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Understanding Contracts in a Time of Crisis: Common Law Arguments You Should Know

Consumers are wondering if they can receive full or partial refunds for the goods and services they’ve paid for but won’t be receiving. Here's what you should know.

Due to the Covid-19 outbreak, the vast majority of traditional spring/summer events have been postponed or canceled outright, from weddings to vacations, summers camps and timeshares. Consumers are wondering if they can receive full or partial refunds for the goods and services they’ve paid for but won’t be receiving – understandable given the millions of people who have filed for unemployment. 

On the other side of the coin, businesses are struggling to make payments of their own, including helping their employees financially survive. Many small businesses are just trying to stay afloat right now and may try to hang on to advance payments from customers.

Consumers most likely are not familiar with common law arguments as they are applied to contracts. It’s a good idea to familiarize yourself to two such doctrines that could come into play when trying to get your money back in these uncertain times: “force majeure” and “frustration of purpose.”

The “Act of God” Clause

Force majeure is a French term which translates into “superior force.” Better known as the “act of God” clause, it excuses a party’s performance of its contract obligations if events beyond their reasonable control make that performance impossible. 

Force majeure clauses are typical in commercial contracts, but their scope varies widely. The clause may include terrorist attacks, fires, tornados, even strikes, but may not specifically mention pandemics. Some clauses might call for full refunds, or a certain percentage of a refund if performance is rendered impossible. 

A standard example of a contract containing a force majeure clause relevant to this crisis is one for a wedding venue. If a force majeure is in place, it protects both parties from unforeseeable circumstances.

Frustration of Purpose

While force majeure is a typical clause in big business contracts, perhaps more applicable to the consumer when the financial stakes are not as high is the “Frustration of Purpose” doctrine. For this common law argument, each party recognizes that there is a contract and performance may still be possible yet the fundamental reason for the contract’s existence – or the basis of the bargain – is frustrated by an unanticipated event. 

Say, for example, you signed a contract for a summer timeshare and paid a deposit or in full. If you are prohibited from using the timeshare because of government-issued public lockdown orders due to the virus, you would argue that the entire value of the contract is substantially diminished such that you would never have entered into the contract in the first place. You would argue for a full refund on your timeshare deposit on the basis that the parties should be discharged from all obligations under the contract.

Making your argument: A 5-Step Checklist

Once you’re familiar with these two approaches to contract challenges, it’s time to dig into the facts before reaching out to the other side. Here are 5 steps to help you make your case:

  1. Examine your facts: Why did you enter into the contract? What was its end goal? Is the whole reason for performing the contract completely frustrated because of this crisis? Alternatively, do you have the benefit of a force majeure clause of which you can take advantage?
  2. Study the signed contract: Look carefully at what the contract stipulates and its terms and conditions.
  3. Determine your preferred outcome: Are you looking to get out of the contract, or still take advantage of it at a later date? Do you want a refund of whatever you paid?
  4. Do some research: For instance, if you’re arguing to get your money back from an airline, you should go to their website and look at their refund policies. Check news articles to see how they and other airlines are handling cancelations. Because so many businesses and consumers are dealing with the consequences of this crisis, you’re bound to find some helpful information. 
  5. Set your strategy and reach out: Once you have your facts at hand and have figured out your argument, it’s time to get it touch, whether it be a hotel, a wedding hall, a caterer, a landlord or an airline.

Extraordinary Times Require Extraordinary Understanding 

A caveat: If you find the contract confusing, the facts are unclear, you’re struggling with strategy to pursue, or you don’t have the benefit of either of these arguments, then should consider help from legal counsel.

One thing is clear, however: We’re living in an extraordinary situation in which we’ll all have to make compromises. Let’s hope that in the vast majority of these transactions, common sense – not common law – will win out.

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