What is a force majeure clause?
It's a provision that should be in your contract, and probably has been for years, but you never really thought about it. So the first question my clients asked me when they've heard about it is: What exactly is a force majeure clause?
It's a clause in your contract that deals with unforeseen events. Years ago, we put force majeure clauses into our contracts that had things that we weren't even sure would happen. Things like acts of God, revolutions, global pandemics. Now for years, we never had to worry about these. But the last couple of years have obviously shown us that a global pandemic can really change our economic future. And once that pandemic hit, a lot of clients came to my office saying: What do I do now?
One of the first places we looked at was a force majeure clause. The reason we look for this clause is it specifically says if one of these catastrophic events happens, can either or both parties get out of the contract that they signed.
Elements of a Force Majeure Clause
There's four main elements to any force majeure clause
- What is the breach that allows you to not perform? So for example, you can say that you're not able to fulfill the parts order, we have supply chain issues, we can't get the raw materials we need to provide you with the product.
- The second is what events does it cover? Now this is where traditionally we had boilerplate basic language with the same act of God and insurrection, and random events that we never thought would happen. A lot of people did not have in their contracts. However, a global pandemic or even an endemic. So now what we're seeing is since 2020, our force majeure clauses have been edited to include a global pandemic. We want to have the pandemic covered so that if you're unable to get those raw materials and perform for your clients, you're not then left on the hook to pay money to your clients because you're unable to get your products from overseas.
- The third part of any force majeure clause is how these two are connected. So when we're looking at a supply chain issue, the force majeure clause will connect the fact that I get steel from India that I then sell to you. If I can't get that steel from India because the pandemic has shut down all of the shipping lanes from India to my company, then I'm unable to provide the steel to you.
- The final provision is what happens next. So in the event that one of these unforeseen events happens, this global pandemic, what happens under the contract? Can one party get out of the contract? Does anybody owe anybody any money or any time or what happens frankly, when the pandemic hits and you're unable to perform your contractual obligations?
Hopefully, the last few years have taught you why you would need a force majeure clause in your contracts. And if you haven't had to run into supply chain issues, if the pandemic or something else hasn't affected your ability to run your business, that is great. That's fantastic for you. But a lot of businesses are not in that same predicament. A lot of them have had a lot of problems, fulfilling contractual orders because of supply chain issues due to the pandemic.
So if you don't have a force majeure clause in your contract, now is a great time to take a look at it. Work with your attorney, work with professionals who create contracts for living and we can make sure that your force majeure clause is properly tailored to you and your business. Rather than just a generic act of God provision, we can have specific force majeure clauses that deal with you, your business, your industry, and what actually happens between you and your partners if there is one of these unforeseen events.
If you don't have anyone to talk to or you want to get your contracts revised, let's hop on the phone for a Legal Strategy Session. We can go over your contracts and see where we can improve them to make sure that the force majeure clause is the correct one for you and your business.