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What Happens When Your Contract is Cancelled Due to COVID-19?

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The world looks different today than it did six months ago. Your business likely looks different today, too. For many, COVID-19 has caused deep and unexpected disturbances in business plans. Unfortunately, the contracts you signed at the beginning of the year probably didn’t account for a global pandemic. So, what happens when your contract is cancelled due to COVID-19?

Contracts Aren’t Drafted with Flexibility in Mind 

Every business uses contracts, whether you think about it much or not. Ordering and delivery of goods are based on contracts. Production is all about contracts. Booking events, renting spaces, and arranging travel — all contracts. But, what if unforeseen circumstances keep you or your business associates from being able to fulfill contract obligations?

Contracts, both fortunately and unfortunately, are not drafted with flexibility in mind. A customer can’t order and pay for twenty-five handbags and you only deliver twenty. A conference can’t agree to book you as a speaker for a set speaking fee and then just cancel your appearance. You can’t agree to rent your facility for an event and then cancel the event, keeping the deposit.

Or, can you? Is there something in a contract that lets you deliver something different than what was agreed upon (or not deliver at all)? As always, it depends. You will have to look to the contract itself.

Does the Contract Allow for an Extension? 

If part of the contract is performance within a certain period of time, there may be a provision that allows for an extension. Even if there is no such provision, it may be possible to salvage the contract by negotiating with the other party around time. Consider what might be a reasonable extension for your business before approaching the other party about extending the contract.

Does the Contract Include Indemnity or Limitation of Liability Language? 

Most contracts include some kind of language that assigns responsibility in the case of breach. Indemnity language in a contract may require one party to compensate the other for losses that occur due to a contract breach. Limitation of liability language, on the other hand, may specifically state that liability for breach of contract is limited to a certain dollar amount or a certain type of damages. 

Is There a Force Majeure Clause?

Without getting too “legalese” on you, let’s talk a little bit about force majeure. In contracts, this clause is often included to accommodate for “acts of God.” Basically, this clause is a legal way of admitting that contracts are fallible. They can’t possibly plan for every eventuality. So, contracts sometimes include a clause that says, under these certain circumstances, one or both parties may not perform their contractual obligations without penalty. Usually, force majeure clauses are used for things like fires, earthquakes, and other natural disasters. However, it may specifically or impliedly include pandemics.

Whether a force majeure clause will be good or bad for your business depends on the circumstances surrounding your unperformed contract. Did you spend time and money expecting the contract to be completed, only to have it cancelled under a force majeure clause? You may be out of luck. But, did you cancel your contract because you weren’t able to perform because of the pandemic? You may be able to walk away without penalty.

Is There Insurance?

While all businesses should be covered by insurance, some contracts also require one or both parties to carry insurance to cover losses due to breach of contract. Contact your insurance company and review the contract closely to see if insurance should be involved.

What if None of the Above Clauses Apply?

If you have gone through your contract and ruled out any avenues related to extensions, indemnity, limitation of liability, force majeure, or insurance, you may be dealing with plain old termination of the contract. Of course, this is not the first time in history that a contract between two businesses was not fulfilled. In fact, contracts fall through all the time for all kinds of reasons. Termination of a contract, for any reason, will typically carry with it some kind of penalty. Maybe you just need to return the deposit you received from a customer. Maybe they need to pay you for your loss of time. Whatever the damages, termination of a contract doesn’t always mean serious consequences for your business. Work with an attorney to help you negotiate a settlement that works for all parties. 

What if There Was No Signed Agreement?

You may already know that, even without a signed written agreement, a contract may still exist. It is possible to commit to a verbal or implied contract without signing and dating on the dotted line. If you had an agreement before the start of the pandemic that has been impacted by COVID-19, there may be something you can do. Talk to a lawyer about the circumstances surrounding your agreement. All may not be lost.

As Always, Every Circumstance is Different 

Just as every contract is different, every business’ experience with contracts is different, too. However, it is important that you know what is possible. It is possible that you can get out of a contract without penalty due to the pandemic. It is also possible that you can recover some of your losses based on a broken contract. It all depends. If you and your business are suffering due to COVID-19, let’s talk. Click here to schedule a consultation. With an experienced business attorney on your side, you may be able to recover more than you think.

P.S. You are not alone! There are lots of businesses that are still reeling from the impacts of COVID-19. Check out some recent stories in the news that will help put your conflict in context.

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