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: |
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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.