Two key con­tract pro­vi­sions to watch in a pan­demic

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Be­cause of the coron­avirus pan­demic, busi­nesses worry about whether they can meet their con­trac­tual obli­ga­tions to other busi­nesses.

Some worry about spend­ing money for ser­vices or things they no longer need, or they just want to cut costs. Some ven­dors worry about whether they can meet con­trac­tual obli­ga­tions when their work­force is down.

While there are many con­tract pro­vi­sions that could come into play in a dis­as­ter, let’s look at two crit­i­cal ones.

How you’ll fare de­pends on the word­ing of your con­tracts. Word­ing mat­ters.

Ter­mi­na­tion for con­ve­nience: Al­most all con­tracts pro­vide that you can ter­mi­nate if the other side breaches.

Usu­ally, those con­tracts have a pro­vi­sion giv­ing the party that vi­o­lated the con­tract a spe­cific amount of time to try to fix the vi­o­la­tion to avoid a con­tract ter­mi­na­tion.

But if you just want out of a con­tract with­out such an ex­cuse, such as to cut costs, you need a clause al­low­ing ter­mi­na­tion for con­ve­nience.

Such a pro­vi­sion al­lows a party to ter­mi­nate for any rea­son or no rea­son. Not all con­tracts have that pro­vi­sion.

Some­times only the cus­tomer has a right to ter­mi­nate for con­ve­nience, and the ven­dor doesn’t have that right — and some­times that’s re­versed, in which case the ven­dor would have the right to ter­mi­nate for con­ve­nience, but the cus­tomer doesn’t.

Some­times nei­ther party has the right to ter­mi­nate for con­ve­nience. Some­times they both do. It varies from con­tract to con­tract.

‘Force ma­jeure’: In sit­u­a­tions where out­side events pre­vent a party from per­form­ing a con­tract, even only tem­po­rar­ily, the ap­pli­ca­ble con­tract pro­vi­sion is the “force ma­jeure” clause.

This mainly ben­e­fits the ven­dor. Such clauses are not writ­ten to help a cus­tomer who can’t pay be­cause of in­suf­fi­cient funds, an eco­nomic down­turn or loss of need for the goods or ser­vices.

In essence, such a clause says that if a party to the con­tract is pre­vented from per­form­ing due to cir­cum­stances be­yond its con­trol, it may de­lay per­form­ing the con­tract until the road­block to performanc­e goes away. The stymied party might even be able to ter­mi­nate the con­tract with­out li­a­bil­ity.

Un­for­tu­nately, in many con­tracts, the force ma­jeure lan­guage is le­gal boil­er­plate that nei­ther side ne­go­ti­ated or care­fully eval­u­ated.

When par­ties can fore­see that spe­cific kinds of cat­a­strophic events are rea­son­ably pos­si­ble and would stymie con­tract performanc­e, the best prac­tice is to ne­go­ti­ate terms that specif­i­cally ad­dress what hap­pens if those events oc­cur.

But such spe­cific dis­as­ter terms are rare and un­for­tu­nately typ­i­cally are ne­go­ti­ated only in large con­tracts be­tween cor­po­rate ti­tans.

The de­tails of a force ma­jeure clause are crit­i­cal.

What counts as a suf­fi­cient ex­cuse? Does a ma­jor dis­ease out­break qual­ify?

Is there a spe­cific list of ex­cuses or a catch-all state­ment that any block­age be­yond a party’s con­trol will suf­fice, or both?

Does a sub­stan­tial in­crease in the cost of the ven­dor’s performanc­e qual­ify? What about much higher la­bor costs, such as from work­ers be­ing un­will­ing to work dur­ing a pan­demic or a la­bor strike?

Is there a pro­vi­sion stat­ing that if a con­tract performanc­e block­age per­sists for a cer­tain length of time, can the cus­tomer ter­mi­nate the con­tract? And if the cus­tomer has paid un­der the con­tract, can it get a par­tial or full re­fund? Can the cus­tomer sus­pend pay­ments un­der the con­tract until performanc­e re­sumes?

Ne­go­ti­ate: Re­gard­ing con­tract terms gen­er­ally, if you are the cus­tomer, the big­gest de­ter­mi­nant of how you’ll fare is usu­ally whether you ne­go­ti­ated the le­gal terms of the con­tract.

Ven­dors have stan­dard con­tracts that they seek to have their cus­tomers sign as is. The con­tracts usu­ally are one-sided in fa­vor of the ven­dor.

If you didn’t have a lawyer ne­go­ti­ate the le­gal terms and just signed the ven­dor’s con­tract as is, you may be in a bad spot and at the mercy of the ven­dor. Keep that in mind when en­ter­ing into new con­tracts.

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