Invoking force majeure during a difficult economy

| Mar 10, 2021 | Business Law |

In 2020, the United States saw an economic dip, downturns in GDP and job losses not seen in generations. Businesses in Georgia and across the country continue to suffer, whether it is brick-and-mortar retail stores and restaurants or the service, sports, entertainment or transportation industries.

With 22 million initial job losses early in the year and a recovery of only 12 million of those, many Americans are still out of work. Many businesses are also experiencing the financial strain of lockdowns and are hard pressed to meet their contractual obligations.

The question is, if a deadline, the fulfillment of an order or the completion of a project set by contract cannot be met due to the loss of a business partner, supplier or reduction of the company’s work force, is the business entity in breach of contract?

Remedies for nonfulfillment of contractual obligations

The force majeure, or “act of God”, clause in a contract usually articulates the conditions under which the contract could be cancelled. The courts will look at several factors to determine if the application of this clause was justifiable under the circumstances. Among these are

  • A list of specific unforeseen events or catastrophes that could invoke force majeure
  • If the event that occurred could have been foreseen
  • If non-performance is the direct result of the force majeure

Even without the force majeure clause, companies may also be able to cancel a contract under Section 2-615 of the Uniform Commercial Code (UCC), using the doctrine of commercial impracticability. Stated in this section is that a party will not be in breach of their contractual duty if:

“Performance, as agreed, has been made impracticable by the occurrence of a contingency, the non-occurrence of which was a basic assumption on which the contract was made.”

Common law remedies

There are two other common law remedies that a small business owner could turn to if their contracts do not include a force majeure clause. These are the doctrines of impracticability and frustration of purpose. The courts may interpret these remedies more narrowly, however, and the application of the law varies by jurisdiction.

Revising future contracts

For Georgia businesses that are starting to reopen and are adjusting to a new environment, this may be a good time to reevaluate current contracts and consider options that will protect the business from unforeseen events. Having an experienced business and corporate law attorneys to discuss options will help ensure the company’s viability and future stability.