Who pays when an agreement to provide services is canceled due to COVID-19?
Recently, a professional musician asked me how to handle existing contracts for gigs that will be canceled due to COVID-19. Should he return deposits? Could he seek payment in even if he didn’t play the gig? His band members count on the gigs to pay rent and support their families. But he didn’t want to get sued, and he wanted to avoid hurting his reputation with venues where he wants to play in the future.
Thousands of service providers and their clients are asking these questions. Plumbers, contractors, gardeners, child care providers and repair people are getting cancellations from people who cannot risk inviting someone into their homes and from businesses that are shut down. Homeowners and businesses are wondering about deposits and cancellation fees they agreed to pay. Visual artists, muralists, and graphic designers may be confined to their homes and unable to fulfill promises they made months ago.
A full analysis of these issues could fill volumes. This article will briefly explain a few of the key concepts likely to come into play.
Language of the contract
The first place to seek answers to the above questions is the written contract. Look for a “Force Majeur” clause. A typical force majeure clause says neither party to the contract can be held responsible if it was forced to violate the terms of the contract due to unforeseen circumstances beyond the party’s control.
For instance, a contract to paint a building may require the painting to be completed no later than May 1st. But a force majeur clause in the contract may say that deadline does not apply if a natural disaster occurs.
Other contract terms may come into play as well. The contract may state what happens to a deposit if one party or the other cancels the service. It may say the service can or will be provided at a later time if delayed by unforeseen circumstances. Or it may give a definitive time limit beyond which the service provider will not get paid if the job isn’t done; or a deadline after which the service provider gets to keep the deposit if the client cancels.
Impossibility / impracticability
What if the language of the written agreement does not answer your question?
In most states including California, if it is impossible for a party to a contract to fulfill its duties under a contract, then his or her performance is excused.
For instance, in the example of the contract to paint a building, if the building burned down, the painter would likely avoid liability for not painting it.
Frustration of purpose
What if the building stayed intact, but the building was condemned by local officials? In that case, the building owner might be able to cancel the painting job without liability by claiming “frustration of purpose.” This defense applies when performance of the contract remains possible, but the reason the parties entered the agreement has been frustrated by an unexpected.
For instance, the purpose of a musical performance might be frustrated if the potential audience is under a stay-at-home order or if the venue has been ordered to shut down.
If you are in a situation like my musician friend or the owners of venues where he was scheduled to perform, you should first contact a lawyer like my friend did. Nothing in this article is a substitute for legal advice tailored to your situation, and this article does not cover anywhere close to all of the potential situations and contracts out there.
All of the legal issues above, however, may be far less important than your ongoing relationship with the other party to the contract and your reputation with your customer or client base. Especially in light of the COVID-19 situation, parties should all understand that we are dealing with “acts of god,” and contracts may have become impossible or purposeless.
Whether you are the service provider or customer, it’s a good idea to first look at the contract, then talk to a lawyer, but then get on the phone. Try to negotiate and to connect on a business and personal level before resorting to legal action. You may save a lot of time, frustration, and money – and improve your business reputation for the day (hopefully soon!) when you can open your doors or get back on stage again.