There is no dispute that right now, March 2020, is a tough time for most large and small businesses, their employees, and their customers. For reasons generally beyond the control of most businesses, they have been forced to cancel services to their customers. This raises the question of what the business must do, if anything, to make the customer whole. The analysis begins with the contract. But, the analysis should also consider the business’s brand and commitment to its customers.
The Contract Defines the Relationship
Does your contract address refunds or rebates? Obviously, the most protective term for the business is to disallow any refund or rebate of any kind for “acts of god” and other such events beyond the control of the contracting party. An example of one such provision follows:
There is always a possibility of an event being affected by circumstances out of our control. This would include things such as earthquakes, floods, extreme weather, civil unrest, pandemics, unsafe air quality and other “Acts of God.”
Refunds, and deferrals/transfers will not be issued for events canceled for these reasons.
Is your force majeure provision enforceable? Assuming that your contract states that in certain extreme, unforeseeable circumstances you will be excused from performance, you may still have a customer that demands a refund or credit. At that point – when you know the specific, factual reason why you are not performing under the contract – you should reconsider whether your provision is an enforceable term. In the United States, that is a question of the relevant state’s contract law.
In California, the contracting party seeking to avoid performance because of a force majeure clause must prove that the clause has been triggered. Essentially, that means that the event you are relying on must be covered by your provision. For example, an extreme fire event in California may no longer be “an Act of God” given the frequency of such extreme fire events. In addition to having drafted a term that reaches the facts your business is facing, you would also need to prove that the failure to perform was caused by the event, notwithstanding the skill, diligence, and good faith of the non-performing party.
Contracts Aside, Consider What is Best for Your Business
Even if you have concluded that your business has solid legal ground upon which to argue that it need not provide a refund or a rebate, consider whether it should. Whether a business should do something is a question of imaging and branding; it need not be a question of morality (although it may also be).
Consider whether a business focused on health and wellness should refuse to give a refund to customers for a canceled wellness event when the reason the event is canceled is because of a risk to the personal health of customers who attend the event. In that instance, the business should carefully consider its response and probably should not outright refuse to give any compensation to its disappointed customers. A business that refuses to accommodate disappointed customers in the face of a health crisis when that business is a wellness focused company would likely negatively harm the image of that company.
In addition to working with your own team to determine what is right for your brand, consider what your competitors are doing or may do. How will your business fare if it takes a different approach?
Thus, at the moment that a business is going to rely on a force majeure clause, it should not only consider whether it has the legal right to do so, it should also consider whether doing so is good for the business. The answers may not be the same.
Best Practices, Now and for the Future
- If you cannot perform because of the crisis, work with legal to determine what rights your company has and work with legal and customer service to determine the right approach and messaging;
- Even if the current crisis has not hit your business, consider what happens if the economy or other events worsen and then determine what rights your business has;
- Consider amendments or addenda now, if necessary; and
- Develop a game plan.
For the Future
- Review your business terms now and consider what rights your business will have in a future crisis; and
- Revise accordingly.