Legally binding contracts allow parties to hold each other accountable for their obligations. If one party breaches the contract, the other can take them to court and potentially attain compensation. A well-designed and thoroughly reviewed contract can help ensure your business receives everything it needs from other parties.
But what if you’re unable to fulfill your obligations to another party because of an unforeseen disaster? This is a question that countless business owners are asking during the COVID-19 pandemic. Businesses have lost both income and labor, and commercial relationships are under constant threat of collapse.
Understanding Force Majeure
Fortunately, one type of clause can help your business avoid liability if COVID-19 prevents you from meeting your obligations: the force majeure clause. Meaning “greater force” in French, force majeure refers to warfare, a natural disaster, or any other “act of God” that neither party could foresee or prevent.
Businesses often include force majeure clauses in their contracts if they have ongoing obligations with other businesses (e.g. sales or supplier relationships). If your contract has a force majeure clause, you might not be accountable for breaching your contractual duties during the pandemic.
No force majeure clause is the same, differing by both state law and contract-specific language. Generally, however, an event qualifies as a force majeure if it is:
- Occurring outside of the contractual relationship
Ultimately, the event must be out of the party’s control and render their contractual obligations impossible or impractical to fulfill.
While the list of qualifications appears simple, the Information Age significantly complicates the first two. Both globalization and scientific advancements have helped us predict and understand large-scale events. Today, determining whether a disaster was truly unavoidable and unforeseeable may be a more difficult question to answer than it was in previous generations.
Your Force Majeure Clause and COVID-19
Depending on state law and the language of your force majeure clause, your business may have contractual recourse during COVID-19.
Some force majeure clauses have specific language about pandemics and other global health crises. This language may either exclude or include these types of disasters—or it may not mention them at all.
Regardless, you can only use a force majeure clause as a defense against a breach of contract claim if you can prove that events related to COVID-19:
- Was a force majeure event (i.e. unavoidable, unforeseeable, and occurring outside the contractual relationship); AND
- Effectively prevented you from performing your contractual duties.
If the clause covers COVID-19 or a related event, some or all of your obligations may be suspended during the pandemic.
How to Protect Your Business from Liability
In the event of a dispute, the court will assess not just whether your force majeure clause is valid but whether you took reasonable steps to mitigate your risk of nonperformance. To minimize the risk of liability, we recommend retaining counsel as soon as you realize COVID-19 could impact your contractual relationships.
- Plan ahead - If you believe COVID-19 may prevent you from fulfilling your contractual duties, do everything you can to mitigate potential losses. This may include finding alternative suppliers, assessing your insurance coverage, planning for travel restrictions, and establishing an effective work-from-home policy. Even if you still must invoke your force majeure clause, your attempts to mitigate the losses can help persuade a court to rule in your favor.
- Create thorough documentation - Documentation can serve as evidence in future litigation, and it may include data about the pandemic, changes to your revenue and expenses, and overall changes in your business structure and financial standing. This documentation can also help you determine whether the pandemic’s impact on your company is significant enough to warrant the use of a force majeure clause.
- Communicate with other parties - If you must modify your operations, communicate this in a notice to any parties that will be affected by your nonperformance. Explain that you are invoking the force majeure clause rather than breaching or terminating your contract.
Let Us Provide Guidance During the Pandemic
Because of the multifaceted nature of the force majeure clause, interpreting and utilizing your contract’s language can be a serious challenge without qualified legal guidance. The Threet Law Firm recommends getting in touch with us before adjusting your business operations, as well as taking the following 3 steps to protect yourself from liability:
With 75+ years of legal experience, our team is fully prepared to help your business navigate COVID-19 and related events. We can review your contract for a force majeure provision, interpret it in relation to the pandemic, and identify any other provisions that affect how you can invoke the clause. We can then recommend the best possible course of action to help your business avoid liability, protect revenue, and ensure its long-term survival.
Due to COVID-19, we are currently conducting all consultations remotely, but we are determined to support you during this crisis. Call (505) 881-5155 or contact us online to request your free, virtual case review today.