Force Majeure and Deposits: Do You Need to Refund?
In light of the COVID-19 pandemic, you are likely experiencing event cancellations, or at a minimum, fielding phone calls from worried customers and clients who are facing a need to cancel their event in light of travel and gather restrictions. Two common questions are “is this covered by my force majeure clause?” and “do I need to refund the client’s deposit?”
In these situations, your first line of defense is going to be your contract itself. Nearly all contracts will contain some version of a force majeure clause, which can be thought of as both a shield and a sword: it serves as a defense to a client’s claim that you have breached the contract by failing to perform under circumstances that are considered force majeure events, but it can also be raised affirmatively to cancel the contract in cases of force majeure events. In layman’s terms, a force majeure clause is simply a contractual provision which allocates the risk of loss if one or both parties’ performance is rendered impossible or impracticable because of events that the parties could not have anticipated or controlled.1Black’s Law Dictionary (11th ed. 2019).
The Montana Supreme Court has only addressed a force majeure clause on a handful of occasions and has not expressly set forth the requirements for successful invocation of this clause; however, other Ninth Circuit courts have addressed it squarely.
Generally, to succeed on the basis of a force majeure clause, you will need to show that: 1) the failure to perform was proximately caused by an event covered by the terms of the clause; 2) the event is beyond your control; and 3) in spite of skill, diligence, and good faith on your part, it is impossible to perform your duties under the contract. Some courts have gone so far as to say impossibility is not necessary and that it is sufficient to show that it would be unreasonably expensive to perform,2Watson Laboratories, Inc. v. Rhone-Poulenc Rorer, Inc., 178 F. Supp. 2d 1099, 1111, 2001 WL 1673405 (C.D. Cal. 2001). while others maintain a requirement of strict impossibility. Additionally, some courts impose a requirement of unforeseeability in order to successfully invoke a force majeure defense.3Perlman v. Pioneer Ltd. Partn., 918 F.2d 1244, 1248, 1990 WL 182184 (5th Cir. 1990); Sabine Corp. v. ONG W., Inc., 725 F. Supp. 1157, 1170, 11 UCC Rep. Serv. 2d 83, 1989 WL 136174 (W.D. Okla. 1989).
Though the Montana Supreme Court has not addressed impossibility as a strict requirement of a force majeure clause, it does regularly consider the related doctrines of impossibility and impracticability, thus opening the door for an argument that it need not be impossible to perform in order to prevail under your force majeure clause (more on impossibility and impracticability below). Montana has not addressed whether the event must be foreseeable.
A common misconception is that the question of refunding deposits will be answered by the force majeure clause. While they are related, the force majeure clause likely will not automatically answer this question. Rather, it governs whether or not either party must continue to fulfill obligations under the contract. If, after looking at each of the elements above, it is clear that it is impossible (or impracticable) for you or your client to carry out your remaining obligations because of the force majeure event (e.g., if you are a venue owner and a couple is supposed to be coming from Italy next week for their wedding, this could be impossible because of travel bans in place), there is no breach of the contract and the language surrounding your deposit clause and in the clause addressing your failure to perform will govern, likely entitling you to keep the deposit.
If, on the other hand, it is possible to continue with the contractual obligations, notwithstanding the force majeure event (e.g., if you own a restaurant that has not received instruction to cease operations, but rather, switch to to-go orders only and you have a contract for supply delivery for tomorrow, it is not impossible for you to accept the delivery order because you are still able to operate), performance will not be excused because of the event.
Whether or not you will need to refund deposits in cases where it is possible to continue with the contractual obligations, regardless of whether you believe it to be a good idea to do so, will depend on who cancels and the language regarding deposits and failure to perform. If the client cancels in this case, but you remained willing and able to continue, the client should not be entitled to a refund because he or she is the one breaching the agreement. On the other hand, if you cancel but the client was willing and able to continue, you’ll need to look to your failure to perform clause: do you have a backup plan set forth in the contract? This is common in personal service contracts such as photography agreements, but not as common in other types of contracts. If you have set out a specific plan in the case of your inability to carry out your obligations, that will be your first step. If you are a photographer, perhaps your contract allows you to substitute a photographer in your place without being considered in breach of your contract.
If you are unable to execute your backup plan, don’t have one, or if your contract simply does not address your failure to perform and you must cancel, then you will likely need to refund some or all of the deposit because you are in breach of your obligations (and it won’t make any difference if you’ve called your deposit a “non-refundable deposit/retainer”). You may be able to keep the amount necessary to compensate you for work you have already performed on the client’s behalf, but the rest will need to be refunded.
If you’ve made it this far, you’ve no doubt noticed the role of impossibility in these considerations. As mentioned above, Montana case law contains more guidance on the doctrines of impossibility and impracticability than it does force majeure clauses and they are closely related to the common law doctrine of force majeure. As such, let’s break them down as well.
Generally, the doctrines of impossibility and impracticability will step in and govern in the event you do not have a force majeure clause, but the Court’s interpretation of this notion is helpful in considering your force majeure clause as well. The Montana Supreme Court has held that a court may determine that an act is “impossible” in the legal sense when it is not practicable. “Impracticable” generally means that the thing can only be done at an “excessive, unreasonable, and unbargained-for cost.” Further, the court will consider whether the public policy underlying strict enforcement of the contract is outweighed by the “senselessness” of requiring one or both parties to perform their obligations.4Cape-France Enterprises v. Estate of Peed, 2001 MT 139, 305 Mont. 513, 29 P.3d 1011.
In light of Montana’s willingness to consider impracticability, and, more specifically in light of COVID-19, the sensibility or lack thereof of performing your contractual obligations, for those of you struggling with whether or not to refund in the case of cancellations as a result of COVID-19, this is important. This provides a layer of protection against a client’s claim for breach of contract, especially in the case of large gatherings, as those gatherings are contrary to the recommendations of credible sources such as the Centers for Disease Control right now (read: senseless). Remember though: this simply means that you may not be in breach of the contract by cancelling. It does not automatically entitle you to keep the deposit. As a general matter, if you are the one cancelling, you will need to be able to show that you are entitled to keep it by proving that you have earned it, notwithstanding the fact that you will not be fulfilling the balance of the contract. If you have invested time and money into the client’s project, through consultations, hard costs expended on their behalf (to the extent they have benefitted from those expenditures), etc., you may be entitled to retain the amount necessary to compensate you for what you have put in, but should refund the balance (or offer to transfer it to a new date).
Alternatively, if the client is the one to cancel, you may still argue that no refund is required because you were prepared to perform, and in the event you and the client cannot agree, it will be up to a court to decide whether you are entitled to keep the full deposit, something less, or none at all. Keeping clear records of all of the work you put in on your clients’ behalf will help you explain to your clients why you are not refunding their deposit, and in the worst case scenario, it will help you justify it to the court.
While I wish I could give you a simple “yes” or “no,” the reality is that force majeure, impossibility, impracticability, and deposits are not clear-cut, black and white issues of the law and the answer is nuanced and fact-specific. A clear and comprehensive contract will serve as the most beneficial starting point, though, and Redmon Law Firm, P.C. is here to help ensure that you’ve got a solid foundation. We offer complimentary one-hour consultations to determine how we may best assist you. Please call us at (406) 585-0440 to get started.
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