A business contract is legally binding. If you don’t fulfill your obligations under a contract, you may be on the hook for a lot of money — so much money that it could seriously damage your business.
A wise business leader will seek to avoid that problem by having backup plans or working out solutions on the fly, but some unforeseen problems are so big there is nothing a business can do about them. These may include natural disasters, civil disturbances, public health emergencies and more.
We’ve all lived through such events in recent years, and we know how they can disrupt seemingly everything, including business. There is no doubt that we will live through more of these in the future.
Good planning for bad times
Businesses along Texas’ coastline prepare themselves for storms and other natural disasters by reinforcing their buildings and so on. Of course, these measures can only do so much to stand up to the force of a major hurricane, but they can be essential.
Likewise, businesses can prepare for the worst by including a clause in their contracts that allows for the possibility that some large-scale event will make completion of their duties impossible. These are known as “force majeure” or “acts of God” clauses. They have been important in recent years, and will almost certainly become more common in the years ahead.
What is included?
Force majeure clauses are generally meant to cover situations involving natural disasters such as flooding, hurricanes and tornadoes, but they can also cover human activity, such as war or terrorist attacks. Serious epidemics and other public health emergencies can be included as well.
To be eligible, the event must have been unavoidable, unforeseeable and completely out of control of the parties. One party’s financial difficulties or labor troubles would not be eligible.
The event must make performance under the contract impossible or impracticable. In this context, “impracticable” means that while it might be theoretically possible for the party to perform, doing so would be unreasonably difficult and expensive.
One difficulty in crafting these clauses is that they are meant to cover events that are, by definition, unforeseeable, and yet the language should be fairly specific. If the language is too vague, a court may find the clause unenforceable, and so businesses should make sure they mention natural disasters, civil unrest and other possibilities.
Another difficulty is the question of whether these events are truly unforeseeable. For instance, while no one can predict the path of a tornado, certain parts of the country experience these destructive storms on a regular basis. One party may argue against application of a force majeure clause to a tornado strike by saying that the other party had reason to foresee that a tornado might disrupt its operations.
If the dire predictions about climate change come true, storms will be increasingly destructive in the years ahead. This could raise the question of whether any destructive storm is truly unforeseeable.
For these and other reasons, it’s important to seek out experienced help when drafting business contracts.