By: John Glover (MBA)

Contracts are the backbone of business operations. They set expectations, define responsibilities, and outline remedies if things go awry. One critical element in many contracts, especially in today’s unpredictable climate, is the force majeure clause.

This clause can significantly impact small businesses, providing a safety net when unforeseen events disrupt normal business activities. Let’s explore how force majeure clauses affect small business contracts and why understanding them is crucial.

What is a Force Majeure Clause?

A force majeure clause is a contract provision that relieves a party from liability or obligation when an extraordinary event or circumstance beyond their control occurs. These events can include natural disasters, war, terrorism, government actions, or pandemics like COVID-19. The clause allows for the suspension or termination of obligations without penalties.

Importance of Force Majeure Clauses

For small businesses, these clauses can be a lifesaver. When unexpected events occur, small businesses often lack the resources to absorb the impacts without some form of contractual relief. Here’s why including a force majeure clause in your contracts is essential:

Risk Mitigation

• Small businesses can face significant financial strain during unforeseen events. Force majeure clauses will help you minimize this risk by temporarily relieving obligations, allowing your business to focus on recovery.

Legal Protection

• Without this clause, your business might be held liable for non-performance. This can lead to costly lawsuits. A well-drafted force majeure clause provides a legal shield, protecting your business from such liabilities.

Operational Continuity

• It provides a framework for how businesses should operate during extraordinary circumstances. This ensures that both parties have clear expectations and a plan in place, promoting smoother operations during disruptions.

Drafting an Effective Force Majeure Clause

If you want to create an effective force majeure clause, it involves more than just listing potential events. Here are key elements to consider:

Defining Force Majeure Events

• Be specific about what constitutes a force majeure event. Commonly included events are natural disasters, pandemics, strikes, and governmental actions. The clearer the definition, the less room for dispute.

Notice Requirements

• Outline the requirements for notifying the other party when a force majeure event occurs. Specify how soon notice must be given and the preferred method of communication.

Obligations During Force Majeure

• Detail the obligations of both parties during the event. This can include taking reasonable steps to reduce the effects and resuming performance as soon as possible.

Termination Rights

• Include provisions for terminating the contract if the force majeure event continues for an extended period. This protects the parties involved from indefinite obligations when it’s clear the contract cannot be fulfilled.

Case in Point

The COVID-19 pandemic has highlighted the importance of force majeure clauses. Many businesses faced unprecedented disruptions, leading to a surge in disputes over whether the pandemic constituted a force majeure event. Here’s a closer look at some examples:

Retail and Supply Chain Disruptions

• Retailers and suppliers struggled with inventory shortages and delivery delays. Those with clear force majeure clauses could suspend performance without penalties, while others faced legal battles.

Event Cancellations

• The events industry was hit hard, with numerous cancellations due to lockdowns. Contracts with force majeure clauses allowed organizers to reschedule events without breaching agreements.

The Role of a Business Attorney

The intricacies of force majeure clauses can be challenging. This is where a small business lawyer becomes invaluable.

They can help you draft, review, and negotiate contracts to include comprehensive force majeure provisions. This not only protects your business but also provides peace of mind.

Practical Tips for Small Business Owners

Review Existing Contracts

• If you haven’t already, get a contract attorney to review your existing contracts to check for force majeure clauses. If they’re absent or inadequate, consider renegotiating to include this provision.

Customize Clauses

• Avoid generic clauses. Tailor them to your specific industry and business needs. This ensures the clause covers the most relevant risks for your operations.

Stay Informed

• Keep abreast of legal developments and how they might affect your contracts. For example, changes in legislation or new interpretations of force majeure events can impact your business.

Clear Communication

• Ensure that both parties understand the implications of the force majeure clause. Clear communication can prevent misunderstandings and foster a cooperative relationship.

Conclusion

Force majeure clauses are a critical component of small business contracts. They provide a safety net, protecting businesses from the fallout of unforeseen events. By getting an attorney to set up an LLC to provide protection for your assets, and draft comprehensive and clear clauses, you can protect your business interests and maintain operational continuity.

A well-crafted force majeure clause can be the difference between survival and closure for your small business.

Disclaimer: “The content in this article is provided for general knowledge. It does not constitute legal advice, and readers should seek advice from qualified legal professionals regarding particular cases or situations.”

 

Published By: Aize Perez