By Dean Kaplan, CEO and President, The Kaplan Group
Thanks to the current pandemic, it’s clear that when negotiating contracts, you need to plan carefully. If disaster strikes, are you still obligated to put on a show, attend a meeting, or supply product? As a commercial collection agent, I’ve seen a lot of contracts and in recent months I’ve seen a lot of payment disputes. I believe well-written force majeure clauses will become much more prominent in future contracts.
Force majeure (superior force) is a contract provision. This provision allows parties to cancel their contractual obligations when certain circumstances occur that would make meeting their obligations unsafe, illegal, impossible, or impractical. So, for example, if an event venue is not legally allowed to host the event because of COVID, the venue would not be contractually obligated to do so. As you are considering adding force majeure clauses to your contracts, here are 5 things to consider.
- Courts tend to interpret these clauses narrowly.
After 9/11, acts of terrorism were written into many contracts as a reason to cancel an event or obligation. However, judges may not see events such as riots as acts of terrorism. It’s important to lay out any events that you think could happen. Examples of events might include weather-related issues, pandemics, riots, acts of terrorism, acts of war, or even union-related strikes. Obviously not all potentially bad events can be listed in a contract. But, you can include a phrase such as, “and any other events, including emergencies or non-emergencies,” to the end of the term. You want to include both emergencies and non-emergencies so that you do not wind up trapped in a debate over whether or not an impending forest fire was an emergency.
- Nothing is impossible.
Just like “non-emergencies” is important to include so that you don’t get trapped in semantic debates, you want to avoid being told that it wasn’t “impossible” for you to fulfill your obligation, just difficult. Impossible is a very high threshold to meet. After all, nothing is truly impossible if you put your mind to it. A better phrase to use would be “inadvisable, commercially impracticable, illegal, or impossible”
- They aren’t just about cancellation.
Force majeure clauses always allow for complete cancellation of an event or obligation. But, sometimes, cancelling an event or order might not be what you want. For example, if you are holding a meeting, you might still want to have it, even if you can only have 50 guests instead of the planned 200. However, you may have a minimum food or beverage commitment that would result in you paying for food for 200. You can draft a force majeure clause that excuses you from meeting certain minimums in unusual circumstances.
- If you don’t have a Force Majeure Clause, you may still have an out.
If there’s no force majeure clause, the narrow common law doctrines of “impracticability” and “frustration of performance” may apply. However, these doctrines can be difficult to interpret and rarely completely excuse non-performance.
- You may want to rewrite contracts now.
Difficult times call for a “big picture” view of your contracts and your relationships. Especially your relationships with long-term customers and suppliers. It’s important that you and your partners work together to find current, workable solutions that provide you both with continuity. You want to make sure to properly document any changes in your contract. Doing so may help avoid expensive battles when things return to normal. It may also help build the foundation for a better future working relationship.
Our world is experiencing a lot of change right now. Not everything can be predicted or documented in a contract. However, protecting yourself and your business with strong contract terms will go a long way towards making sure your business survives these challenging times.
Dean Kaplan is president of The Kaplan Group, a commercial collection agency specializing in large claims and international transactions. He has 35 years of manufacturing, international business leadership and customer service experience. Today, he provides business planning, training and consultation to a variety of global companies.