By Adam Atlas, Attorney at Law
Adam Atlas, Attorney at Law
Sadly, because of the COVID-19 pandemic, some participants in the payments industry are unable to meet their contractual obligations. The purpose of this article is to give some guidance to people on either side of that terrible turn of events.
Specifically, I want to discuss force majeure clauses, which are most likely to apply to a pandemic-caused contractual default. Simply put, when it comes to the law, force majeure pertains to unforeseeable circumstances that prevent someone from fulfilling a contract.
Force majeure clauses in contracts are usually buried in the general provisions and are rarely negotiated or even read. The pandemic has suddenly given great importance of force majeure clauses.
A typical force majeure clause in a payment processing agreement reads as follows:
"Force Majeure. No Party shall be liable for any default in the performance of its obligations under this Agreement if such default or delay is caused, directly or indirectly, by an Act of God, fire, flood, earthquake, conditions or events of nature, war, terrorism, riots, pestilence, civil disturbances, work stoppages, equipment failures, power failures, governmental orders, or any other similar cause or event beyond the reasonable control of the affected party (provided the non-performing Party is without material fault in causing such default or delay)."
The key legal question when facing a force majeure clause is to determine whether it relieves the party of default for non-performance. In other words, but for the force majeure event, would the failure of the party place them in default. For example, without a tornado, I would have delivered the garden shed you ordered. Because of the tornado, I can't, because it blew away.
Force majeure clauses in contracts are included to provide one or more parties to an agreement relief from their obligations should certain circumstances arise. The event contributing to the application of the force majeure clause should not only be unforeseeable, but also beyond the control of the parties.
Unforeseeable here, means unforeseeable at the time the contract was entered into. As in the typical clause example above, force majeure clauses outline the types of situations where the clause may excuse non-performance. Since such clauses are a construct of the parties, the meaning and scope shall be those given by the parties in creating the agreement. Where clauses are lacking or where there is room for interpretation, courts will apply common law principles.
Many drafters of force majeure clauses include catch-all phrases to extend the provision to non-enumerated situations by including words such as "other," etc. Courts tend to apply the ejusdem generis (Latin for "of the same kind") theory when determining if a given situation fits within the catch all phrasing.
Ejusdem generis dictates that when general terms follow an enumerated list of two or more items, then the general terms must apply only to items of the same class as those enumerated. The potential application of ejusdem generis to a force majeure clause must be kept in mind not only when drafting such clauses, but also when formulating argumentation to either defend or argue the non-applicability of a force majeure clause.
When analyzing force majeure clauses, courts will often ask three questions:
Taking an extreme but illustrative example, if an ISO has focused on selling merchant services to amusement parks, and all amusement parks are closed by order of the state, even if the force majeure clause in the ISO agreement does not expressly mention pandemics, generic wording on factors beyond the control of the ISO would likely support the ISO in being relieved from its liability for minimums. Most ISOs, however, do not sell to only amusement parks and will face a challenge of proving that the circumstances are a force majeure, in particular given that online sales are surging right now.
Suppose key officers (for example, the CIO or CCO) at a crypto wallet or exchange were all out of action because of COVID-19 for an extended period of time. Suppose as well that, despite having (often legally required) disaster recovery and business continuity plans, those plans were ineffective because other key personnel were out of commission.
The crypto business grinds to a halt. Customers will be frustrated because they are not able to get support or possibly access their assets. Here, a court might look to the crypto operator to have had a more robust disaster recovery plan.
Assuming the problems are not caused by infrastructure (for example, Amazon down) or orders to close by the state, the crypto business will have a harder time arguing that they were legally relieved of their obligations on account of force majeure. The reason for this is that, in this case, the causes are not external to the business.
Cases decided on the basis of the COVID-19 pandemic will be studied in law schools for the next 100 years. I hope none of our readers are the basis of that new law.
As our way of giving back to the payments and crypto community that sustains us, my colleagues and I will provide free review of any force majeure clause in payments or crypto. Our whole team is actively researching solutions for the financial services sector for these difficult times, and we will share all useful information as and when we collate it. (Some of you know how much we love lists, charts and more lists). In the meantime, stay healthy and safe in anticipation of (hopefully) a surge larger than any of us could have ever imagined in electronic payments and crypto when the COVID-19 crisis is over.
In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. For further information on this article, please contact Adam Atlas, attorney at law, by email at firstname.lastname@example.org or by phone at 514-842-0886.
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