Exiting a contract can come with consequences. But as coronavirus halts business operations across the globe, companies are skimming their agreements’ fine print to reevaluate the relationships they hold with others.
Many are doing so through Force Majeure, also known as Act of God clauses. These provision allow parties to withdraw from a contract if conditions beyond their control prevent them from fulfilling their duties. Depending on the circumstances, Act of God clauses can temporarily or permanently relieve companies of their obligations to other businesses.
Typically, businesses use Act of God clauses for things like supply chain disruptions or natural disasters. However, most have never dealt with such provisions regarding pandemics.
It’s not always easy to use
Invoking an Act of God clause is easier said than done. As contracts are governed by state law, some businesses must go to greater lengths to demonstrate operational disruption more than others. While Georgia’s contract laws don’t state anything about pandemics, a recent report says if a pandemic isn’t enough to terminate a contract, it may as well not have Act of God provisions to begin with. If that’s the case, businesses could utilize other options like the Doctrine of Impossibility or Frustration of Purpose.
Do pandemics qualify parties to invoke Act of God clauses?
It depends on the language in the agreement. Contracts that include Act of God provisions tend to list specific events that allow parties to exit them. Those reasons can include natural disasters, war or unforeseen government actions. Pandemics and epidemics can be listed in there as well, but that’s not always the case. Moreover, some parties may use broad “catch-all” language to utilize Act of God.
Are there other avenues for contract relief?
If businesses enter agreements that lack Act of God language, there are other options available. In some cases, courts could deem a contract unenforceable if a business faces substantial burdens due to the coronavirus.
Contracts, let alone the current pandemic, can be difficult for businesses to navigate on their own. Because of this, it’s crucial that businesses address the legalities of the situation before making any decisions.