Buyer of cleaning franchise loses money during pandemic. Stops paying seller. Massachusetts high court says covid no legal excuse for stopping payments.
M&A Stories
February 8, 2023
Introduction
During the pandemic, many business buyers faced significant challenges. However, a recent court case in Massachusetts highlights that COVID-19 does not legally excuse a buyer from fulfilling their payment obligations.
The deal
In 2015, a buyer purchased a cleaning franchise with an agreement to make installment payments until 2022. When the pandemic struck in March 2020, the business had to cease operations, causing a loss in cash flow. Consequently, the buyer stopped making installment payments to the seller in April 2020.
The lawsuit
To collect the remaining balance owed, the seller took legal action against the buyer and its owners. The buyer argued that they should be excused from payment due to the impact of COVID-19 on their business. However, both the Massachusetts trial and high court rejected this argument. Merely citing the occurrence of the pandemic and the difficulty in fulfilling contractual obligations is insufficient grounds for exemption.
Court Ruling: The court emphasized that the buyer could have been exempt from paying the seller if there was a force majeure clause in the purchase documents. This type of clause accounts for circumstances beyond a party’s control. However, in this case, the contract did not include such a clause, and therefore, the buyer was still obligated to make payments.
See Le Fort Enterprises, Inc. v. Lantern., SJC-13269., Supreme Judicial Court of Massachusetts, Middlesex, (January 3, 2023).
Conclusion
Buyers of businesses cannot use COVID-19 as an excuse to avoid their financial responsibilities. It is crucial to include a force majeure clause in purchase agreements to address unforeseen events like a pandemic. By clarifying contractual obligations and potential exemptions, businesses can navigate challenging situations more effectively.
By John McCauley: I write about recent legal problems of buyer and sellers of small businesses.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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