All business people are looking to their liability exposure during this period of national emergency caused by the COVID-19 pandemic. When reviewing your contracts (be they leases, franchise agreements, etc.), look for a force majeure clause. This is the term which states that the obligations of one or both parties are excused in times of national emergencies or natural disasters. If it is included in the contract (warning – not all contracts contain this clause), you will usually find it near the end of the agreement among the miscellaneous clauses.
The clause may go by a different name, such as “Acts of God,” or “Acts Beyond the Parties’ Control,” “Unavoidable Delays” or simply, “Force Majeure,” which means unforeseeable circumstances preventing someone from satisfying their contractual obligations.
Here are a few examples of how the clause may appear in your contracts:
Acts Beyond the Parties’ Control. Neither of us shall be liable for loss or damage or deemed to be in breach of this Agreement if either of us fails to perform our obligations as a result solely from the following causes beyond our reasonable control, specifically: (i) transporting shortages or inadequate supply of equipment, merchandise, supplies, labor, material or energy; (ii) compliance with any applicable law; or (iii) war, strikes, natural disasters or acts of God. Any delay resulting from any of these causes shall extend performance accordingly or excuse performance in whole or in part as may be reasonable, except that these causes shall not excuse payments of amounts owed to us for any reason.
If either party shall be prevented or delayed from punctually performing any obligation or satisfying any condition under this Lease (other than an obligation or condition requiring the making of any payment hereunder) by any strike, lockout, labor dispute, inability to obtain labor or materials or reasonable substitutes therefor, Act of God, governmental restriction, regulation or control, enemy or hostile governmental action, civil commotion, insurrection, sabotage, fire or other casualty, or any other condition beyond the reasonable control of such party (herein, an “Unavoidable Delay” or “Force Majeure”), then the time to perform such obligation or satisfy such condition shall be extended for a period equal to the duration of the delay caused by such event. If either party shall, solely as a result of any such event, be unable to exercise any right or option within any time limit provided therefor in this Lease, such time limit shall be deemed extended for a period equal to the duration of the delay caused by such event.
I have heard from several clients so far concerning these contract provisions. In one instance, a Franchisor had ignored the clause and demanded that its Franchisees continue to make payments of royalties and fees regardless of the national emergency. In a second example, the landlord was pressing for its rent payment.
The pandemic, and specifically the national emergency leading to retail and food establishment closures and safe distancing requirements, is precisely the situation anticipated by the force majeure clause. If your contract contains this term, then you are protected from default on the contract due to your inability to perform as a result of government action or any other cause for a substantial decline in your business due to COVID-19.
Generally, this protection from default continues until the cause for the delay ceases. Oftentimes, as in the second example provided above, your obligation will be “extended for a period equal to the duration of the delay caused by such event.”
Review your contracts. If they contain the Force Majeure term, then you will be prepared to push back on the other contracting party’s threat to default you despite these extraordinarily difficult economic times.
We here wish you, your employees and loved-one’s good health and future prosperity.
BE ADVISED that these comments are not intended as legal opinions and are not to be relied upon as legal advice. If you need franchise-related legal advice, please contact us to discuss the specifics of your franchise business.
© KilcommonsLaw, P.C. 2020