Effective Use of the Force Majeure Clause for Small Business
How can a force majeure clause for small business clients be used you might wonder. Well those clauses are not just for big business and they can be very effective at reducing the financial risk to your client if they can’t perform as a result of a defined force majeure event. But they can also be used by the party expecting performance to cancel the contract and move on to establishing a contract with another company who can perform without significant additional delay. There benefits to both contracting parties, but a well thought out and carefully crafted clause is required.
What is a Force Majeure Clause?
How can a force majeure clause for small business clients be used you might wonder. Well those clauses are not just for big business and they can be very effective at reducing the financial risk to your client if they can’t perform as a result of a defined force majeure event. But they can also be used by the party expecting performance to cancel the contract and move on to establishing a contract with another company who can perform without significant additional delay. There benefits to both contracting parties, but a well thought out and carefully crafted clause is required.
What is a Force Majeure Clause?
Force majeure events can be anything you define as disrupting the performance of your client, even if it is not a major catastrophe. It all depends on what your particular client’s true business risks and disruptors are to timely fulfill a contract. So, make sure you understand not only your client’s business, but also what goes on behind the scenes for them to complete a contract. If it is a complicated piece of equipment made up of 15 different parts from 15 different manufacturers, then there is a potential any one of them could cause a delay or failure of performance that falls on your client if there are no backup manufacturers readily available.
How and When to Give the Other Party Notice?
Really, in any situation it is usually best to give notice promptly so the other side cannot claim you waived your right to request a delay or cancellation, and now your client is facing a breach of contract claim and sizable damages for non-performance. Giving timely notice faces the issue head on and gets the parties talking. Avoiding the consequences of a possible triggering event is not good practice.
For instance, the CDC report on the coronavirus explained that on January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization (WHO) declared the outbreak a “public health emergency of international concern”. So, depending on how your force majeure clause for small business is worded, it might not be required to give notice of a “public health concern” unless it is acknowledged by the WHO as an epidemic or a pandemic.
On the other hand, reaching out to the other party to let them know the situation is being carefully monitored and the parties maintaining good communication between themselves will likely avoid problems down the line since they can try to work things out the best they can given the situation as it develops.
Really, in any situation it is usually best to give notice promptly so the other side cannot claim you waived your right to request a delay or cancellation, and now your client is facing a breach of contract claim and sizable damages for non-performance. Giving timely notice faces the issue head on and gets the parties talking. Avoiding the consequences of a possible triggering event is not good practice.
For instance, the CDC report on the coronavirus explained that on January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization (WHO) declared the outbreak a “public health emergency of international concern”. So, depending on how your force majeure clause for small business is worded, it might not be required to give notice of a “public health concern” unless it is acknowledged by the WHO as an epidemic or a pandemic.
On the other hand, reaching out to the other party to let them know the situation is being carefully monitored and the parties maintaining good communication between themselves will likely avoid problems down the line since they can try to work things out the best they can given the situation as it develops.
How to Handle the Foreseeability Element so the Court Does not Rule Against Your Client.
While you may not want to draft a lengthy two page force majeure clause for small business clients listing a never ending set of possible events, you need to address the foreseeability issue with them and explain that it is one of the force majeure elements a court will examine when conducting its analysis to assign liability. If you don’t list enough force majeure events you run the risk of the other side claiming they were foreseeable events that your client should have been prepared to deal with. If you list too many then the other side claims anything not on the list is not a force majeure event and you can’t claim it as a defense to performance. Try to use language that covers both bases by stating something like this:
Do Small Businesses Really Need a Force Majeure Clause?
Absolutely!!! There are many things that can go wrong in a performance, manufacturing, distribution, construction or event contract and just because it may be a small business doesn’t make the matter any different. Even the University of Connecticut in its Student Activities “Good Practices” for Registered Student Organization Activities recommends using a force majeure clause and how it can benefit both sides to the contract.
While you may not want to draft a lengthy two page force majeure clause for small business clients listing a never ending set of possible events, you need to address the foreseeability issue with them and explain that it is one of the force majeure elements a court will examine when conducting its analysis to assign liability. If you don’t list enough force majeure events you run the risk of the other side claiming they were foreseeable events that your client should have been prepared to deal with. If you list too many then the other side claims anything not on the list is not a force majeure event and you can’t claim it as a defense to performance. Try to use language that covers both bases by stating something like this:
- The parties have attempted to list those events most likely to occur and impact performance of the contract. The listed events, while foreseeable, will excuse performance, but only if they have a causal connection or direct impact on the performance of the contract.
- Any events not listed that do occur, will be considered force majeure events excusing performance, but only if they have a causal connection or direct impact on the performance of the contract.
Do Small Businesses Really Need a Force Majeure Clause?
Absolutely!!! There are many things that can go wrong in a performance, manufacturing, distribution, construction or event contract and just because it may be a small business doesn’t make the matter any different. Even the University of Connecticut in its Student Activities “Good Practices” for Registered Student Organization Activities recommends using a force majeure clause and how it can benefit both sides to the contract.
Is a Right to Request an Extension or a Right to Cancel Better?
Force majeure clauses for small business can be even trickier than those for large businesses. Sometimes it may be better for your client to cancel the contract altogether than to ask for an extension that never gets met resulting in litigation for breach of contract damages. The client wants to keep the contract for two reasons. First, to make a profit on a particular job or order and second, to keep that customer happy and not risk losing the customer to a competitor. So, it becomes a balancing act and all you can do is fully understand your client’s needs as well as the particular contract.
Perhaps the force majeure clause for small business clients can be worded so they have the best of both worlds. Consider allowing your client that has to perform the contract a right to request up to a thirty calendar day extension if the force majeure event occurs that has a direct impact on completing the contract as agreed. If you client cannot complete within thirty additional days then perhaps the customer will agree to sixty calendar days, and if they won’t your client can issue a cancellation notice and be relieved of liability for non-performance.
Which Party Gets to Cancel?
More often than not it is the party paying for the performance that gets the right to cancel if a force majeure event occurs and will delay performance. The force majeure clause for small business should spell out the situation under which party gets to cancel and how the cancellation is invoked by that party. Much will depend on how long your client will take to perform beyond the originally agreed upon date. If both parties have been doing business together a long time it may be easier to renegotiate terms rather than cancelling. There may also be an issue with a competitor really being able to fulfill the contract on time unless they have not been fit with the effects of that force majeure event. Force majeure events can be defined in such a way that they sometimes only affect a particular company, but the odds are that there is likely another company somewhere that will be able to complete performance on time and thereby steal a good customer from you client.
Should Liquidated Damages be Agreed Upon in Advance?
This will really depend on the particular situation and whether or not the client feels it can accurately gauge what damages he would agree to pay for the delay and if it is worth paying for the delay and keeping a good customer. Sometimes it can be more expensive losing a good customer than paying something in damages for the delay but retaining that customer, so they don’t look elsewhere and decide to try one of your client’s competitors for a change.
What if the Event is Not Covered by the Force Majeure Clause for Small Business?
You can still rely on impossibility of performance as long as your force majeure language is not exclusive to those events listed or otherwise preclude you from raising impossibility of performance. Impossibility of performance is still a valid defense, although harder to prove if you do not have it spelled out in force majeure contract language. The best approach is not to leave it up to the courts to decide. Spend the time to really talk to the client and craft a well-thought out force majeure clause for small business.
Don’t Forget to Mitigate your Damages.
If your client is the one expecting performance in the face of a force majeure event, make sure they take steps to mitigate their damages. Whether or not it proves to be a force majeure event under the contract relieving the non-performing party of liability, in most situations, you cannot be certain that it will be a true force majeure. If the force majeure clause for small business is not well drafted, the party suing over non-performance does not have an automatic win. Even if the force majeure event is not proven as a reason excusing performance, then your client will still have the burden of proving how it tried to mitigate damages. Most courts will not look favorably on a party claiming breach of contract damages if that party got notice from the other party to the contract of a force majeure claim (or even just notice of inability to perform) and knew breach was likely. Your clients need to actively seek to mitigate their damages and create a file of documentation so that they can adamantly support their position that they used their best efforts to mitigate their damages.
Force majeure clauses for small business can be even trickier than those for large businesses. Sometimes it may be better for your client to cancel the contract altogether than to ask for an extension that never gets met resulting in litigation for breach of contract damages. The client wants to keep the contract for two reasons. First, to make a profit on a particular job or order and second, to keep that customer happy and not risk losing the customer to a competitor. So, it becomes a balancing act and all you can do is fully understand your client’s needs as well as the particular contract.
Perhaps the force majeure clause for small business clients can be worded so they have the best of both worlds. Consider allowing your client that has to perform the contract a right to request up to a thirty calendar day extension if the force majeure event occurs that has a direct impact on completing the contract as agreed. If you client cannot complete within thirty additional days then perhaps the customer will agree to sixty calendar days, and if they won’t your client can issue a cancellation notice and be relieved of liability for non-performance.
Which Party Gets to Cancel?
More often than not it is the party paying for the performance that gets the right to cancel if a force majeure event occurs and will delay performance. The force majeure clause for small business should spell out the situation under which party gets to cancel and how the cancellation is invoked by that party. Much will depend on how long your client will take to perform beyond the originally agreed upon date. If both parties have been doing business together a long time it may be easier to renegotiate terms rather than cancelling. There may also be an issue with a competitor really being able to fulfill the contract on time unless they have not been fit with the effects of that force majeure event. Force majeure events can be defined in such a way that they sometimes only affect a particular company, but the odds are that there is likely another company somewhere that will be able to complete performance on time and thereby steal a good customer from you client.
Should Liquidated Damages be Agreed Upon in Advance?
This will really depend on the particular situation and whether or not the client feels it can accurately gauge what damages he would agree to pay for the delay and if it is worth paying for the delay and keeping a good customer. Sometimes it can be more expensive losing a good customer than paying something in damages for the delay but retaining that customer, so they don’t look elsewhere and decide to try one of your client’s competitors for a change.
What if the Event is Not Covered by the Force Majeure Clause for Small Business?
You can still rely on impossibility of performance as long as your force majeure language is not exclusive to those events listed or otherwise preclude you from raising impossibility of performance. Impossibility of performance is still a valid defense, although harder to prove if you do not have it spelled out in force majeure contract language. The best approach is not to leave it up to the courts to decide. Spend the time to really talk to the client and craft a well-thought out force majeure clause for small business.
Don’t Forget to Mitigate your Damages.
If your client is the one expecting performance in the face of a force majeure event, make sure they take steps to mitigate their damages. Whether or not it proves to be a force majeure event under the contract relieving the non-performing party of liability, in most situations, you cannot be certain that it will be a true force majeure. If the force majeure clause for small business is not well drafted, the party suing over non-performance does not have an automatic win. Even if the force majeure event is not proven as a reason excusing performance, then your client will still have the burden of proving how it tried to mitigate damages. Most courts will not look favorably on a party claiming breach of contract damages if that party got notice from the other party to the contract of a force majeure claim (or even just notice of inability to perform) and knew breach was likely. Your clients need to actively seek to mitigate their damages and create a file of documentation so that they can adamantly support their position that they used their best efforts to mitigate their damages.
