Can I Cancel a Contract Because of Coronavirus?

On March 11, 2020, The World Health Organization declared the spread of COVID-19 a pandemic. Already craft businesses are experiencing supply chain disruptions and loss of income from events being postponed or canceled. As you evaluate how to proceed, you might wonder if the “Act of God” clause in your contract might allow you to end contracts that will become difficult to complete due to complications arising from this pandemic.

An “Act of God,” or force majeure clause, allows one party to cancel a contract when unforeseen circumstances arise. However, this clause has restrictions on when it can be used.

In general, most courts say that this clause can only be used when it’s legally or physically impossible to hold up your end due to circumstances that you couldn’t foresee or reduce the likelihood of happening.

This clause can’t be used when it would simply be more expensive or more difficult to perform your promises under the contract. Courts also generally require that you show you’ve attempted to put steps in place to lessen the damages or that you’ve investigated alternatives, but none were available.

In relation to the current pandemic, it might become legally impossible to host an event due to a ban on gatherings or a travel ban. However, it wouldn’t be impossible to honor your contract promises if your alternative supplies cost significantly more or if disease fears resulted in fewer event attendees.

Not all force majeure clauses include the situation we’re currently experiencing with Covid-19. When you’re reviewing future contracts including the words “disease” or “epidemic” will make this clause more enforceable in court should something like this happen again.

Keep in mind that using an “Act of God” clause is also usually a nuclear option and one that reduces the likelihood the other party will work with you again. Because of that, the better option for many small craft businesses is to approach the other party and inform them of the challenges you are facing due to the pandemic. This might open the door to renegotiate the price, scope, or timeline for completing your end of the deal. This route is the better option if your goal is to maintain a strong working relationship and the chance to work together again in the future.

I’d encourage you to come up with a list of alternative suppliers or other options to continue to make and ship your products and run the numbers to see how using them will impact your profit margin. It may be in everyone’s best interest to simply find an alternative for the time being, rather than to back out of a contract.

Going forward, it’s a good idea to protect your business against possible future unexpected disruptions. Consider contacting your insurance broker to get a quote for business interruption insurance. This insurance covers the loss of business revenue suffered due to a disaster. While some policies exclude diseases, others would cover the loss of business revenue in these situations.

The likelihood of successfully using an Act of God contract clause is dependent on your exact situation. So you should consult with your attorney before deciding if you should or shouldn’t rely on this clause. (Don’t have an attorney? Your state’s Volunteer Lawyers for the Arts organization is a great place to start.)

Want more information? Get our tips for catastrophe-proofing your handmade business. Become a member of Craft Industry Alliance to download our editable Emergency Operating Plan spreadsheet.