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COVID-19 When Circumstances Beyond Your Control Prevent Your Business from Meeting a Contractual Obligation

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COVID-19 When Circumstances Beyond Your Control Prevent Your Business from Meeting a Contractual Obligation

As the global economy reels from the impact of the COVID-19 pandemic and small businesses are forced to shutter or drastically change their operations, small business owners may find themselves locked into contracts where performance has become impractical or impossible due to changed circumstances.  Other businesses may find themselves locked into contracts where the performance of the other party becomes uncertain.  For all companies seeking to avoid or enforce contractual obligations, the legal doctrines of force majeure and impossibility of performance must be considered.

First: Does the contract contain a force majeure clause?

Generally, a force majeure provision excuses a party from performing under a contract when performance would be impossible or impracticable due to circumstances beyond the party’s control.  COVID-19 itself, the state of emergency declared by Governor Kemp, and local stay-in-place orders and business closures may qualify as force majeure events.  Whether or not they qualify depends on the specific language of the contract and how the contracting parties have been impacted.

A traditional force majeure clause may look like this:

Neither Party will be held responsible for any delay or failure in performance (other than payment obligations) to the extent that such delay or failure is caused by fire, flood, explosion, war, strike, embargo, government regulation, civil or military authority, act of God, failure of the internet, or other similar causes beyond its control.

The clause may be titled “force majeure” or “right of termination.”  Georgia courts uphold such clauses.  See Lodgenet Enter. Corp. v. Heritage Inn Assocs., 261 Ga. App. 557 (2003) (upholding contractual clause allowing for the termination of the contract after the cessation of business operations “for any reason whatsoever.”).

If your contract does not contain such a clause, contractual doctrines such as impossibility, impracticability, or frustration of purpose may fulfill the same function.  If your contract is for the sale of goods, the Uniform Commercial Code may provide relevant guidance.  See O.C.G.A § 11-2-615 (Excuse by Failure of Presupposed Conditions).  The below considerations may still apply in the absence of a force majeure clause.

Second: Does the clause apply to your circumstance?

The inability to perform under the contract must be related to the reason for invoking the force majeure clause or the clause may not apply to your circumstance.  Ask yourself the following questions:

  • Does the language of the provision encompass COVID-19 or the government’s response to it?  The provision should include language such as “national emergency,” “act of government,” “act of God,” and “circumstances beyond the parties’ control.”
  • Under what circumstances does the provision excuse performance?  Must performance be impossible?  Or merely commercially impractical?  Do your circumstances meet this standard?
  • Is the failure to perform directly related to COVID-19 itself or the government’s response to it?  There must be a causal link between the failure to perform and the triggering event.
  • What can the defaulting party do to mitigate the impact of non-performance?

Third: What steps should you take?

How to Properly Invoke a Force Majeure: How to Defend the Invocation of a Force Majeure:
  • Review the contractual provision at issue to determine whether the circumstances qualify as a force majeure event.
  • Gather any documents that link your non-performance to COVID-19.
  • Review the contractual provision at issue for any official notice requirement and ensure it is being followed.
  • Even if there is no notice requirement, early discussions with the counterparty are advisable, as a good relationship may prevent litigation later.

 

  • If a contracting party’s performance departs from the contractual terms, you must give written notice of your intention to enforce the agreement as written.  Failure to do so could result in arguments that you waived your rights under the contract.
  • Review the contractual provision at issue to determine whether the circumstances qualify as a force majeure event.
  • Review any documentation provided by the counterparty to determine whether the circumstances qualify under the terms of the contract.
  • Evaluate the counterparty’s compliance with notification provisions and their efforts to mitigate harm caused by non-performance.
  • Evaluate the position of the counterparty, including their ability to satisfy any judgment if they are found to be in default and any ongoing business relationship you would like to maintain with the counterparty.
  • Determine the best action based on the circumstances.  Your options include:
    • Demand performance under the contract as written
    • Amend the contract to accommodate the counterparty
    • Terminate the contract
    • File suit for damages

Conclusion

The COVID-19 pandemic is forcing many small businesses into uncharted territory.  The actions you take now can determine the long-term stability of your business.   Krevolin & Horst is here to assist small business owners in determining their legal rights and options during this difficult time.  If you would like to have your options evaluated, please contact us.

Kana Caplan

404-835-8054

Email Kana

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