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How to Reevaluate Business Contracts After COVID-19

As a response to the COVID-19 pandemic, state governments imposed a ban on travel, large gatherings, and movement. These restrictions have impacted businesses and their ability to fulfill their contractual obligations.

So, if you can't make a deadline set by a contract due to the pandemic, are you in breach of your contract? If you paid for a venue, but the venue is no longer operating because of COVID-19, can you ask for your money back? These are some of the many questions people are asking with regard to the enforcement of contracts.

Force Majeure Clauses

Small businesses are increasingly relying on force majeure or impossibility of performance to show they are not breaching their contracts. A force majeure clause in a contract will allow you to cancel your contractual obligations when an event that can't be foreseen or controlled makes it impossible for you to perform the contract.

Courts look at several factors to see if a force majeure clause applies in a particular situation. These include:

  • What the contract actually says about force majeure (some contracts list out what would qualify for a force majeure)
  • Whether the event that happened could have been foreseen or controlled
  • Whether the non-performance is the direct result of the force majeure

Does COVID-19 Qualify as a Force Majeure?

It depends on the particular case at hand. It will depend on the actual work that was to be performed and the language of the contract itself. In some cases, the contract itself lists unforeseen events that would qualify for force majeure. These may include:

  • Acts of God
  • Pandemics
  • Natural disasters
  • Government interventions

You will also have to show that the pandemic is the direct cause of your inability to perform. In general, courts will review contracts on a case-by-case basis to decide if COVID-19 would qualify as a force majeure.

What If There Is No Force Majeure Clause?

Small businesses may still be able to cancel a contract even if the contract doesn't have a force majeure clause. Section 2-615 of the Uniform Commercial Code allows people to cancel a contract under what is called the “doctrine of commercial impracticability."

This section states a party will not be in breach of their duty if:

“Performance, as agreed, has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made."

You can also use the common law doctrines of impracticability and frustration of purpose. You should note, however, that the courts interpret these doctrines narrowly.

Note: the application of the laws might vary by jurisdiction. So, make sure to research your state's laws to know what might apply in your situation.

How Should Businesses Draft Contracts in the Future?

Now, as companies start reopening and adjusting their practices to the new business environment, it is important that they revise their standard contracts and improve some provisions. Some of the things companies should consider revising include the following:

  • They should make sure their future contracts specify whether force majeure provisions cover pandemics similar to COVID-19
  • They should specify the contracting parties' rights and duties in cases of force majeure
  • They should also state what is required of the non-performing party before invoking force majeure (such as how far the other party should go to mitigate damages)

These reevaluations can help small businesses identify gaps in their contracts, identify necessary new provisions, and revise them.

Additional Resources

Not Sure How to Evaluate Your Standard Contracts? Speak to an Attorney

While your standard contract may appear to be complete on its face, it may contain several loopholes that could make your business vulnerable. This is especially true at times of pandemics. If you are looking to reevaluate your business contracts, make sure to speak to an experienced small business attorney near you.

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