COVID-19 upended the world economy and caused massive disruptions to the everyday operations of businesses, including the enforcement of legal contracts. Businesses sign contracts every day to promise to purchase, sell, ship, deliver goods or services, or otherwise engage in activities with each other. When companies fail to uphold their contracts, this is called a “breach of contract,” which can require courts to intervene.
But one of the most damaging effects of the pandemic for businesses was the fact that many contracts became unenforceable. When you can no longer do business as usual, when you can’t gather people together for live events and when venues have to shut down for public health emergency orders and social distancing, many business activities can no longer happen.
What does this mean for business contracts, and how can businesses create better legal contracts for the new realities of life as the pandemic slows down and the economy improves?
Here are a few big-picture ideas to keep in mind when creating legal contracts and dealing with contract enforcement for your business during COVID-19 and beyond.
Understanding Breach of Contract in Legal Contracts
Usually, when two parties (businesses or individual people) enter into a contract, they are making a good faith agreement to provide some goods or services in exchange for money. If one party to the contract fails to uphold their end of the deal, they can be found liable for breach of contract.
For example, let’s say that your business sells wedding cakes and you had a contract to deliver a massive $5,000 wedding cake for a big wedding on May 1, 2020. Let’s say that the client paid you for 50 percent of the fee in advance, with the rest due upon receipt of the cake.
Normally, if you failed to show up with the cake on the big day, your client could take you to court for breach of contract and demand a refund of that $2,500 deposit.
But in March 2020, COVID-19 hit. What if your business was unable to operate because of newly announced public health restrictions? What if your employees got sick, and you had to shut down your business? What if you don’t want to refund the client’s $2,500 deposit because you already spent it on cake ingredients and wages for your bakery staff?
Depending on the contract, you might have a legal right to be excused from your contract because of these external events and problems that happened that were beyond your control. This is called a defense of “impossibility/impracticability:”
Impossibility: the contract could not be upheld because it became impossible to do so, such as if your business was ordered to close by public health officials.
Impracticability: meaning that the contract is too impractical to fulfill due to external events that were no one’s fault and could not have been foreseen.
These defenses of impossibility and impracticability can potentially be used to excuse a breach of contract, even if there is not specific language in the contract to describe these situations; they are part of common law. Consult with an attorney about your situation and see your options for valid defense in case of a contract breach.
Most business owners never want to breach a contract. It’s not anyone’s ideal situation to be in. But in case you ever end up in a business dispute due to a contract where you cannot uphold your end of the deal, you might have a valid legal defense that can protect your business. Learn more about typical contract breach defenses from this article in the National Law Review.
Force Majeure Clauses
Another legal term that has been more widely used and that more business owners have unfortunately had to become familiar with is “force majeure,” which means “superior force.” Some contracts are written with a “force majeure” clause, which outlines provisions for what happens to the agreement between the parties in case of some extraordinary catastrophic events.
A typical force majeure clause will include a list of force majeure events — specific types of disasters or situations — that would trigger the clause. For example, what happens to your deal in case of terrorist attack, war, extreme weather events, epidemic or pandemic?
One prominent recent example of a force majeure clause is from the world of pro sports. In March 2020, the NBA postponed its season and eventually invoked the force majeure clause in the collective bargaining agreement (CBA) between the league and the players’ union. The NBA was known for having a particularly clear, specifically written force majeure clause in its contract that had a specific legal agreement for what would happen in case of a pandemic.
This gave the league and its players some clarity and certainty about what to do next during the crisis; even though the league had to cancel some games and both sides lost money, they were able to move forward in a more proactive way because they had agreed upon that force majeure clause.
Not every small business might have a force majeure clause in your contracts. But going forward, you might want to include some language to protect yourself from worst-case scenarios.
For example, in the case of a wedding cake business mentioned above, what happens if the wedding is canceled due to a natural disaster or other event? Is the cake business expected to refund the $2,500 deposit? Can the cake business issue a partial refund of the $2,500, keeping some of the money to cover the costs they already incurred by baking the cake?
Putting these expectations into your contract can help save time, effort and money. A well-written contract ultimately helps protect both sides of a business deal. It secures both parties’ rights and clarifies expectations.
What You Should Do Next
Business owners should take a fresh look at their standard business contracts that they use for everyday transactions. Talk with an attorney and ask them to review your business contract language to see if there are any loopholes that need to be fixed or any updated that need to be made.
The pandemic is already here, so whatever language you add to your contract cannot protect you from what already has happened since March 2020. But you can think strategically about how to protect your business from other unforeseen big risks that are still possible in the future.
Having a well-written business contract is an ideal way to protect your business, clarify expectations with your customers and ultimately help everyone do business with greater confidence and efficiency. No business owner wants to go to court and no one wants to get sued. Having clear, specific contract language in place can help your business focus on what you do best while protecting everyone’s rights and interests.
Incfile offers business contract templates that can help you get everything in order. We have 25+ high-quality legal documents written by a business attorney to help aid in keeping your business contractually protected.
DISCLAIMER: This article does not constitute legal advice; talk to an attorney for advice about your specific situation.
Ben Gran is a freelance writer from Des Moines, Iowa. Ben has written for Fortune 500 companies, the Governor of Iowa (who now serves as U.S. Secretary of Agriculture), the U.S. Secretary of the Navy, and many corporate clients. He writes about entrepreneurship, technology, food and other areas of great personal interest.