May 04, 2020
The recent developments of the COVID-19 pandemic have forced many business owners to make drastic operational changes. This can mean anything from transitioning to a more remote working environment, recalculating their supply orders, or even refinancing their business loan. Normally for businesses, consistency is key. However in such uncertain times, having the capacity to be dynamic, flexible, and adaptive can be hugely beneficial.
Business contracts are a recurring concern of owners trying to operate through the COVID-19 pandemic. A signed contract is a powerful document that effectively locks multiple parties into a legally-backed agreement. But given the current state of the U.S. economy, it’s not uncommon for customers to want to cancel or suspend their contractual obligation. This may or may not be possible depending on the language of the contract.
For example, some contracts contain cancelation provisions or monthly renewal clauses. In these cases, clients may indeed legally opt out in accordance to the terms of the contract. Without these types of provisions, however, it’s far more difficult for a party to cancel or delay their agreement.
To reiterate, these business contracts are legally-backed agreements and parties usually cannot break them on a whim. They are, however, amendable if both parties agree to make a modification to the original document. Optimally for business owners, customers will be transparent about any plans associated with canceling their contract. In these instances, there’s actually an opportunity to compromise and ultimately arrive at an amended agreement that works for everybody. Obviously this also requires some flexibility from the business owner.
Amendments or modifications to a contract only work if both you and your customer can come to agreeable terms. The other option for customers looking to cancel without penalty is force majeure. Force majeure is a common contractual clause that effectively excuses a party’s non-performance under certain “extraordinary” circumstances. In other words, a client can successfully cancel their contract without legal ramifications so long as a qualifying force majeureevent (ie. COVID-19) as the reason for the cancelation. Whether or not the Coronavirus pandemic actually qualifies as an “extraordinary event” largely depends on the language of the contract.
The Importance of Working With Customers
As stressful as the current situation is for your business, it’s safe to assume that the customer is facing a similar set of financial challenges. Perhaps before getting into the hard details of the contract, it may be worthwhile to conjure alternatives that might work for all involved parties. It’s important to remember that the current recessed economy is temporary. You’ll want to maintain as many of the business relationships as possible so that once the economy begins to approach “normalcy” again, you’ll have the same connections (or perhaps stronger connections) with your base clientele.
One way to do this is to coordinate a postponement. For example, if the contract relates to services that are to be provided at a given date/time, rescheduling is certainly preferable to outright cancelation. Rescheduling to a later date will minimize your loss by maintaining the business of the client. Another option is to allow downgrades or order reductions. Again, the reason the customer is canceling is likely financial. Thus, making the usual contractual obligations more financially palatable may in-fact help retain the customer’s business in the long-run.
In general, it’s important to keep in-mind that both you and your client are caught in a difficult situation that wasn’t either party’s fault. If you can devise creative solutions that address their pressing concerns, you’ll likely maintain their business in the post-pandemic economy. Nonetheless, certain customers may be less willing in compromise and more interested in freeing themselves from their contractual obligations as soon as possible. In these instances, it’s imperative to consult a legal professional and carefully review the terms of your contract.
The Importance of the Business Contract
At the end of the day, a signed contract is a document enforceable by law. Therefore, if a dispute arises between you and your customer, the courts determination will ultimately depend on their interpretation of the contract. Every contract is different, but most will include some sort of language pertaining to cancelation, termination, or force majeure clauses. These are pivotal provisions that—depending on their phrasing and the situational details—may free parties from their liability and contractual obligations.
Force majeure is particularly relevant in the context of the COVID-19 pandemic. A successful invocation of this clause effectively excuses a party’s non-performance. However, does COVID-19 indeed qualify as a force majeure event? The answer to this isn’t necessarily straight forward, but based on similar types of events in recent history, the answer often points to “yes”. Nonetheless, it depends greatly on the details of the dispute and the language contained within the agreement. Contracts that make mention of pandemics, disease, plagues, or more generally “Acts of God”, will likely constitute a qualifying force majeure event.
Importantly however, the interpretation is circumstantial and largely impacted by the phrasing of the contract. If you find yourself in a situation where a customer is looking to cancel their contract, it’s wise to consult an attorney—especially if they’re trying to invoke force majeure clauses.
