Vendor Contracts: The Importance of Force Majeure Provisions in Light of the Coronavirus (COVID-19)

Category: Special Bulletins
Date: Mar 17, 2020 07:28 PM

Schools should consider how the Coronavirus may affect the business contracts they have with vendors.  Many schools are considering or have implemented school closures and are cancelling events, including upcoming international and domestic trips.  Whether the school is entitled to a refund or whether it must pay the vendor upon cancellation, will depend on the specific contract terms, including whether the contract has a force majeure provision.

A force majeure provision excuses a party’s performance of its obligations under a contract when certain events beyond the control of the parties take place.   In light of the current pandemic, we recommend that force majeure provisions be drafted broadly to include outbreaks, epidemics, and pandemics, in addition to other standard force majeure events, such as any fire, flood, act of God, war, governmental action, act of terrorism, natural disaster, or any major event beyond the school’s control.  A force majeure provision should also clearly explain the obligations of the parties regarding payment for services when there is a force majeure event.  If the force majeure provision does not clearly state that the school will not be liable to the vendor or third party for payment if the vendor or third party is not able to perform services, there is a possibility that the school may continue to be liable for payment despite not receiving the goods or services. 

However, what if you’ve already signed the contract?  Review the contract to determine the following:

”        What is the timing for cancellation? 

”        What are the penalties?

”        Does it have a force majeure clause and, if so, what does it say?

”        Does the contract have termination provisions?

 Whether a cancellation or closure related to Coronavirus will be considered a force majeure event that excuses performance of the contract obligations will not only depend on the wording of the force majeure clause, but also on whether the school was required to close or cancel based on the direction of local health officials or other government officials.  For schools that decide to close or cancel without such direction from local public health officials or government officials, it will be more difficult for the school to argue that the closure was beyond the control of the school.  Events that are not beyond the school’s control are not considered force majeure events, and will not excuse performance of the contractual obligations. 

If the contract does not have a force majeure provision or the provision does not allow for cancellation in the wake of this pandemic, there might be other options for the school.

”        Consider cancelling the event sooner, rather than later, to avoid larger cancellation fees as the event approaches. 

”        Can you work with the business to postpone the event or services?  If so, consider drafting an amendment to the original contract that modifies the original agreement to include a force majeure provision (in case the postponed event/service still cannot take place). 

”        If the contract has a termination for convenience clause, consider cancellation as an option.

Most contracts include strict requirements to provide notice of force majeure events, cancellation or termination.  Schools should follow the requirements for giving notice in the contract to make sure the action is legally effective. 

If a business contract does not have a force majeure provision, courts excuse a breach of contract (and the corresponding obligations of the parties) when an unforeseeable event makes performance impracticable or impossible. The doctrine of impracticability excuses performance of a contract obligation when an unforeseeable event makes performance extremely difficult or expensive.  The doctrine of impossibility excuses performance of a contract obligation when an unforeseeable event makes performance literally impossible.  Whether performance of a contract obligation in light of the Coronavirus pandemic is impractical or possible will depend upon the facts of each case, but application of the doctrine may relieve the school from paying for services it has not received.

Future Business Contracts

Not all insurance companies insure financial losses that occur due to a pandemic.  Therefore, schools should include force majeure provisions in their business contracts to explain how the parties would handle such a situation.

While a force majeure provision can afford a contracting party some relief, it can also create a problem if it is ambiguous or too restrictive.  For example, a force majeure clause allowing nonperformance if an event occurs that makes performance “impossible” is a very high standard and may not excuse a party following government guidance.  Similarly, a force majeure clause defining a force majeure as an “Act of God” without defining an “Act of God” or listing events, leaves the clause to varying levels of interpretation.  A clause that defines a force majeure as a “pandemic” would be interpreted more strictly than one defining it as a “pandemic or threat of pandemic.”  Schools should carefully choose their words when drafting a force majeure provision.

Educational Travel Organization Contracts

It is especially important for schools to have a force majeure provision in any travel vendor agreement so that the school can receive a refund or release from payment obligations when the trip is cancelled due to a force majeure event. 

As an alternative, the agreement may provide that if the trip cannot take place due to a force majeure event, the trip will be postponed.  Schools will need to decide if that alternative provision is agreeable, since postponement of the trip could result in a different group of students in a subsequent school year participating in the trip.  

If the school directly collects payment from parents for the trip and, in turn, pays the travel vendor, schools should also coordinate the provisions and force majeure language in their agreement with parents with such provisions in the travel vendor agreement.

Schools may also consider purchasing trip insurance for all participating students, or require families to purchase trip insurance as part of any domestic overnight or international field trip.  In some cases, trip insurance permits schools or families to cancel the trip for any reason. 

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