months ago? How was what you could have foreseen taken into account? No doubt, courts will be examining this question in the future.

Q. Can I rely on the phrase “causes outside a party’s control”?

A. Maybe. Again, you must be able to show a direct connection between these causes and your non-performance. You likely will also have to show that you cannot mitigate your non-performance in some way.

II. Can I cancel my agreement? 

Q. If I decide to invoke my force majeure clause, can I terminate my agreement?

A. It depends. Some clauses say that performance is abated, but the affected party should commence as soon as is practicable. Other clauses give the party expecting performance the opportunity to seek fulfillment of the contract elsewhere, meaning the other party may terminate. In some instances, the clause allows for termination, but then you have to see which party has that right. In short, not all force majeure clauses are the same in terms of which party benefits once an event of force majeure occurs.

Q. If my force majeure clause does not cover me or there is no force majeure clause, are there any other arguments I can make for non-performance?

A. There are some common law defenses that are available under narrow circumstances. First, the doctrine of “impossibility” may apply if Covid restrictions render performance impossible. The key is impossible, however, as opposed to inadvisable or economically difficult. Second, you could consider using the “frustration of purpose” doctrine. What is the purpose of the agreement? If circumstances have changed sufficiently so that you cannot meet the underlying purpose of the agreement, then you may be able to use this doctrine. Keep in mind, however that it is a narrow interpretation.

Q. If I can’t get out of my contract, what can I do?

A. Look at your business interruption, casualty, and property insurance policies. Some policies explicitly describe losses related to communicable diseases or viruses. Broader policies provide coverage for interruption of supply chains or intervention of governmental regulations. It is also possible that legislation may be enacted at the state or federal level that requires coverage related to Covid-19 business interruption. Watch in real time for legislative updates. At the same time, during these unprecedented circumstances, consider opening negotiations with your business partners. Many of them value their existing relationships and will want to preserve them for the future. If you reach a solution, amend your agreements, at least for the short term. Communication is key here. It is best to address the problems openly. If you cannot reach resolution, look at your agreement to see if any breach would result in litigation or arbitration or mediation. During these times, you may want to keep your disputes private. Remember that even if you do not have a dispute resolution clause, the parties can always agree to go to mediation or arbitration rather than litigation.

III. How should I draft my contracts prospectively?

Q. What if I’m entering in a contract now? How should I draft my Force Majeure clause?

A. Carefully! Do not rely on boilerplate at this time (and there is a lesson in there about boilerplate generally, pandemics aside). Choose your words intentionally. Just referencing a pandemic may not be sufficient to cover you in six months or a year. In addition, what rights do you want if there is a bona fide force majeure event to which you can link non-performance? Do you want the other party to mitigate if possible? Do you want the right to terminate unilaterally? What about economic distress? While this may not be properly addressed in a force majeure clause, perhaps there are ways to draft options to postpone obligations or terminate them in other portions of your contract.

Q. Are there specific concerns for those running consumer-facing advertising/marketing campaigns?

A. We typically think about force majeure clauses in B2B transactions. You may want to consider whether to include a force majeure clause in your B2C transactions as well. For example, if you are launching, relaunching, amending, or terminating your loyalty program, the availability of a business-friendly force majeure clause may be helpful. If you are running a sweepstakes that offers a travel prize, for instance, a force majeure clause might help should that prize be unavailable? If you are using influencer or refer-a-friend programs, you might consider including a force majeure clause that would allow you to terminate the program quickly. Of course, in all these cases, your terms and conditions should also include robust rights to alter or terminate the programs.

IV. Conclusion

When making decisions about your contract and its force majeure clause, these FAQ are general advice. They do not provide legal advice on any particular situation. Each contract and force majeure clause bears separate analysis.

Do you have a question about whether you can cancel contracts due to Covid-19 ? Contact us for answers.