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My contract has a virus and my business needs a ventilator!

My contract has a virus and my business needs a ventilator!

You entered into the contract fully intending to perform it. Then a virus emerged from China, causing a pandemic and requiring your business and/or your key suppliers to close. The other party is threatening to sue for damages caused by your breach of contract. This “hypothetical” is now your reality.

Reduce risk of uncontrollable events with a “force majeure” clause.

In contract negotiations, consider including a “force majeure” clause excusing performance when prevented by causes beyond your control. Contrary to common belief, “force majeure” does not have a standard meaning under law and must be defined. In the absence of a clause excusing performance for the particular event, courts allocate this risk based on their interpretation of the parties’ intent and their ability to “foresee” the event’s occurrence. While other defenses may exist, the expense and uncertainty of litigation is always best avoided by an appropriate clause.

Reduce risk of uncontrollable events with a “force majeure” clause typically involves a non-exclusive listing of events which, since not all events can be predicted or listed, is followed by a “general” excuse of performance for matters beyond your control. While business negotiators prefer brevity, “force majeure” clauses may become lengthy to address related issues.

This type of protective clause should, in addition to the typical “acts of God” lists of natural disasters, specifically identify pandemics as well as government closures/restrictions of your business or of your suppliers. Negotiations typically focus on: (i) the duration of the “force majeure” event after which the other party may terminate the contract, (ii) exclusion of events that could have been prevented by the nonperforming party’s reasonable precautions, (iii) notice by the nonperforming party that a “force majeure” event has occurred; and (iv) the efforts required to minimize its impact.

These issues are not exclusive to supply contracts. Construction contracts, leases, services contracts and M&A agreements should address these issues within the applicable terminology. For example, a “material adverse change” clause in a M&A agreement permits a buyer to terminate the acquisition. Among other limitations, a seller frequently wants to limit a buyer’s termination right to events “disproportionately impacting” the business or property being sold.

Neither this post nor any other content on this website creates an attorney-client relationship or constitutes legal advice for any particular situation.