Force Majeure – sounds powerful, sounds foreign. Many businesspeople aren’t familiar with this lawyerly term. Should you shrug your shoulders and move forward or pay attention?
People often ask me about boiler plate clauses in contracts. They ask—are they necessary? (sometimes). Are they just there so an attorney can make more money? (despite
public opinion, not really).
Force Majeure is one of those boiler plate clauses in all properly drafted contracts.
Businesspeople can go entire careers never having to worry about what it means, let alone having it enforced. And then one day, something big, like Covid-19, happens that is outside of the control of both parties to the contract. Now Force Majeure may be the most important part of your contract.
We’re now living in a world where we have no idea if our customers are going to be able to pay us and, let’s be honest, we may have no idea if we can pay (or for how long) our vendors and staff. Your customers do need to pay you, correct? You have to pay your vendors and staff, surely? Whether you do or don’t have to pay (or get paid) depends on what is in your contract. I am talking about the force majeure clause. In its most simple terms, force majeure means unforeseeable circumstances that prevent someone from fulfilling a contract.
Here is an example of a force majeure clause in a contract:
Neither party shall be liable in the event that its performance of this Agreement is prevented, or rendered so difficult or expensive as to be commercially impracticable, by reason of an Act of God, labor dispute, unavailability of transportation, goods or services, governmental restrictions or actions, war (declared or undeclared) or other hostilities, or by any other event, condition or
cause which is not foreseeable on the Effective Date and is beyond the reasonable control of the party. In the event of non-performance or delay in performance attributable to any such causes, the period allowed for performance of the applicable obligation under this Agreement will be extended for a period equal to the period of the delay. In the event that the performance of a party is delayed for more than 6 months, the other party shall have the right, which shall be
exercisable for so long as the cause of such delay shall continue to exist, to terminate this Agreement without liability for such termination.
Most of the time, a force majeure event will effect one of the parties to a contract. In the current climate it almost assuredly applies to both parties That means the contract is essentially at a standstill.
So, you need to go over all of your contracts and figure out if you are or are not subject to force majeure. You’d hate to be in a situation where your vendor is asking you to pay, but your customer who is supposed to pay you doesn’t have to pay you. While you’re doing this review, you want to be sure all of your contracts contain force majeure clause that is most beneficial for you.
At some point we will be out of this morass and life will return to normal. It is very likely that there will be quite a few lawsuits filed based on the failure of one party to perform. A force majeure clause is what is known as an “affirmative defense.” Simply stated, that means “yes, I did what you said, but I don’t owe you because of….” In this case, the reason why the money would not be owed would be because of something contemplated under the force majeure clause.
Are there other options if your contracts do not contain force majeure clauses? Most likely. You should contact your attorney to discuss how best to handle this situation.
Force majeure – the clause that we never pay attention to until something bad happens and then it’s too late.
Keep in mind one thing—there are other things that can help you if your contracts do not have a force majeure clause. Next time—impossibility of performance.
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