Coronavirus Pandemic Gets Some Business Owners To Wonder If They Can Terminate Or Suspend A Contract Due To COVID. If You Have Queries About This Feel Free To Contact Us.
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This article is based on the transcript from the video above – you should look at the clauses referred to in the video.
Can You Get Out of a Contract Due To COVID?
The growing impact of Covid-19 to the economy involves all businesses around the world. Because your business can no longer perform your obligations under that contract, can you terminate a contract due to COVID-19?
What should you do?
The first thing you need to do is find your contract, then do a ‘control F’ or a search for the word ‘force’. Once you come up to the relevant clause, you need to examine carefully what the clause says.
The Force Majeure Clause
The Force Majeure is a clause that is included in contracts to remove liability for natural and unavoidable catastrophes that interrupt the expected course of events and prevent participants from fulfilling obligations.
As an example, this clause says ‘neither party has any liability under breach of this agreement for any delays or failures in performance, which result from circumstances beyond reasonable control’.
As COVID is a circumstance that is beyond the reasonable control of the party, then they’re not in breach for a failure to perform.
For instance, let’s say you run a fish canning factory in Alaska and COVID breaks out. The government says you have to stand down your workers because they need to self-isolate. Now, because that would be a circumstance that’s out of your control and you no longer can fish because your workers can’t turn up to the factory, then you’re excused from any breach or failure to perform.
That means you’re not under an obligation to perform as long as COVID exists.
What do you have to do Under the Contract?
You need to look at the relevant clause. Under this clause you’ve got to promptly notify the other party in writing about the cause of delay and when they ceased to do so.
Write to the other side and say something like, “Due to COVID, we are no longer able to supply you 10,000 tins of fish a week because we have to stand down our workers. As soon as the government lifts the ban, we will be back up to production capacity within two weeks.”
That’s basically the best you can do because you do not know how long the COVID stand down may last. Then usually there’s a clause like this in a contract which then allows you to terminate if the event lasts for a longer period.
If the circumstance continues, then either party can terminate the agreement. Which makes sense because you enter into a contract to do certain things.
In this case, can fish and supply tins of fish. If a circumstance arises where you can’t do that, that’s fine. You’re excused from performing. But, if it goes on for a longer period of time, then either party should be able to get out of the contract.
Let’s have a look at this next contract.
What is a Force Majeure Event?
It’s anything outside the reasonable control of a party, but only if the non-performing party is without fault in causing the default or delay.
Example Of A Force Majeure Event
Let’s use COVID as the example and the fish canning scenario I mentioned before. If COVID arises, that’s something that’s outside the reasonable control of the party. The party who is not able to perform due to COVID must be without fault in causing the delay.
So did the fish canning people cause COVID? Well, NO. So that means that under this clause they don’t have a problem.
Could my fish canning people have taken steps to prevent the delay? Well, No. They couldn’t because the government said, “Look, you’ve got to stand down. You got to self-isolate. People can’t go to work.” So that means this clause is okay as well.
Now, if the government said, “Everyone can turn up to work as long as you wear a mask.”
So then the fish canning factory would need to take steps to enable its workers to turn up. This means they’d need to buy masks and make those available. That way, the fish canning people could still perform under this contract. But given there’s a government stand down, you don’t need to worry about that.
And then there’s another catch-all which basically says, the delay cannot reasonably be circumvented by the non-performing party at its expense through other means.
In other words, could the fish canning factory put in place other means so that they can still continue to perform under the agreement?
And in this case, the answer is clearly NO. There’s a government stand down. People can’t go to work. People have to self-isolate. Given that, they can’t turn up to the factory and do fish canning.
The Clause and the Affected Party
Looking at the clause again this says, if an event, a force majeure event arises, which by looking at the definition we know it has, and it prevents a party from performing its obligations, then they’re defined as the affected party.
The affected party must notify the other party of the event, what it is, it’s COVID, and the obligations that prevented from performing.
So the affected party, the fish canning people, would write to the people they’re supplying and say:
“We were meant to supply you 10,000 tins of fish a day. But due to COVID, we can’t do that. We’ve been asked to stand down all our workers. We will stand them down until such time as the government notifies us that we can go back to work.
Once the government notifies us that we can get back to work, we will be up and running. We will be at full production capacity within say two or three weeks.”
This written notice has to go out, to satisfy the obligations under this clause. Then this clause basically says, well, you don’t have to perform your fish canning duties for as long as the force majeure event continues.
If COVID goes on for six months, then for the same period of time, the six month period, the fish canners do not have to supply.
Logically then, because the force majeure event is something out of the reasonable control of either party, then neither party is liable to the other for any damages.
What If There Is No Force Majeure Clause?
If you cannot find a Force Majeure clause, do a search for ‘Unforeseen events’.
In this contract, we have a clause titled ‘Unforeseen Events’.
Now this clause says, a party is excused from performance obligations to the extent it’s prevented by circumstances beyond its reasonable control, including but not limited to acts of nature, natural disasters, acts of war, terrorism, riots, strikes outside the party organization.
It would be good if the clause referred to ‘virus or pandemic’. But because it’s not, that’s not fatal because of the way the clause is drafted.
Practical Suggestion On What to Do When an Event like COVID arises
Circumstances described above may arise. Then the affected party must give notice of these circumstances to the other party as soon as possible. They should identify the effect they’ll have on their performance.
Another example like I’ve mentioned above, the ‘Affected Party’, the fish canning people, would write to the people they’re supplying. For example, they can say, “Listen, we meant to provide you with 10,000 cans of fish a month. We can’t do that due to COVID. As soon as COVID ends, within two to three weeks, we’ll be back up to production capacity.”
You have to notify the other party, and take all reasonable efforts to minimize the effect of the circumstances.
If the government after a month basically says, “Look, people can return to work as long as they keep a distance of 1.5 meters and wear masks,” then you need to try… Well, you need to use your reasonable efforts to try and make your business operational in supplying tins of fish within those parameters.
Now, if for some reason that was not possible because people have to stand within two feet of each other on a production line or something like that, then you might be still off the hook (no pun intended). In other words, you still may not be able to return to supplying the contracted quantity of tinned fish.
But you might be able to do something. For instance, you may be able to spread your people out on the production line. You may not be able to produce 10,000 tins of fish a week. However, lets say you might actually be able to produce 3,000 tins. This is something that would allow you to return to production under your contract.
So if you could recommence supply, even at the reduced amount of 3,000 tins, that at least, under this clause anyway, you would have made reasonable efforts to minimize the effect of the COVID delay.
That’s how an event like COVID can pause your obligations to perform under a contract. It can even potentially allow you to get out of the contract.
Have any questions? Please feel free to get in touch.